RBI urges financial institutions to disclose climate risks

According to RBI, domestic lenders must disclose information on a standalone basis and not for the consolidated entity.  (HT)
According to RBI, domestic lenders must disclose information on a standalone basis and not for the consolidated entity. (HT)

Summary

  • The proposed norms will apply to scheduled commercial banks, excluding local area banks, payments banks, and regional rural banks

Mumbai: The Reserve Bank of India (RBI) on Wednesday suggested that financial institutions, including banks and large non-bank financiers, should disclose climate change risks. The central bank believes the move will help customers, depositors, investors, and regulators understand the risks better.

Emphasizing the growing importance of climate-related financial risks, RBI said there was a need for regulated entities to provide structured information about the risks. Such disclosures should be integrated into the lender's financial results or statements on its website, it added.

To be sure, while existing norms mandate lenders to disclose material risks as part of their Pillar 3 disclosures, RBI suggested that the disclosures should comprise governance, strategy, risk management, and targets across four thematic areas.

RBI said climate change is one of the most significant risks confronting lenders today, and the proposals are part of the draft disclosure framework on climate-related financial risks. The proposed norms will apply to scheduled commercial banks, excluding local area banks, payments banks, and regional rural banks.

It would also apply to tier-IV primary urban co-operative banks, and all-India financial institutions such as Exim Bank, Nabard, and Sidbi, as well as top and upper layer non-banking financial companies (NBFCs).

According to RBI's scale-based regulations, NBFCs are categorized into four layers based on their size, activity, and perceived risks: base, middle, upper, and top layers. Fifteen NBFCs, including Tata Sons, Shriram Finance, and LIC Housing Finance, belong to the upper layer.

The new guidelines will roll out in phases. Governance, strategy, and risk management for banks, all-India financial institutions, and both types of NBFCs will start from FY26. Disclosure on metrics and targets will become effective from FY28. Urban cooperative banks will adopt these norms a year after banks and NBFCs.

“Regulated entities (REs) should disclose information about their climate-related financial risks and opportunities for the users of financial statements," it said, adding that such disclosures will foster an early assessment of climate-related financial risks and opportunities, besides facilitating market discipline.

According to RBI, domestic lenders must disclose information on a standalone basis and not for the consolidated entity. Likewise, foreign banks should disclose this information only for their India business.

Regarding governance, the entities must disclose information on the board's oversight of climate-related risks and opportunities, as well as the senior management's role in assessing and managing such risks and opportunities. 

In terms of strategy, disclosures should include identified climate-related risks and opportunities across short, medium, and long terms. Additionally, they should also address the impact of these risks and opportunities on business, strategy and financial planning, and the resilience of their strategies in various climate scenarios.

According to RBI, climate resilience involves the ability of a regulated entity to adapt to climate-related changes, developments, or uncertainties. Regarding risk management, the third theme, entities should outline their processes for identifying, assessing, prioritizing, and monitoring climate-related financial risks and opportunities.

Lastly, metrics and targets would include details of the lender’s performance in relation to its climate-related financial risks and opportunities, including progress towards any climate-related targets it has set, and any targets it is required to meet by statute or regulation.

RBI invited comments and feedback on the draft framework by 30 April.

Meanwhile, Indian banks, particularly public sector lenders, have started integrating green initiatives into their business strategies in response to increasing climate change risks. They are seeking external assistance to develop frameworks that enhance their decision-making on sustainability matters. 

According to a Mint report in December, State Bank of India and Bank of Baroda are spearheading these efforts among state-owned banks.

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