RBI's Discussion Paper on Climate Risks (27 July , 2022) is a big welcome to India's ESG Journey !

On 27 July , India’s Central Bank RBI (Reserve Bank Of India) came up with path breaking discussion paper on climate related risks . Embracing ESG by the central bank is right signals to global investment community !

1. What are climate-related risks?

Risks associated with climate change and its mitigation, as well as its influence on the economy and financial implications, are considered to be climate-related risks. The two main routes via which it can have an effect on the financial industry are physical risks and transition risks.

(i) Physical Risks- This category covers the financial costs and losses brought on by the escalating frequency and intensity of extreme weather events connected to climate change, longer-term progressive climatic changes, and indirect consequences of climate change.

(ii) Transition Risks- These are the dangers associated with the transition to a low-carbon economy. This adjustment is influenced by a variety of variables, including modifications to laws and regulations relating to the environment, the introduction of newer technology, and changes in consumer attitudes and behaviour. The economy may be significantly impacted by the transition process, or by cutting carbon emissions.

2. All REs should adhere to the following principles:

(i) Appropriate governance: REs may have a board-level committee or subcommittee made up of sustainability and risk experts, with duties including directing climate-related policy, identifying and managing climate-related risks and opportunities, overseeing timely updating of internal risk reports, keeping tabs on the status of pertinent goals and targets, and directing external disclosures.

(ii) Risk management strategy for climate change: REs may designate the appropriate Committees to handle financial risks associated with climate change. They may make sure that the Board and Senior Management are adequately aware of the financial risks associated with climate change and have the skills and expertise necessary to manage these risks. They may take initiatives to educate the Board about challenges connected to climate change through internal training and workshops, external collaboration, or both.

(iii) Risk management: REs may include indicators of climate-related risk in their framework for assessing risk appetite, which must include quantifiable, objective measures. A climate-risk assessment may well be incorporated as a step in their due diligence procedure. Customers that have significant exposure to these hazards may receive a climate-risk rating as a consequence of the evaluation.

(iv) Policies and Procedures: REs may consider major physical and transition concerns when designing a policy relating to climate change. The three lines of defence should be clearly defined, with roles assigned and reporting lines established.

(v) Risk Identification and Assessment: To determine which of its operations are subject to physical and transition hazards associated to the climate, REs may construct a model or framework, such as a heat map. Depending on the type of risk, this mapping may be divided into several sectors.

(vi) Risk Monitoring: REs can create a technique to evaluate the relationship between the carbon footprint of their clients and the hazards connected to the climate they face. This approach may have developed for certain CO2/GHG-intensive industries.

(vii) Risk Management and Mitigation: REs may take significant precautions to reduce or forego climate-related hazards that do not align with their risk tolerance. The RE's own evaluation of the risk concentrations connected to climate change can be used to guide the development of these measures. Given the risks associated with its own operations, such as floods, earthquakes, and other climatic and environmental hazards, RE may geographically distribute or situate its vital services throughout multiple locations.

3. Financial transparency and reporting for REs tied to climate risk

The TCFD was established by the FSB and is the most well-known disclosure framework for climate and sustainability. The TCFD published a set of recommendations in 2017 to assist businesses in disclosing risks and opportunities associated with climate change. The TCFD proposals have undergone extensive discussions and are now more widely accepted by users and preparers throughout the world. Regulators and authorities also routinely accept, use, or refer to these.

The FSB's TCFD framework, which is increasingly recognised as an appropriate foundation for climate-related financial disclosures, may be used by REs to align their Climate-related Financial Disclosures. By adapting the same, REs' climate-related financial disclosures would be more consistent and comparable to those of their competitors worldwide.

Link of the announcement : https://www.rbi.org.in/Scripts/PublicationsView.aspx?id=21071

ABBREVIATIONS

1. RE - Regulated Entities

2. FSB - Financial Stability Board

3. TCFD - Task Force on Climate-related Financial Disclosures

3. GHG - Green House Gas

4. CO2 - Carbon Dioxide