Lenders need to disclose more structured information about climate-related financial risks: RBI

The Reserve Bank of India said there is a need for lenders (regulated entities/REs) to disclose more structured information about their climate-related financial risks.

The central bank noted that there is a need for a better, consistent and comparable disclosure framework for REs, as inadequate information about climate-related financial risks can lead to mispricing of assets and misallocation of capital by them.

Accordingly, RBI has decided to put in place a standard Disclosure framework for REs on Climate-related Financial Risks. The REs have to disclose the information detailed in the framework on a standalone basis and not consolidated basis., per RBI’s “Draft Disclosure framework on Climate-related Financial Risks, 2024”.

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As per the draft framework, REs will be required to make disclosures on four thematic areas (Pillars) -- “Governance”, “Strategy”, “Risk Management” and “Metrics and Targets”, per RBI’s Draft Disclosure framework on Climate-related Financial Risks, 2024.

The disclosures are applicable to Scheduled Commercial Banks/SCBs (excluding Local Area Banks, Payments Banks and Regional Rural Banks), large urban co-operative banks (UCBs), all-India financial institutions(AIFIs), and large NBFCs.

“Climate-related disclosures by REs is an important source of information for different stakeholders (e.g., customers, depositors, investors and regulators) to understand relevant risks faced and approach adopted to address such issues,” RBI said.

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Impact inevitable

The central bank emphasised that given the increasing threat of climate change and the associated physical damage, changes in market perception and the transition towards more environment-friendly products and services, the impact of climate change on REs is inevitable.

“The REs also play an important role in financing the transition towards an environmentally sustainable economy. It is therefore imperative for the REs to implement a robust climate-related financial risk management policies and processes to effectively counter the impact of climate-related financial risks,” RBI said.

As per the glide path provided for disclosures, SCBs, AIFIs & large NBFCs and UCBs have to start making disclosures on “Governance, Strategy, and Risk Management” from FY26 and FY27 onwards, respectively.

SCBs, AIFIs & large NBFCs and UCBs have to start making disclosures on “Metrics and Targets” from FY28 and FY297 onwards, respectively.

As part of enhanced disclosure, REs have to disclose the absolute gross greenhouse gas emissions generated during a financial year.

The also have to reveal absolute gross financed emissions (portion of gross greenhouse gas emissions of an investee or counterparty attributed to the loans and investments made by an RE to the investee or counterparty) for each industry by asset class.

RE have to disclose the climate-related physical and transition risks - amount and percentage of assets vulnerable to both the risks;

The lenders have to reveal whether and how climate-related considerations are factored into remuneration of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers.

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