The foreboding challenge of climate change has been a threat to the whole global community. The role of the banking sector remains pivotal for developing nations such as India. With the introduction of the ‘Disclosure Framework on Climate-related Financial Risks (2024)’ by RBI, it is quite apparent that the sector is continuously striving towards sustainability and climate sensitization.

Looking at the concept of financial stability, the role played by risk assessment has been an irreplaceable one. This is visible in the introduction of the discussion paper by RBI in 2021 which highlights the relationship between the various sources of climate risk and their impact on regulated entities (REs).

The new framework evolves the narrative, acknowledging the inevitability of climate change affecting these entities and, consequently, the broader financial stability. Mitigating the effects of climate change requires just more than acknowledgement; it requires prompt actions and as such these REs must not only adapt to the changing challenges but also cater to the financial instability in a sustainable economy. It calls for the implementation of robust climate-related financial risk management policies. This framework is not only a regulatory requirement but it also fulfils the duty of the bank as a custodian of the financial system to safeguard it against climate-induced shocks.

Nurturing Transparency through Standardized Disclosure—at its core is a call for standardized disclosure. The rationale is clear, i.e., insufficient information about climate-related financial risks can lead to mispricing of assets and misguided capital allocation. These aim to rectify and contribute to the same by fostering better, consistent and comparable disclosure practices among regulated entities. The framework not only acts as a means to inform the various stakeholders about climate-related issues but also to develop a narrative of financial resilience in the face of unprecedented challenges related to climate risks. The framework is built upon four main pillars—Governance, Strategy, Risk Management, and Metrics & Targets to help REs to follow upon. It calls upon them to follow these four pillars to articulate their actions and plans concerning climate-related financial risks. 

Governance

Transparency as the cornerstone: In the framework, governance takes centrestage demanding from the financial institutions a report on how the various climate-related risks are being tackled. It also calls for the REs to share with the world the various skills and learnings that they have developed in the course of mitigating such complex climate finance problems.

Strategy

Navigating uncertainty with resilience: In terms of implementation and strategy development, it directs the REs to detail and document the various implications of the climate-related risks and the areas where improvements could be made. As such, the need to integrate climate resilience into the business model is stressed upon, to be fairly able to navigate these new and unprecedented challenges.

Risk Management

Anticipating, assessing, and mitigating: Another aspect of climate resilience focused by the framework is risk management, which demands a thorough and detailed understanding of how the various entities/financial institutions evaluate the nature, likelihood and magnitude of climate-related financial risks. The framework calls for a comprehensive approach to cover every aspect from credit risks to operational risks, thereby ensuring that every consideration from the climate aspect is taken under consideration.

Metrics and Targets

Illuminating the path to a sustainable future: The final part of the framework stresses the importance of using Metrics and Targets. REs have been urged not only to set targets but also to detail their progress using metrics while progressing towards climate-related risks. The framework urges the various entities to be transparent in providing information regarding greenhouse gas emissions, and financed emissions so that they could be aligned with the national targets.

In all, the framework is a comprehensive implementation plan which serves as a guiding pathway for the various entities based on their categories. The framework is expected to be adopted by every financial institution like scheduled commercial banks, All India Financial Institutions, and NBFCs from the financial year 2025–26, with 2026–2027 serving as the year for the Urban Co-operative banks are going to be part of the same. The adoption of the guidelines issued has not been made mandatory, demonstrating that the framework is not only transformative but also flexible. One could argue that this framework is not only a regulatory framework but also a tool for the various institutions to assess their roles and responsibilities in the changing scenario of climate-related risks. It presents an opportunity to call for innovation and a contribution towards a sustainable economy.

The framework requires a call to action, urging financial institutions to not only weather the storm but to emerge as a beacon of resilience in the face of climate uncertainty.

Disclaimer: There is no affiliation of the current piece to any institution or any person. Views are personal. #

Naman Mishra, anonymous scholar, School of Arts & Humanities, FS University, India, Email: mnaman225@gmail.com and Dr Megha Jain, Assistant Professor, Shyam Lal College (Day), Dept. of Commerce, University of Delhi, Email: megha.jain@shyamlal.du.ac.in