Mumbai: On Wednesday, the Reserve Bank of India (RBI) recommended that banks and significant non-bank financiers communicate the risks associated with climate change. The central bank thinks that by taking this action, investors, depositors, customers, and regulators will everyone have a better understanding of the risks.
The RBI emphasised the necessity for regulated firms to give structured information on the risks, citing the growing significance of climate-related financial hazards. It further stated that these disclosures had to be included in the lender’s online financial statements or results.
While current regulations require lenders to report material risks as part of their Pillar 3 disclosures, the RBI recommended that the disclosures also include information on governance, strategy, risk management, and targets in relation to four different themes.
One of the biggest risks facing lenders today, according to the RBI, is climate change. The recommendations are included in the draft disclosure framework on financial risks associated with climate change. With the exception of local area banks, payments banks, and regional rural banks, the proposed standards will only be applicable to scheduled commercial banks.
Along with all-India financial institutions like Exim Bank, Nabard, and Sidbi, it will also cover tier-IV main urban cooperative banks and upper and top layer non-banking financial organisations (NBFCs).
Based on their size, activity, and perceived risks, NBFCs are divided into four tiers under RBI’s scale-based regulations: base, middle, upper, and top layers. The top tier consists of fifteen NBFCs, such as LIC Housing Finance, Shriram Finance, and Tata Sons.
The new policies will be implemented gradually. Beginning in FY26, banks, all-India financial institutions, and both kinds of NBFCs will implement new governance, strategy, and risk management practices. Metrics and target disclosure will take effect in FY28. These guidelines will be implemented by urban cooperative banks a year after banks and NBFCs.
In addition to promoting early assessment of climate-related financial risks and opportunities, the statement stated that “Regulated entities (REs) should disclose information about their climate-related financial risks and opportunities for the users of financial statements.”
Domestic lenders are required by RBI to provide information separately, rather than on behalf of the consolidated organisation. Foreign banks should also only reveal this information in relation to their business in India.
In terms of governance, the organisations have to provide information about how the board oversees opportunities and risks associated to climate change, as well as how senior management evaluates and manages these possibilities and risks.
As far as planning goes, disclosures ought to cover recognised short-, medium-, and long-term climate-related risks and opportunities. They should also discuss how these risks and opportunities affect their business, financial planning, strategy, and strategy’s adaptability to different climate scenarios.
The ability of a regulated entity to adjust to changes, developments, or uncertainties associated to climate change is referred to the RBI as climate resilience. The third theme is risk management. Organisations should describe how they detect, evaluate, prioritise, and keep track of financial risks and opportunities associated to climate change.
Last but not least, metrics and targets would include information about how the lender has performed with respect to its financial risks and opportunities related to climate change, including its progress towards any targets it has set and any targets it is mandated to accomplish by law or regulation.
By April 30th, RBI requested comments and suggestions regarding the draft framework.
In the meantime, as the dangers associated with climate change increase, Indian banks—especially public sector lenders—have begun incorporating green projects into their business plans. They are looking for outside help to create frameworks that improve their ability to make decisions on sustainability.
