1. Background

Emissions Gap Report 2020 of the United Nations Environment Programme state that despite a dip in CO₂ emissions caused by the Covid-19 pandemic, the world is still heading towards a temperature rise of 3°C this century. This is far beyond the Paris Agreement 2015 goals adopted by 196 countries, of limiting global warming to well below 2°C and pursuing 1.5°C above pre-industrial levels. This amounts to an untenable future for people and the planet.

The financial impact of global warming and climate change risks are not limited to companies causing direct greenhouse gases (GHG) emissions. The threat is real and growing with each passing day for banks and insurance companies which have financial exposure to entities whose activities cause direct and indirect GHG emissions and the ones which are adversely affected by climate change.

Financial risks faced by banks and insurance firms can get heightened from the transition of nations to lower-carbon energy systems, increasing use of renewable energy, change in demand / supply position of certain items, damage to assets financed by banks, abrupt and extreme weather events, disruptions in supply chains, cyclones, floods etc. Serious long term risks to the existing and future business of many banks / insurance companies might arise from macro / micro-level changes in the policy framework relating to emission reductions.

As one would expect, globally, there is a consensus regarding the need for a consistent analysis of the financial impact of climate change and the introduction of a mandatory risk disclosures framework for organisations (including banks). Information sharing has assumed greater significance for investors and stakeholders in understanding the way climate change-related financial risks are handled by the management. Moreover, comprehensive disclosure of climate change-related risks will indeed facilitate banks and insurance companies to go for strategic planning and better climate risk management practices.

It is notable that during the last 3-4 years, regulatory authorities of the EU, New Zealand, UK and the USA have taken initiatives to identify and delineate the threats to financial systems and come out with recommendations to address the challenges which banks and financial institutions might face.

Acknowledging the threat, the Financial Stability Board (FSB), in its report on climate change released on 23 November 2020 stated that ‘there are various actions that financial institutions can take to reduce or manage their exposure to eliminate related risks, but the efficacy of such actions may be hampered by a lack of data with which to assess client’s exposure to climate-related risks or the magnitude of such effects. Hence risk management may be supported by initiatives to enhance information with which to assess climate-related risks.’

In this article, first, we will look at the various categories of climate risks, second, a brief outline of Government of India initiatives for addressing climate change is provided; third, the nature of reporting system of emissions currently followed by listed entities within the overall sustainability reporting system, and fourth, the current regulatory framework in India introduced by SEBI from 2021-22 onwards is stated. Finally, based on the internationally acknowledged frameworks and the recommendations of the Task Force on Climate-Related Financial Disclosure (TFCD), we have examined how disclosure framework in India can be made more robust, meaningful and target-oriented for banks to manage the risks of climate change.