RBI releases draft disclosure framework for banks to address climate risks

With climate change one of the biggest emerging risks, the Reserve Bank of India (RBI) released a draft standard disclosure framework on climate-related financial risks for regulated entities (REs) on Wednesday.

"There is a need for a better, consistent and comparable disclosure framework for REs, as inadequate information about climate-related financial risks can lead to mispricing of assets and misallocation of capital by them," the RBI said.

The central bank said regulated entities should detail the governance processes, controls and procedures used to identify, assess, manage, mitigate and monitor climate-related financial risks and opportunities.

It said all scheduled commercial banks, financial institutions and larger non-banking financial companies (NBFCs) will have to disclose their governance, strategy and risk management processes from fiscal 2026 and specify metrics and targets from fiscal 2028 onwards.

The RBI has previously acknowledged climate change as a source of financial risk. In July 2022, it released a discussion paper exploring strategies to address climate change-related financial risks.

Banks and non-bank financial firms will be required to detail the impact of climate-related risks and opportunities on their businesses, strategy and financial planning, while taking into consideration different climate scenarios, the RBI said.

They will also have to disclose how, and to what extent their processes for climate-related financial risks and opportunities are integrated into and inform their overall risk management.

The entities will also have to disclose their progress towards their climate-related targets as well as any targets required by statute or regulation.

Such disclosures should be part of their financial statements, the RBI said.

This, the central bank said, will foster an early assessment of climate-related financial risks and opportunities as well as facilitate market discipline.

The RBI has invited comments on the draft framework by April 30.