On February 28, the Reserve Bank of India (RBI) introduced a preliminary regulation titled “Draft Disclosure Framework on Climate-related Financial Risks, 2024,” which had been eagerly awaited since the publication of a discussion paper, “Discussion Paper on Climate Risk and Sustainable Finance,” by the RBI in July 2022. This draft framework outlines guidelines for banks and Non-Banking Financial Companies (NBFCs) regulated by the RBI to disclose climate-related financial risks.
The entities covered by this framework include 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 (such as EXIM Bank, Nabard, NaBFID, NHB, and SIDBI), all top and upper layer non-banking financial companies, and all foreign banks operating within India. Urban co-operative banks will begin disclosing in FY27, while the rest will start in FY26. These disclosures must be included as part of the entity’s financial results/statements on its website, and they must be standalone, although assurance is optional.
The draft regulation is based on the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Established in 2015 by the Financial Stability Board, a G20-associated not-for-profit association, the TCFD was tasked with developing recommendations for companies to disclose information to help investors evaluate and price climate-related risks. In 2017, the TCFD released its recommendations, structured around governance, strategy, risk management, and metrics and targets, which form the core of business operations. The TCFD recommendations include suggested disclosures under each of these pillars. Although the TCFD has been disbanded since October 2023, the FSB has entrusted the IFRS Foundation with continuing the program.
Climate risks have consistently ranked high in the Global Risks Reports of the World Economic Forum. These risks encompass both physical risks, such as those to assets, lives, and business continuity resulting from climate-change events, and transition risks, including market, product and technology, regulatory and legal, and reputational risks resulting from the low-carbon transition.
No sector or industry is immune to climate risks. Banks and NBFCs, given their exposure across sectors, carry significant climate risks. Under certain scenarios, these risks can affect the stability of a financial institution or even the financial system of a country. The TCFD recommendations provide sector-agnostic guidance for mapping, assessing, and managing climate-related financial risks and opportunities and integrating these risks into business strategy.
Since their release, the TCFD recommendations have been voluntarily adopted by hundreds of companies worldwide, including 55 in India. Many jurisdictions, including the UK, Switzerland, Japan, New Zealand, Thailand, Malaysia, the Philippines, Brazil, Columbia, Egypt, Kenya, the US, and Canada, have mandated TCFD-aligned disclosures. India will join them once the RBI draft becomes a regulation. It’s worth noting that the Business Responsibility and Sustainability Reporting mandate by SEBI does not currently incorporate TCFD recommendations, except for Scope 1, 2, and 3 emission data reporting.
Once implemented, the draft regulation will allow the RBI to gain a consolidated view of the climate-related financial risk landscape among its regulated entities, enabling the formulation of further guidelines and regulations to navigate these risks without compromising the financial stability or growth agenda of the country. It will also help regulated entities understand their climate-related risk profiles, manage risks, and drive the country’s transition to net-zero.
However, developing reliable risk profiles for making business strategies or national policies will be a long and challenging journey for regulated entities. Each step required presents its own challenges. The primary challenges faced by regulated entities revolve around disclosure of aggregate financed emissions covering 100% of gross exposure and risk assessment and scenario analysis, which require gathering emission data and mapping risks of existing loans/investments and standard operating procedures (SOPs) to ensure that risk assessment and emission data reporting are integral to all new loans and investments.
Challenges related to emission data stem from the need to collect data from clients across sectors, asset classes, and scales nationwide, while challenges related to risk mapping arise from variations in physical and transition risks across locations and sectors. Aligning business strategy with climate risks and opportunities and establishing appropriate targets and metrics for tracking and measurement will be relatively easier once robust inputs become available from emission data and risk mapping. Regulated entities must enhance governance to integrate all these aspects through appropriate oversight, policies, internal controls, and systems and procedures. Achieving this requires subject knowledge and skills across all levels of the organization, presenting another challenge that regulated entities must address early on.
The draft regulation is open for public comment until April 30, 2024. It may take a few months for this draft to become a regulation, leaving very little preparation time before the proposed compliance year FY2025–26. Therefore, regulated entities would be wise to view this as impending regulation and take action promptly.
Bose Varghese is a senior director of environmental, social, and governance at Cyril Amarchand Mangaldas.
