Disclosure Framework on Climate-related Financial Risks, 2024

Context

The Reserve Bank of India (RBI) has recently released a draft Disclosure Framework on Climate-related Financial Risks, 2024 for banks to follow. 

About

• The regulated entities i.e., banks are meant to reveal statistics approximately their climate associated with economic risks and opportunities for the users of economic statements.
• It recognizes the importance of the environment and its long-term impact on businesses and the economic system as a whole. 

What are Climate-associated Financial Risks? 

• The RBI has defined climate-related economic dangers as the potential dangers that could rise up from weather change or from efforts to mitigate climate trade, their associated impacts and monetary and financial consequences.
  • It can affect the economic region through a huge channel i.e., physical risks and transition dangers.
• Physical Risks: It refers back to the financial costs and financial losses as a consequence of the increasing frequency and severity of intense climate exchange-related weather occasions.
• Impact on REs: Expected coins flowing to the REs from an exposure may be harassed at the incidence of a local / regional climate event.
  • Chronic flooding or landslides can also pose a threat to the value of the collateral that REs have taken as security against loans.
  • Severe climate events may damage a RE’s owned or leased physical assets and statistics centers, thereby, affecting its ability to offer monetary offerings to its customers.
• Transition Risks: It refers back to the dangers springing up from the system of adjustment towards a low-carbon economic system. 
  • A range of things affects this adjustment, which include modifications in climate-related policies and policies, the emergence of newer technology, shifting sentiments and behavior of customers. 
  • The process of transition i.e., lowering carbon emissions may additionally have a substantial effect on the economic system. 

About the Framework

• All India economic establishments, and top and higher layer NBFCs will need to begin to provide statistics on governance, approach, and chance control approach from 2025-26 and begin disclosure metrics and goals from 2027-28. 
• Banks might be mandated to reveal the ones weather-associated dangers which have a relation to their financial balance.
• The revelation will foster an early evaluation of climate-related monetary risks and opportunities and also facilitate market area.

Organisations under the Purview

• All scheduled commercial banks (excluding local area banks, payments banks and regional rural banks).
• All Tier -IV primary (urban) and cooperative banks (UCBs).
• All top and upper layer non-banking financial companies.

Disclosure by the REs

• Identified weather-associated risks and possibilities over short, medium and long time.
• The impact of weather-associated risks and possibilities on their corporations, strategy and financial planning.
• The resilience of the RE’s approach considering the one-of-a-kind weather eventualities.

Significance

• There is an urgent want for a better and steady disclosure framework for regulated entities, without which the economic risks can lead to mispricing of belongings and misallocation of capital. 
• This basically led to a preferred disclosure framework on weather associated economic risks.

Source: The Hindu

UPSC Mains Practice Question

Q.Explain how Climate-associated Financial Risks affect India’s Economy? (200 words)

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