Towards Resilience: Navigating RBI’s Climate-Related Disclosure Framework for Indian Financial Entities

With climate-related disclosures gaining momentum and emerging as a global priority, many countries are proposing their disclosures for sustainability and climate-based information. The International Financial Reporting Standards (IFRS) introduced its first standards in June 2023, IFRS S1 General Requirements for Disclosure of Sustainability-Related Financial Information and IFRS S2 Climate-Related Disclosures, which has been effective from 1^st January 2024. In March 2024, the U.S. Securities and Exchange Commission (SEC) enacted legislation on climate-related risk disclosures integrating key aspects of the Task Force Climate-Related Financial Disclosure (TCFD) framework. The Canadian Sustainability Standards Board (CSSB) has also proposed its first Canadian sustainability disclosure standards (CSDS) that is aligned with IFRS framework with some modifications.

On 28^th February 2024, the Reserve Bank of India (RBI) released a draft disclosure framework on climate-related financial risks that mandates regulated entities (REs) to integrate climate-related financial risks into the operational and strategic planning. This disclosure is mandatory for all Indian banks, financial institutions, and top NBFCs. These initiatives are set against the backdrop of accelerating climate concerns and aim to enhance the transparency and accountability of financial institutions in line with India’s net zero goals.

RBI permits REs to provide information on a standalone basis rather than consolidated, for different stakeholders like customers, depositors, investors, and regulators which will help them to understand relevant risks faced and the approach adopted to address such issues. This framework exemplifies India’s commitment to SDG 13: Climate Action and marks a considerable step for Indian banking and financial institutions to align with the global landscape. 

Impact on REs

• Board Leadership Reinvented: RBI’s directives reshape board dynamics, mandating dedicated committees and sub-committees to oversee climate policy, risk assessment, and mitigation. This signals a shift in governance, demanding accountability.
• The Integration Conundrum: It can be quite challenging for REs to integrate climate related risk into their existing risk frameworks. The quantitative and qualitative nature of climate metrics sets an integration challenge, increasing the urgency for standardized methodologies and operational resilience.
• Unveiling Customer Risk: RBI’s climate mandate reveals a new frontier in risk analysis for REs. Beyond assessing customer exposure, it offers a unique point to gauge reputational risks. This nuanced understanding is controlled to redefine investor preferences, reshaping the landscape for ESG-conscious investing. 
• Infrastructure imperatives: Compliance with RBI climate directives necessitates a shift in RE infrastructure. From redefined models for granular risk analysis to safeguarding against climate-related vulnerabilities. This includes assessing exposure to CO2 intensive assists, energy efficiency ratings, and vulnerabilities to climate change impacts like flooding and coastal risks.
• Talent Pool in Demand: As REs adapt to RBI’s climate mandate, the demand for skilled professional skyrockets. From climate risk analysts to finance experts, a new breed of talent will be crucial. Training and capacity-building initiatives become indispensable in fostering a climate-resilient workforce.

Types of organizations impacted

• Scheduled commercial banks (SCBs) excluding local area banks, payments banks, and regional rural banks.
• Tier-IV primary (urban) co-operative banks (UCBs).
• All India Financial Institutions (AIFI) viz. EXIM Bank, NABARD, NaBFID, NHB, and SIDBI.
• Top and upper layer non-banking financial companies (NBFCs). 

All the other REs can choose to adopt these guidelines voluntarily. Furthermore, foreign banks must disclosure the information related to their operation in India.

What to report

The key areas that are included under these disclosures are:

1.Governance requires REs to demonstrate their governance structure, board-level oversight and management of climate-related risks and opportunities.

2.Strategy focuses on RE’s strategy for managing the identification of short, medium, and long-term financial risks and opportunities that may have material financial impact on entity’s financial planning.

3.Risk management mandates REs to focus on procedures for identifying, assessing, prioritizing, and monitoring climate-related financial risks and opportunities.

4.Metrics and targets compel REs to quantify risks and track progress against specific goals and targets. 

However, it is key to note that RBI has proposed a phased-approach for these disclosures, with the first 3 pillars of governance, strategy, and risk management slated for disclosure from FY25-26 onwards and the 4^th pillar for metrics and targets slated from FY 27-28 onwards. Financial institutions are required to report on these disclosures as a part of financial/results or statements on the website. 

Internal controls and assurance

RBI mandates that the disclosure must pass stringent internal controls assessments. These disclosures must be reviewed by the board of directors or a designated committee of the board. This requirement underscores the critical importance of transparency and accuracy in reporting.

How technology can help

Utilizing the right tools and technology can significantly assist financial entities in effectively meeting RBI’s climate resilience disclosure guidelines. With advanced software, data analytics, and artificial intelligence (AI) support, entities can streamline their process and integrate climate-related issues into their overall operations and strategy. The use of machine learning to sift through vast amounts of external ESG and climate risk data simplifies the process for financial institutions. This reduces portfolio risk, increases sustainable investment opportunities, and promotes greater long-term sustainability.

Our strong tech foundation coupled with our tech-led offerings and investments in IPs like i.RiskMan serve as a strong foundation for meeting the technology needs for ESG Data Management, climate risk and integrations and sustainable supply chain assessment. These tools help banking and financial institutions to meet regulatory standards with accuracy and efficiency ensuring compliance.