Assessing The Reserve Bank Of India’s Disclosure Framework For Climate-Related Financial Risks

Such disclosures are an important source of information for various stakeholders such as customers, depositors, and investors to understand risks and the approach adopted by firms to address them. 

The disclosure framework will also help the RBI in evaluating where regulated entities (REs) are allocating their funds, and how they plan to transition towards an environmentally sustainable economy.

Consequently, this will enable the RBI to make better policy decisions to strengthen India’s financial sector against the growing risks of climate change.

Some industry members have praised the RBI framework as a 'welcome step’. However, there are notable issues in the disclosure framework. It requires REs to provide long-form, qualitative information on internal governance, strategic planning, risk management, and report metrics and  targets related to climate change. 

A key concern lies in its assumption that REs possess the necessary expertise in identifying climate-related risks and are aware of comprehensive strategies for their mitigation. On the contrary, multiple survey-based studies indicate that firms often lack the expertise as well as the resources needed to furnish such information. 

This calls into question its effectiveness as a tool to help investors and lenders take informed decisions about firms which are taking steps to mitigate climate-related risks.

Without consolidated and comparable information, it is also going to be a challenge for the RBI to identify firms that have adopted climate-related mitigation strategies, potentially resulting in misallocation of resources and funds - contrary to the primary objective of its framework.

Burden Of A Copycat

The fundamental problem with the RBI framework is that it is a direct replication of an existing international framework of the Task Force on Climate-Related Financial Disclosures (TCFD), set up by the Switzerland-based Financial Stability Board (FSB) in 2015.

In 2021, the Task Force finalised its guidelines on the type of information that companies should share to help investors, lenders and insurers assess their exposure to climate related risks. 

The TCFD-based guidelines have been adopted globally and are credited with increasing climate-related disclosures related to the firm's business operations and strategic management. However, studies suggest that there are differences in the quality of these climate-related disclosures.

A 2022 survey with fixed income investors and credit-risk agencies on the TCFD reporting framework, highlighted the lack of comparability between companies’ disclosures viz. gaps in the information provided by companies, and a lack of harmonisation between different sectors as key roadblocks in conducting credit-risk analysis. 

Another survey-based study on the adoption of TCFD guidelines in India highlighted challenges related to insufficient or poor-quality reporting. Conducted in 2020, the study found that the majority of Indian companies do not make any sustainability or climate-change related disclosures, let alone those aligned with the TCFD recommendations.

Some of the key reasons behind this were limited access to relevant expertise, and relevant tools and methodologies, as well as high costs of assessment for such disclosures.

A similar survey conducted in 2022 by the RBI itself corroborates these findings. The survey was aimed at assessing the level of climate-related disclosures by Indian banks.

The results showed that while banks do consider climate-related financial risks as a material threat to their business, they lack skilled human resources, do not have adequate data, and find difficulties in measuring climate risk for climate-related disclosures. Most banks asked for regulatory guidance on the subject.

However, RBI's disclosure framework, mirroring TCFD guidelines, does not address these challenges. Instead, it broadens the scope of disclosures by requiring financial lenders to report not only their emissions but also those of firms within their portfolio.

This means that banks will continue to grapple with the above-mentioned challenges, with the added burden of having to adopt the RBI framework by FY2025-26.

While maintaining parity with international standards is important, it is equally essential to tailor policies to accommodate domestic realities such as resource and technological constraints.

Instead of enforcing the TCFD-based guidelines, the RBI should consider incorporating some of the climate risk indicators in the standardised Business Responsibility and Sustainability Report (BRSR), which is qualitative in nature and readily available to firms. 

The apex bank could also collaborate with research institutes such as the Indian Institute of Technology (IITs) to develop detailed guidance documents for firms, discussing methodologies and metrics needed for climate-related disclosures, reducing the burden on banks to independently navigate these intricate issues.

The gathered data and insights could be used to inform policymakers' decisions, thereby advancing the objective of mitigating the economic impact of climate change.

(The author is an Associate Fellow at the Esya Centre, working on economic analysis of policies and regulation surrounding emerging technologies such as virtual digital assets, artificial intelligence, online gaming and digital media. Views expressed are personal.)