Decoding RBI's Disclosure Framework on Climate-related Financial Risks, 2024

What started as a discussion paper around developing a structured climate-related financial risks disclosure framework almost 2 years (July 27th, 2022) ago culminated into a draft on February 28th, 2024, inviting comments for closure. The purpose is to enable integration of climate risks and opportunities in the financial statements, enabling early assessment of these risks as well as inculcating market discipline.

There is a clear guideline on the applicability of these disclosures, definitions of the key technical terms, the thematic pillars under which these disclosures are expected to be made & the glide path through which these disclosures shall be mandated, the expected mode of release and the validation of disclosures made. Through this article, I attempt to dive into what the draft addresses, simplify what that means and the objectives that this development tries to meet.

The thematic pillars have been strategically designed to address the most pertinent building blocks that shall help REs and other decision makers objectively and transparently understand the institution's:

1. Governance around climate action: WHO HOLDS THE RESPONSIBILITY?The governance structure, roles and responsibilities, policies around climate-related issues. The competencies & skills of the governing bodies, the frequency of engagement & communication to the identified body on climate related issues, incorporation in the remuneration policies and integration of climate conversation within internal functions and more.
2. Strategy for incorporation of climate related risks & opportunities in decision making: WHAT ARE THE SHORT-, MEDIUM- & LONG-TERM RISKS?Clear description of short-, medium- and long-term horizon, identification & climate related issues expected to arise during these horizons, impacts anticipated on the business models, financial position & performance, climate resilience of RE's strategy, capability to adapt, resource allocation, climate scenario analysis & outcomes and more.
3. Climate-related financial Risk Management: HOW ARE THESE RISKS ASSESSED?Nature, likelihood & magnitude of effects of climate related financial risks, methodologies employed to assess the impact of climate-related risk drivers on the market risk positions, liquidity risk profiles, operational risks & other risks; monitoring of these risks, integration in the overall risk management and more.
4. Metrics and Targets used to measure climate-related financial risks: HOW IS PROGRESS MEASURED?Targets set and the objectives, metrics used - the base period and period for which target has been set, milestones, clear disclosure on whether the targets are for absolute GHG emissions or for the intensity of these emissions, whether they have been independently validated, alignment with India's Nationally Determined Contribution (NDCs). This also expects information about the performance against these metrics, trends, which GHGs are covered and which of the scopes (Scope1,2 and 3) have been addressed, scope 3 categories, approach, inputs and methodologies used, financed emissions and more.

Given the complexity of disclosures expected and evaluating the current readiness of the REs, these disclosures have been categorized as 'Baseline Disclosures - Mandatory' and 'Enhanced Disclosures - Voluntary' similar to the construct followed by SEBI's Business Responsibility & Sustainability Report requirement for the top 1000 listed entities which outlines 'Essential' & 'Leadership' indicators.

Further, to ease these institutions into the process and gradually enhance the disclosure quality and quantum, the draft proposes the following adoption timeline:

Some of the crucial outcomes that this requirement attempts to achieve are:

• Ensuring that there are standardized disclosures according to a clearly outlined framework that allow for comparability among Regulated Entities (REs), a level playing field and prevent mispricing of assets and misallocation of capital due to lack of accounting of climate related risks and opportunities.
• Ensuring transparency for all key stakeholders by incorporation of climate related disclosures as a part of the financial results / statements on their websites.
• Inculcating the discipline of exercising rigor through appropriate internal control assessments for climate related disclosures
• Ensuring leadership accountability through reviews by the Board of Directors or a Committee of the Board.
• Recommending that regulated entities take into account the biggest source of climate related impact beyond scope 1 and scope 2 GHG emissions, to disclose on scope 3 GHG emissions for each industry and asset class, gross exposure to each industry by asset class.
• Incorporation of material climate-related financial risks over time horizons into Internal Capital and Liquidity Adequacy Assessment Processes.
• Incorporation of climate related financial risks in the credit risk management systems and processes

This development occurs at a very critical juncture of India's climate integration journey. As financial institutions play a critical role in shaping the country's economy, it also impacts where the money flows and how it is being utilized responsibly. The bigger objectives of meeting the NDCs and long term ESG goals shall be shaped based on the decisions made in the years to come and disclosures will remain an important pillar to enable institutions, organisations and stakeholders understand transparently on the current status and actions planned to mitigate risks and leverage opportunities.

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