RBI: What are climate-led financial risks? Key questions answered

While acknowledging the importance of the environment and its long-term impact on organisations and economy as a whole, the Reserve Bank of India (RBI) has now released a draft framework for banks to follow. 

As per the framework, banks will be mandated to disclose those climate-related risks which have a bearing on their financial stability.

While observing that climate-related risks are one of the emerging risk and are expected to significantly impact them, these entities play an important role in financing the transition towards an environmentally sustainable economy. 

It is, therefore, imperative for the REs to implement a robust climate-related financial risk management, noted the RBI.

What is the draft disclosure framework about?

The draft framework addresses climate-related Financial Risks and it states that regulated entities (REs) i.e., banks are supposed to share information about their climate-related financial risks and opportunities in their financial statements. 

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The revelation will foster an early assessment of climate-related financial risks and opportunities and also facilitate market discipline.

What are climate-related financial risks? 

The RBI has defined climate-related financial risks as the potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and economic and financial consequences.

Which organisations come under the purview?

These guidelines will be applicable to all the regulated entities:

A. All scheduled commercial banks (excluding local area banks, payments banks and regional rural banks).

B. All Tier -IV primary (urban) and cooperative banks (UCBs).

C. All top and upper layer non-banking financial companies.

What should they disclose?

The RBI circular states that they must disclose the following:

1. Identified climate-related risks and opportunities over short, medium and long term.

2. The impact of climate-related risks and opportunities on their businesses, strategy and financial planning.

3. The resilience of the RE's strategy taking into consideration the different climate scenarios.

What is the need of  this framework?

The RBI clarified that there is an urgent need for a better and consistent disclosure framework for regulated entities, without which the financial risks can lead to mispricing of assets and misallocation of capital. 

This essentially led to a standard disclosure framework on climate related financial risks.