The Reserve Bank of India has sought comments on a proposed framework on disclosure of information by regulated entities (REs) such as banks, NBFCs and HFCs, etc., about their climate related financial risks and opportunities. Although the framework is meant for REs in the financial sector, it must be heeded by all industries since it signals larger changes that will unfold in the business preferences of lenders, investors, asset managers and insurers at large.

This framework has been proposed with the objective of making REs understand the interaction between climate-related and environmental risks and their business activities.

The historical data and traditional backward-looking risk assessment methods are unlikely to adequately capture future impact of climate change. Therefore, the data collected through such disclosures will become relevant in guiding future lending.

Unlike Basel Committee Framework, the RBI has refrained from asking REs to carry out a supply chain analysis of their borrowers for the time being. This will avoid any shocks to the system given the lack of experience in climate-related disclosure reporting and perhaps the lack of availability of trained professionals. However, as REs gain experience, the next logical step would be to expect REs to carry out supply chain analysis. This will have a direct impact on the creditworthiness of businesses.

Ripple effect

The likely trend of RBI guidance can be drawn from the Securities and Exchange Board of India’s (SEBI’s) shift from a voluntary disclosure requirement to a mandatory scheme. The Business Responsibility and Sustainability (BRSR) framework now mandates that the top 250 listed entities (by market capitalisation) make ESG disclosures regarding their value chains on a comply-or-explain basis starting FY25. This will create a ripple effect which will indirectly bring unlisted entities within the fold of ESG reporting.

When viewed together, the steps taken by SEBI and RBI will act as catalysts in changing the larger behavioural trend among businesses by making the largest companies (by market capitalisation) and regulated entities agents of such change.

Considering that insurers also play an important role in the financial sector by facilitating risk transfer as well as investments, they too might be called upon to join the ranks of agents of change. International experience too points in that direction.

The Task Force on Climate related Financial Disclosures provided supplemental guidance for banking as well as insurance companies to make disclosures relating to climate risks. Later, the International Financial Reporting Standards (IFRS S2) provided more elaborate and specific climate related disclosure requirements for insurance companies.

Prudential Regulatory Authority, UK’s financial services regulatory body, expects insurance companies and financial institutions it plans to disclose steps taken by the firms to manage their climate related financial risks. The European Union’s insurance regulatory regime was also amended to require stronger sustainability risk management by (re)insurers, including climate scenario analysis. In Singapore, the Financial Institutions Climate Related Disclosure Document is divided into different sections for each of the following industries in the financial sector: banks (for lending activities), asset managers (for investment activities), and insurance companies (for underwriting activities).

Therefore, the international trend suggests that efforts have been made to bring insurance companies within the ambit of climate-related disclosures.

Goswami is Director-Public Policy, Rathore is Senior Associate, and Jeph is Associate, Cyril Amarchand Mangaldas