RBI'S Framework For Climate Related Financial Risks

Credit risk – If customers asset values decline due to climate-related factors such as damage from extreme weather events), banks could face credit risk this may impact
borrowers who struggle to repay debt, leading to potential losses for lenders.

Supply chain impact – Disruptions in supply chains due to climate events can affect operations, profitability, and viability which in turn impacts borrowers’ ability to service debt.

Liquidity demand – Consumers may need funds to cope with extreme weather events or other climate-related challenges which leads to liquidity demand.

Asset liquidation – Consumers may perceive difficulties in liquidating assets affected by climate events, affecting their capacity to raise funds.

Claims exposure – Banks face the risk of not meeting exposure to claims such as insurance claims from customers seeking to recover climate-related losses, it is particularly risky in vulnerable sectors such as agriculture, tourism etc.,

Market risks – A shift in investor preferences toward sustainable investments can impact financial markets.

Adverse climate effects on economic activity can lead to market risks.

Vulnerable NBFCs – Non-Banking Financial Corporations extend significant credit to sectors like power and automobiles (both with high carbon footprints) and MSMEs that rely on conventional fuel.

The interconnectedness of these sectors raises concerns about potential “largescale default” leading to “macro financial instability”.

What are the key highlights of disclosure framework by RBI?

Climate related financial risk – It means the potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and economic and financial consequences.

Purpose – The regulated entities must disclose information about their climaterelated financial risks and opportunities for the users of financial statements.

Disclosure of information – Identified climate-related risks and opportunities over short, medium and long term.

The impact of climate-related risks and opportunities on their businesses, strategy and financial planning.
The resilience of the RE’s strategy taking into consideration the different climate scenarios.

Applicability – The guidelines shall be applicable to the following entities, collectively referred to as Regulated Entities (REs).

All Scheduled Commercial Banks (excluding Local Area Banks, Payments Banks and Regional Rural Banks).
All Tier-IV Primary (Urban) Co-operative Banks (UCBs).
All-India Financial Institutions (viz. EXIM Bank, NABARD, NaBFID, NHB and SIDBI)
All Top and Upper Layer Non-Banking Financial Companies (NBFCs).

Governance – It should detail the governance processes, controls and procedures used by the RE to identify, assess, manage, mitigate, monitor and oversee climate related financial risks and opportunities.

Strategy – It should detail the RE’s strategy for managing climate-related financial risks and opportunities.

Metrics and targets – It should detail the RE’s performance in relation to its climate related financial risks and opportunities, including progress towards any climate related targets it has set, and any targets it is required to meet by statute or regulation.