CFA bats for enhanced climate accountability measures in RBI's draft norms

Says clarity and specificity are needed to ensure effective implementation and compliance with disclosure requirements

The Centre for Financial Accountability (CFA) has urged the Reserve Bank of India (RBI) to broaden its understanding of climate risk, increase the level of disclosures by financial institutions, and explore additional oversight mechanisms to ensure comprehensive climate accountability.

CFA’s reaction came in response to RBI’s draft disclosure framework on climate. In February this year, the RBI introduced a Draft Disclosure Framework on Climate-Related Financial Risks.

This framework requires financial institutions to regularly report on their governance structures, strategies, risk management frameworks, and targets aimed at addressing the financial risks posed by the climate emergency to their investments. The RBI sought feedback and suggestions on the draft.

CFA highlighted concern over the lack of clarity in the draft regarding disclosure requirements. While the draft allows financial institutions to disclose reasons if they lack the skills, capabilities, data availability, or resources to provide certain information, it does not specify any remedial or procedural directives.

Clarity and specificity are needed to ensure effective implementation and compliance with disclosure requirements, it said.

CFA stressed the importance of establishing clear investment standards, goals, thresholds, and redressal mechanisms alongside the disclosure framework.

While the framework requires financial institutions to set investment targets addressing climate-related financial risks, it predominantly focuses on greenhouse gas emissions. It has emphasised that setting targets for reducing Scope 1, 2, and 3 greenhouse gas emissions is crucial. However, a comprehensive set of standards is needed to consider the broader impact of investments on the environment, people, and climate. Suggestions include evolving standards aligned with goals set by international institutions to ensure a more holistic approach to risk mitigation and accountability.

CFA highlighted the limitation in the disclosure framework's focus solely on climate-related financial risks, neglecting broader environmental and social impacts. This oversight was seen as ironic and short-sighted, given that financial institutions often fund activities contributing to the climate crisis, it said.

CFA has called for a more holistic perspective that considers the interconnectedness of climate, environment, and communities. The failure to do so was seen as a missed opportunity to align with global trends towards broader accountability for all impacts of investments. Additionally, the CFA emphasised that social and ecological impacts pose significant financial risks, necessitating the avoidance of projects harmful to communities, environments, and climates.

The CFA highlighted the necessity of incorporating an 'impact risk' perspective into the disclosure framework. This perspective considers the risks posed by financial institutions' investments to people's health, livelihoods, land, environment, and climate. While the framework focuses on carbon emissions, it overlooks project-specific and cumulative impacts, especially in mega projects.

An impact risk perspective is deemed essential not only for the affected communities and environments but also for financial institutions to avoid investments that could face opposition due to adverse consequences, they said. By assessing and disclosing impact risks, financial institutions can steer clear of detrimental investments, enhancing accountability to the public, investors, and depositors.

The feedback underscored the importance of project-based transparency within the disclosure framework. While the framework requires disclosure of Scope 1, 2, and 3 greenhouse gas emissions for specific industries or asset classes, it falls short in revealing the specific projects financed by financial institutions.

This lack of project-level transparency is significant as local communities and environmentalists often raise concerns about particular projects or clusters of projects in a region, CFA said.

To ensure full public accountability and comprehensive impact assessment of financial institutions, it's crucial for them to disclose specific projects and activities where their financing is deployed. This level of transparency allows independent observers, scientists, and the public to scrutinise the claims made by financial institutions and highlight any discrepancies.