RBI's Draft Disclosure Framework On Climate-Related Financial Risks 2024
Jayshree Navin Chandra and Nitika Bakshi
14 Aug 2024 7:07 AM GMT
Climate-related and environmental risks threaten the safety, soundness and resilience of entities regulated by Reserve Bank of India (“RBI”) and in turn the stability of the overall financial system. The RBI in its Discussion Paper on Climate Risk and Sustainable Finance, published in July 2022, identified the need to develop an appropriate framework to identify, assess and manage climate-related risks and recently (in February 2024) published the draft Disclosure Framework on Climate-related Risks, 2024 (“Draft Disclosure Framework”) to put in place a standard disclosure framework for REs on climate-related financial risks.
As per the draft the disclosure framework it would be applicable to the following Regulated Entities (“REs”):
- All Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks and Regional Rural Banks);
- All Tier-IV Primary (Urban) Co-operative Banks;
- All All-India Financial Institutions (viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI); and
- All Top and Upper Layer Non-Banking Financial Companies .
Adoption of these guidelines is voluntary in case of entities other than regulated REs.
The REs would be required to disclose the information detailed in the Draft Disclosure Framework on a standalone basis and not consolidated. Foreign banks are to make disclosures specific to their operations in India.
Climate-related financial risks are the potential risks that may arise from climate change or from efforts to mitigate climate change, their impact and economic and financial consequences. According to the RBI, climate related financial risks can impact the financial sector through two broad channels namely physical risks and transition risks.
The impact of physical risks may vary from region to region, for instance cash flows to REs may be stressed on occurrence of a local/ regional weather event or severe weather events, chronic flooding or landslides in a particular region may pose a risk to the value of collateral/ security taken by REs or even the physical property and data centres of the REs themselves, affecting its ability to provide financial services to its customers.
Transition risks may include risks related to technological innovations such as production, storage, and transport of cleaner energy decreasing the value of assets dependent on the older technologies, i.e., causing losses on investment portfolios or reduction in cash flow of certain borrowers. Further, customers may also request REs that their savings or investments be directed towards businesses with more climate-friendly policies or projects having a positive environmental impact.
Climate change may also give rise to liability risks arising from persons who have suffered losses physical or transition risk, seeking to recover losses from those they hold responsible.
As per the draft the disclosures by the REs should cover the following 4 (four) thematic areas/ Pillars:
- Governance Disclosures: details the governance processes, controls and procedures used by the RE to identify, assess, manage, mitigate, monitor and oversee climate-related financial risks and opportunities.
- Strategy Disclosures: details RE's strategy for managing climate-related financial risks and opportunities.
- Risk Management Disclosures: details the RE's processes to identify, assess, prioritize and monitor climate-related financial risks and opportunities, including whether and how those processes are integrated into and inform the RE's overall risk management process.
- Metrics and Targets Disclosures: details the RE's performance in relation to its climate-related financial risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by statute or regulation.
The minimum, key-disclosures under each thematic pillar, that REs are required to disclose, have been elaborated in Annex I along-with prescription for baseline disclosure as well as an enhanced disclosure for each pillar.
All specified SCBs, AIFIs and NBFCs are required to report both baseline and enhanced disclosures, whereas Tier IV UCBs, are required to report only baseline disclosures and the enhanced disclosures are voluntary for such UCBs.
Further, REs are also required to make known the assumptions/ proxies and external assurances taken in their disclosures.
The draft also indicates the phased glide path for Governance, Strategy and Risk Management disclosures and Metrics and Targets disclosures by REs starting with FY 2025-26 onwards with UBCs getting more time to start meeting disclosure requirements.
Since, climate-related disclosures by REs is an important source of information for different stakeholders including customers, depositors, investors and regulators to understand relevant risks faced by REs and their approach to address such issues, the draft also mandates that such disclosures must be included and disclosed as a part of the REs financial results/ statements on its website.
It would be prudent for stakeholders to be cognizant of the provisions of the Draft Disclosure Framework and undertake the preparatory work to re-calibrate their internal processes and systems for the proposed disclosure framework.
Authors: Jayshree Navin Chandra (Senior Partner) and Nitika Bakshi (Senior Associate) at ZEUS Law Associates. Views are personal.
