In response to the Reserve Bank of India’s (RBI) ‘Draft Disclosure Framework on Climate-Related Financial Risks’ released in February 2024, the Centre for Financial Accountability (CFA) has advocated for an expanded approach to assessing and addressing climate-related risks faced by financial institutions (FIs).
The CFA emphasised the critical need to empower shareholders, customers, and the general public with comprehensive information on the climate crisis’s impact on FI investments. They highlighted the urgency of understanding direct physical risks from rising temperatures, sea-level rise, and glacial melting, as well as the broader transition towards low-carbon technologies and infrastructures globally.
“While it is a notable step from the RBI to emphasise greater transparency and accountability of REs towards climate-related financial risks, we feel that there is a need to broaden the scope of ‘risk’ as understood by the central regulator, enhance the level of disclosures obligated upon the REs and to also explore oversight mechanisms beyond disclosures to unleash the full breadth of climate accountability of REs,” CFA said in its submission.
This is important because the global trend, owing to relentless interventions by affected communities and civil society, is to understand the accountability of financial institutions in an all-embracing manner which holds them responsible for the environmental, climate and social consequences of their investments, it said.
Lending to projects
The CFA also raised questions about the prudence of lending to projects like highway infrastructure and energy ventures in flood-prone mountainous regions vulnerable to glacial collapse. Concerns were also raised about the future profitability of investments in coal, given the global commitment to reducing reliance on fossil fuels, and whether renewable energy projects can yield sufficient returns.
The draft framework mandates regulated entities (REs) to periodically report on governance structures, strategies, risk management frameworks, and climate-related targets. While acknowledging the RBI’s effort to promote transparency and accountability, the CFA highlighted the necessity to broaden the scope of ‘risk’ beyond carbon emissions alone.
Comprehensive accountability
According to the CFA, there is a global trend towards comprehensive accountability, driven by affected communities and civil society, holding financial institutions responsible for environmental, climate, and social consequences of their investments. This accountability cannot be restricted solely to carbon emissions assessments.
The CFA underscored the importance of enhancing disclosure obligations on REs and exploring oversight mechanisms that go beyond disclosures to ensure comprehensive climate accountability. They emphasized that understanding climate-related financial risks requires a holistic approach that encompasses broader environmental and social impacts.
