The ‘Draft Disclosure Framework on Climate-Related Financial Risks’ released by RBI in February this year is meant to empower shareholders, customers and the general public with comprehensive information on the risks posed by the climate crisis to the investments of financial institutions (FIs). In a world beset by climate emergency investments by FIs face direct physical risks from rising temperatures, sea levels and melting glaciers, as well as risks arising from the fact that globally there is an attempt to switch to low carbon-producing technologies and infrastructures. How wise is it to lend to highway infrastructure and energy projects in flood-prone mountains caught amidst glacial collapse? Will profits on investments in coal be affected as the world commits to reducing its reliance on fossil fuel (coal, oil and gas) based energy? Will investments in renewable energy projects yield sufficient returns? The framework on disclosures stipulates financial institutions (Regulated Entities, REs) to periodically report on the governance structures, strategies, risk management frameworks and targets they have set to address financial risks arising owing to climate change. Such disclosures are intended to produce greater transparency in the efforts by FIs to factor in climate change in their financial decisions and make them more accountable towards investors, shareholders, stakeholders and the general public.
While it is a notable step from the RBI to emphasise greater transparency and accountability of REs towards climate-related financial risks, we feel that there is a need to broaden the scope of ‘risk’ as understood by the central regulator, enhance the level of disclosures obligated upon the REs and to also explore oversight mechanisms beyond disclosures to unleash the full breadth of climate accountability of REs.
This is important because the global trend, owing to relentless interventions by affected communities and civil society, is to understand the accountability of financial institutions in an all-embracing manner which holds them responsible for the environmental, climate and social consequences of their investments. Such accountability is not and cannot properly remain limited to assessing only carbon emissions.
Read and download the full draft here: Submission to Reserve Bank of India on ‘Draft Disclosure Framework on Climate-Related Financial Risks, 2024’