RBI’s Draft Framework on Climate-Related Financial Risks: Strengthening India’s Green Finance Architecture

The Reserve Bank of India (RBI) recently released a draft disclosure framework titled ‘Disclosure of Climate-related Financial Risks, 2024’. This initiative marks a significant step toward formalizing 'Green Finance' in India by requiring Regulated Entities (REs)—including Scheduled Commercial Banks, All-India Financial Institutions (like NABARD and SIDBI), and large NBFCs—to transparently report how climate change impacts their financial health.

The framework is structured around four thematic pillars: Governance, Strategy, Risk Management, and Metrics and Targets. This alignment with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) ensures that Indian financial institutions meet international standards. REs will be required to disclose their internal processes for identifying, assessing, and managing climate-related risks, as well as the specific metrics used to measure these vulnerabilities.

Climate risks are broadly categorized into two types: Physical Risks and Transition Risks. Physical risks involve the direct impact of extreme weather events (like floods, droughts, or heatwaves) on assets, collateral, and supply chains. Transition risks arise from the global shift toward a low-carbon economy, including changes in government policy, technological advancements, and shifting consumer preferences that could lead to 'stranded assets' in carbon-intensive sectors like coal or traditional manufacturing.

For governance and policy, this framework is crucial. It compels financial institutions to move beyond short-term profit motives and consider long-term environmental sustainability. By mandating disclosures, the RBI aims to prevent 'greenwashing' and ensure that capital is efficiently mobilized toward sustainable projects. Furthermore, it protects the Indian financial system from systemic shocks that could arise from sudden climate-induced asset devaluations, thereby safeguarding the economy's overall health.