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On February 28, the Reserve Bank of India (RBI) unveiled draft guidelines on the disclosure framework on climate-related financial risks for regulated entities (REs). These guidelines are set to apply to a wide array of REs, including scheduled commercial banks, Tier IV primary urban co-operative banks (UCBs), foreign banks operating in India, all Indian financial institutions (AIFIs), and top and upper layer non-banking financial companies (NBFCs). REs have been requested to furnish their comments and feedback by the end of April.
These guidelines aren’t unanticipated, given prior developments, such as the RBI’s joining the Central Banks and Supervisors Network for Greening the Financial System (NGFS) as a member in April 2021, the release of a discussion paper on climate risk in July 2022, and the Monetary Policy Statement in February 2023.
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Four pillars
The current guidelines mandate REs to disclose information relating to the banks’ ability to both identify and manage climate-related financial risks and opportunities in their credit portfolio. The disclosures by REs are expected to cover four thematic pillars: governance, strategy, risk management, metrics, and targets, aligning with the global framework of the Task Force on Climate-related Financial Disclosures (TCFD).
According to the report, the RBI’s climate-related financial disclosures will rapidly percolate ESG risk identification and management to the organised sector, as the banks will now request their borrowers to report both their emissions and their exposure to other climate risks.
In addition to portfolio performance on targets and metrics, banks also have to report their risk governance mechanisms, including the board’s oversight of climate-related risks and opportunities, senior management’s role in assessing these risks, the identification and listing of climate-related risks and opportunities over short, medium, and long terms, and their impact on REs’ business, strategy, and financial planning.
Unlike the recent scaled-back requirements by the U.S. Securities and Exchange Commission (SEC), which excluded Scope 3 greenhouse gas (GHG) emissions, the RBI’s requirements are aligned with the NGFS’s guidelines and those of European and other Asia-Pacific jurisdictions like Hong Kong, Singapore, and Australia, encompassing measurement and disclosures for Scope 1, Scope 2, as well as Scope 3 GHG risks.
Glide path
RBI has additionally specified a glide path for disclosures, with Governance, Strategy, and Risk Management pillars slated for disclosure by FY 2025-26 onwards and Metrics and Targets by FY 2027-28 onwards and a year later for commercial banks, AIFIs, and NBFCs, with UCBs.
The disclosures require significant changes to Res current portfolio evaluation and maintenance process, necessitating the measurement of portfolio risks and opportunities and, in some cases, where even data is lacking, using estimations or proxies.
Comprehensive end-to-end portfolio risk assessment solutions are essential for managing various risks effectively. Banks require methodologies to understand the impact of both physical and transition risks on liquidity and operational aspects. Integrating climate risk into credit risk assessment processes is crucial, as is establishing a governance framework for managing environmental, social, and governance (ESG) risks. Additionally, scenario analysis plays a pivotal role in evaluating financial risks stemming from climate change.
Although some banks should begin disclosing their ESG-related information in the upcoming fiscal year, establishing the necessary institutional framework should commence promptly. While certain banks have formulated strategies based on NGFS scenarios, the recent requirements set forth by regulatory bodies necessitate significant efforts to train staff, operationalize strategies, and transition from planning to execution phases. This transition phase demands comprehensive solutions that can seamlessly integrate into existing banking operations and help banks navigate the complexities of ESG risk management.
The writer is the co-founder and CEO of ESGDS
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