The Reserve Bank of India released the Draft Disclosure Framework on Climate-related Financial Risks, 2024 on 28th February 2024. The draft has been kept open for comments and feedback till April 30, 2024. Here’s all you need to know about it:
Why was the need felt?
Financial institutions are at the forefront of mitigating climate risks through evaluation and financing of sustainable projects. Investments made by financial institutions play a critical role in the development and promotion of the invested sectors and significantly manoeuvre economic activity in that direction. Resultantly, in the interest of promoting climate consciousness and guiding allocation of funds to vigilant entities, the RBI has proposed a comprehensive framework for financial institutions to report on climate-related financial risks from their own and financed operations.
What is the proposed applicability of the Framework?
The framework shall be applicable to four categories of financial institutions, which are collectively referred to as Regulated Entities (REs):
Scheduled Commercial Banks (SCB) excluding Local Area Banks, Payments Banks and Regional Rural Banks
Tier-IV Primary (Urban) Co-operative Banks (UCBs) – which basically means UCBs that have deposits exceeding INR 10,000 crores
All-India Financial Institutions (AIFI) viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI
Top and Upper Layer Non-Banking Financial Companies (NBFCs) – this category includes roughly 15 NBFCs, currently
To ease the adoption, the Framework proposes a glide path for adoption of four key disclosure areas - Governance, Strategy, Risk Management and Metrics & Targets.
Further, each of these areas has two types of disclosures – Baseline and Enhanced Disclosures. UCBs have been provided relief from mandatory reporting of Enhanced disclosures.
Particulars | Type of Disclosures | Governance, Strategy, and Risk Management | Metrics and Targets |
SCBs, AIFIs, Top and Upper layer NBFCs | Both Baseline and Enhanced Disclosures are mandatory | FY 2025-26 onwards | FY 2027-28 onwards |
Tier IV UCBs | Baseline Disclosures are mandatory; Enhanced Disclosures are voluntary | FY 2026-27 onwards | FY 2028-29 onwards |
What are the Four Thematic Pillars of Disclosure under the Framework?
As discussed above, the Framework requires disclosure across four areas which are referred to as the ‘Four Thematic Pillars’. These four pillars are similar to the more-popular and globally followed Taskforce on Climate Related Financial Disclosures (TCFD) Framework created by the Financial Stability Board, and now merged with IFRS Foundation.
Baseline disclosures, as the name suggests, are high-level disclosures while Enhanced disclosures seek more details. Here is a brief of overview of the kind of information REs need to be prepared to report on:
Governance:
Corporate body, committee and individual persons responsible for oversight of climate-related issues, its competency and share of responsibilities
Use of processes and controls by the body to oversee response to climate risks
Oversight and review mechanisms instated by the body to integrate climate issues in strategy and operations
Strategy:
Climate-related issues (risks and opportunities) identified by the RE over the short, medium and long term
Financial impact of these issues on the RE’s financial position and performance and its ability to address them
Planned investments, targets and transition plans adopted to identify, assess, monitor and manage the climate-related issues
Risk Management:
Methodologies employed to understand the impact of climate-related risk drivers on market positions, liquidity, operational risk, and other risks
Internal control framework across three lines of defence to ensure sound, comprehensive and effective identification, measurement and mitigation of material climate-related financial risks
Use of scenario analysis/ climate risk testing to prepare for alternate situations
Metrics & Targets:
Targets set, its objective, base period, milestones, methodology used and verification mechanisms adopted
Greenhouse Gas Emissions across Scope 1, 2 and 3, including gross financed emissions for each industry and asset class
Capital allocation towards climate related risks and opportunities
Measure of vulnerability to climate risks, alignment with climate opportunities, and capital deployed towards both risks and opportunities.
So, what are our views?
PROS
The Framework is big step towards meeting India’s Nationally Determined Contribution as part of achievement of the goals in Paris Agreement. It shall bring climate considerations at the very heart of economic activity in India.
The Framework is extensive and takes a leaf from numerous global frameworks like IFRS, SBTi, BCBS, which adds a lot of credibility to climate disclosures.
CONS
Many disclosures sought are very detailed (such as measurement of Scope 3 emissions, disclosure of financed emissions, quantification of effects of risks) and may be cumbersome to track. Though the framework provides an option at certain places to omit disclosure by providing reasons, it may not reflect very well on the RE and may defeat the purpose of reporting.
It may add to the compliance burden of already regulated institutions.
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