RBI Draft Disclosure Framework on Climate-related Financial Risks 2024

The "Draft Disclosure Framework on Climate-related Financial Risks 2024" issued by the Reserve Bank of India (RBI) is a significant step toward addressing the financial stability implications of climate change. This document sets forth a comprehensive disclosure framework aimed at enhancing transparency and accountability in how financial institutions manage climate-related risks. Here's a detailed overview of the document:

1. Introduction and Purpose

The framework acknowledges the substantial impact of climate change on financial institutions and the broader financial system. It emphasizes the need for Scheduled Commercial Banks, Tier-IV Urban Co-operative Banks, All-India Financial Institutions, and top-tier Non-Banking Financial Companies (NBFCs) to develop robust policies and processes for managing climate-related financial risks. The purpose of these guidelines is to ensure that regulated entities (REs) disclose information about their climate-related financial risks and opportunities, facilitating an early assessment and fostering market discipline.

2. Applicability

The guidelines apply to a wide range of financial entities, including all scheduled commercial banks (excluding Local Area Banks, Payments Banks, and Regional Rural Banks), all Tier-IV Primary (Urban) Co-operative Banks (UCBs), All-India Financial Institutions (e.g., EXIM Bank, NABARD, NaBFID, NHB, and SIDBI), and all top and upper-layer NBFCs. Foreign banks operating in India are required to make disclosures specific to their operations within the country.

3. Definitions

Key terms defined in the framework include "Climate-related financial risks," "Climate resilience," "CO2 equivalent," "Financed emissions," "Greenhouse gases (GHGs)," "Material risk takers," "Physical risk," "Scenario analysis," and the scopes of greenhouse gas emissions (Scope 1, 2, and 3). These definitions provide a foundation for understanding and assessing the various dimensions of climate-related risks and opportunities.

4. Thematic Pillars of Disclosure

The "Draft Disclosure Framework on Climate-related Financial Risks 2024" outlines four thematic pillars for disclosure by regulated entities (REs). These pillars are designed to provide comprehensive information on how an entity identifies, assesses, manages, mitigates, monitors, and oversees climate-related financial risks and opportunities. Below are detailed descriptions of these thematic pillars:

4.1 Governance

This pillar focuses on the governance processes, controls, and procedures used by REs to manage climate-related financial risks and opportunities. Disclosures under this pillar should include:

- The Board’s oversight of climate-related risks and opportunities.

- Senior Management’s role in assessing and managing climate-related risks and opportunities.

4.2 Strategy

The Strategy pillar requires REs to disclose their approach to managing climate-related financial risks and opportunities. This includes:

- Identification of climate-related risks and opportunities over short, medium, and long term.

- Impact of climate-related risks and opportunities on the RE’s businesses, strategy, and financial planning.

- Resilience of the RE’s strategy, taking into consideration different climate scenarios.

4.3 Risk Management

Disclosures under the Risk Management pillar should detail the processes REs use to identify, assess, prioritize, and monitor climate-related financial risks and opportunities. This includes:

- Processes and related policies to identify, assess, prioritize, and monitor climate-related financial risks.

- Processes used for managing climate-related risks.

- Integration of climate-related financial risks and opportunities identification, assessment, prioritization, and monitoring processes into the overall risk management process.

4.4 Metrics and Targets

This pillar focuses on the RE’s performance in relation to its climate-related financial risks and opportunities, including:

- Metrics used to assess climate-related financial risks and opportunities in line with its strategy and risk management process.

- Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions and the related risks.

- Targets used to manage climate-related risks and opportunities and performance against these targets.

The annexure of draft disclosure framework on climate related financial risk has detailed coverage of baseline disclosure & enhanced disclosure for each thematic pillar.

5. Commencement and Disclosure Requirements

The document outlines a glide path for detailed disclosures, with different timelines for SCBs, AIFIs, top and upper layer NBFCs, and Tier-IV UCBs, starting from FY 2025-26 onwards for Governance, Strategy, and Risk Management disclosures, and from FY 2027-28 onwards for Metrics and Targets disclosures.

6. Validation and Scrutiny

Disclosures must undergo appropriate internal control assessments and be reviewed by the Board of Directors or a Committee of the Board. They must also be disclosed as part of the RE's financial results/statements on its website.

This comprehensive framework aims to enhance the financial system's resilience to climate-related risks by promoting transparency and encouraging proactive risk management practices among financial institutions.