RBI: What are climate-led financial risks? Key questions answered

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Reserve Bank of India (RBI) has now released a draft framework for banks to follow. As per the framework, banks will be mandated to disclose those climate-related risks which have a bearing on their financial stability. While observing that climate-related risks are one of the emerging risk and are expected to significantly impact them, these entities play an important role in financing the transition towards an environmentally sustainable economy.

It is, therefore, imperative for the REs to implement a robust climate-related financial risk management, noted the RBI. The draft framework addresses climate-related Financial Risks and it states that regulated entities (REs) i.e., banks are supposed to share information about their climate-related financial risks and opportunities in their financial statements. ALSO READ: RBI streamlines Bharat Bill Payment System norms, customer protection in focus The revelation will foster an early assessment of climate-related financial risks and opportunities and also facilitate market discipline.

The RBI has defined climate-related financial risks as the potential risks that may arise from climate change or from efforts to mitigate climate change, their related impacts and economic and financial consequences. These guidelines will be applicable to all the regulated entities: A. All scheduled commercial banks (excluding local area banks, payments banks and regional rural banks).

B. All Tier -IV primary (urban) and cooperative banks (UCBs). C.

All top and upper layer non-banking financial companies. The RBI circular states that they must disclose the following: 1. Identified climate-related risks and opportunities over short, medium and long term.