Climate Change Disclosure: A Critical Gap in Indian Financial Regulation

Strategic Insights -

As Indian financial regulators focus on disclosure to mitigate climate-related risks, a significant gap exists in the mandatory reporting of "financed emissions," a critical component of banks' and financial institutions' (FIs) environmental impact. Financed emissions, representing greenhouse gas emissions from investments or loans, are predominantly categorized under Scope 3 emissions, which are excluded from the Securities and Exchange Board of India's (SEBI) Business Responsibility and Sustainability Reporting (BRSR) framework. This restrictive approach fails to capture 95% of the total financed emissions of banks and FIs, highlighting the importance of comprehensive disclosure.

Key Takeaways:

  • Indian financial regulators, particularly RBI and SEBI, have introduced climate change guidelines focusing on disclosure to increase market transparency.
  • Financed emissions, a crucial aspect of banks' and FIs' environmental impact, are predominantly categorized under Scope 3 emissions, excluded from SEBI's BRSR framework.
  • Scope 3 emissions contribute an average of 95% of the total financed emissions of banks and FIs, making comprehensive disclosure essential.
  • RBI's recent Report on Currency and Finance suggests that Indian banks' exposure to high energy-intensive sectors is relatively high, and Non-Banking Financial Companies (NBFCs) provide approximately 50% of their gross credit to carbon-intensive power and automobile segments.
  • Mandatory financed-emissions disclosure by banks and FIs is critical for assessing climate change risks and environmental impact.
  • The Partnership for Carbon Accounting Financials (PCAF) has developed a harmonised accounting approach for FIs to assess and disclose GHG emissions associated with their loans and investments.

Statistics:

  • Scope 3 emissions contribute an average of 95% of the total financed emissions of banks and FIs.
  • RBI's Report on Currency and Finance indicates that Indian banks' exposure to high energy-intensive sectors is relatively high.
  • NAFCs provide approximately 50% of their gross credit to carbon-intensive power and automobile segments.
  • Around 6% of NBFC credit is exposed to Micro, Small, and Medium Enterprises (MSMEs) that typically depend on conventional fuel.
  • The Partnership for Carbon Accounting Financials (PCAF) has a harmonised accounting approach for FIs to assess and disclose GHG emissions associated with their loans and investments.

Sources:

  • RBI's Report on Currency and Finance (no date provided)
  • RBI's Business Responsibility and Sustainability Reporting (BRSR) framework (no date provided)
  • Partnership for Carbon Accounting Financials (PCAF) (no date provided)
  • Task Force on Climate-related Financial Disclosure (TCFD) supplementary guidance (now a part of the International Sustainability Standards Board formed by IFRS Foundation) (no date provided)
  • GHG Protocol (no date provided)