RBI proposes norms for disclosure of climate-related financial risks for lenders

The Reserve Bank on Wednesday proposed to make it mandatory for banks and NBFCs to disclose information about their climate-related financial risks on a standalone basis. Climate-related financial risks mean the potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and economic and financial consequences. Climate-related risks are one of the emerging risks and are expected to significantly impact the regulated entities (REs) as well as have implications on financial stability, the RBI said in draft guidelines on Disclosure framework on Climate-related Financial Risks, 2024.

The REs include commercial banks (excluding Local Area Banks, Payments Banks and Regional Rural Banks), certain primary (Urban) cooperative banks, All All-India Financial Institutions (viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI) and all large non-banking financial companies (NBFCs). "The REs should disclose information about their climate-related financial risks and opportunities for the users of financial statements. It will foster an early assessment of climate-related financial risks and opportunities and also facilitate market discipline," the draft said.

The REs, it said should disclose the information detailed in these guidelines on a standalone basis and not a consolidated basis. Foreign banks shall make disclosures specific to their operations in India. The REs are already required to disclose information on material risks as a part of certain disclosures. Given the growing importance of climate-related financial risks, there is a need for REs to disclose more structured information about their climate-related financial risks, said the draft on which the RBI has invited comments by April 30, 2024.

The RBI's draft further said the disclosures by the REs should cover four thematic areas (Pillars) - Governance, Strategy, Risk Management, and Metrics and Targets. The draft also proposes a glide path for detailed disclosures by the REs on the areas of Governance, Strategy, Risk Management and Metrics and Targets. The disclosures should be subject to appropriate internal control assessments and should be reviewed by the Board of Directors or a Committee of the Board, the draft said.