The Reserve Bank of India (RBI), in its ongoing commitment to fostering financial stability and sustainability, has introduced draft guidelines on climate-related financial disclosures for regulated entities within the financial sector.
These guidelines represent a significant step towards enhancing transparency and accountability in addressing climate-related risks and opportunities.
In this explainer, we look into the key aspects of the RBI’s draft guidelines, outlining their scope, objectives, alignment with international standards, implementation timeline, challenges, and potential benefits for regulated entities.
Which entities do these guidelines apply to?
These guidelines are applicable to a broad spectrum of regulated entities, including scheduled commercial banks, Tier IV primary urban co-operative banks (UCBs), foreign banks operating in India, all Indian financial institutions (AIFIs), and top and upper layer non-banking financial companies (NBFCs).
What information do regulated entities need to disclose under these guidelines?
Regulated entities are mandated to disclose information pertaining to their ability to identify and manage climate-related financial risks and opportunities within their credit portfolios. These disclosures are structured around four thematic pillars: governance, strategy, risk management, and metrics/targets.
How do these guidelines align with international standards?
The framework aligns with international standards set by the Task Force on Climate-related Financial Disclosures (TCFD), emphasising transparency and consistency in reporting practices. Additionally, the guidelines encompass measurement and disclosure of Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions, ensuring a comprehensive assessment of climate-related risks.
What is the timeline for implementation of these guidelines?
The RBI has outlined a phased approach for disclosures, with Governance, Strategy, and Risk Management pillars slated for disclosure by FY 2025-26 onwards, followed by Metrics and Targets by FY 2027-28. This staggered approach provides regulated entities with sufficient time to adapt their reporting frameworks and integrate climate risk considerations into their business strategies.
What challenges do regulated entities face in implementing these guidelines?
The implementation of these guidelines necessitates significant changes to current portfolio evaluation processes, requiring banks to measure and mitigate climate-related risks effectively. Comprehensive risk assessment solutions, including scenario analysis and governance frameworks, are essential for managing these risks.
What are the potential benefits of complying with these guidelines?
By fostering transparency and accountability, these guidelines empower financial institutions to proactively address climate-related risks and contribute towards building a more resilient and sustainable financial system. Additionally, compliance with international standards enhances the credibility and reputation of regulated entities in the global market.
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