Introduction
The integration of climate risk into banking regulation has moved with unusual speed from a fringe concern to a mainstream prudential imperative. Five years ago, the idea that a bank’s carbon-intensive loan portfolio represented a material risk to the institution’s financial stability — rather than merely an environmental concern — was contested by much of the banking industry and many regulators. Today, the Bank for International Settlements, the Financial Stability Board, the Basel Committee on Banking Supervision, the Network for Greening the Financial System (NGFS), and virtually every major central bank have endorsed the view that climate risk is financial risk, and that banks’ failure to identify, measure, and disclose this risk creates systemic instability.
The transition from voluntary disclosure to mandatory prudential obligation is now well underway in many jurisdictions. India’s approach, characterised by the RBI’s measured and incremental engagement with climate risk, is at an earlier stage but moving in the same direction. Understanding the legal framework that is emerging, the gaps that remain, and what mandatory climate risk disclosure would actually require of Indian banks is an exercise that will become increasingly necessary as regulatory expectations crystallise.
Legal Framework
India’s current climate risk disclosure framework for banks is anchored in the RBI’s Disclosure Framework on Climate-related Financial Risks issued in February 2024. The framework, applying initially to Scheduled Commercial Banks and then to other regulated entities on a phased basis, requires banks to disclose climate-related financial information aligned with the four pillars of the Task Force on Climate-related Financial Disclosures (TCFD): governance, strategy, risk management, and metrics and targets.
The disclosures are currently mandatory but not yet accompanied by specific minimum quantitative requirements or verification obligations — they are process disclosures (describe your governance structures, describe your risk identification approach) rather than outcome disclosures (quantify your physical climate risk exposure, report your Scope 3 financed emissions). This structural limitation means that compliance with the framework’s letter is currently possible without meaningful climate risk quantification.
The Securities and Exchange Board of India’s Business Responsibility and Sustainability Report (BRSR) framework, mandatory for the top 1,000 listed companies by market capitalisation since 2022-23, applies to listed banks and covers environmental disclosures including energy consumption, emissions, and water use. The BRSR Core requirements, introduced in 2023-24, include assurance obligations for certain disclosures. However, BRSR does not specifically address financial risk from climate exposure — it focuses on the bank’s own operational footprint rather than the climate risk embedded in its loan and investment portfolio.
The Banking Regulation Act 1949 and the RBI Act 1934 provide the statutory basis for the RBI’s prudential regulatory authority. The RBI can, under its existing powers, require banks to hold additional capital against climate-related risks and mandate specific disclosure formats — it does not require new legislation to move from voluntary to mandatory quantitative climate risk disclosure.
Regulatory and International Developments
The Basel Committee on Banking Supervision’s publication of Principles for the Effective Management and Supervision of Climate-related Financial Risks (2022) established the international prudential standard, identifying seventeen principles across governance, risk management, capital adequacy, and disclosure. The principles explicitly contemplate scenario analysis — requiring banks to model their financial performance under different climate trajectories, including a 1.5°C pathway and a disorderly transition scenario — as a core tool for understanding climate risk.
The European Central Bank’s 2022 climate stress test of major euro area banks revealed that, under a disorderly transition scenario, the loan losses of tested banks would be significantly higher than under an orderly transition. This finding — that bank financial stability is materially affected by the pathway of climate policy rather than just the endpoint — has become a central justification for integrating climate scenario analysis into prudential frameworks.
The UK Prudential Regulation Authority’s (PRA) supervisory statement SS3/19 on enhancing banks’ and insurers’ approaches to managing financial risks from climate change, updated in 2023, represents the most developed national banking regulator engagement with climate risk. The PRA requires banks to embed climate risk into their risk management frameworks, conduct scenario analysis, and report findings to the board and to the PRA on a regular basis.
Contemporary Issues and Analysis
The measurement challenge is the most fundamental obstacle to meaningful climate risk disclosure by Indian banks. Unlike market risk or credit risk, climate risk — particularly physical risk (the risk of climate-driven physical damage to collateral, business disruption, or agricultural loss) and transition risk (the risk of losses as carbon pricing, regulatory change, and technology shift affects asset values) — requires forward-looking modelling under uncertain scenario assumptions. Banks that currently report credit risk through standardised Basel III models do not have the internal data or modelling capacity for credible climate risk quantification.
The financed emissions problem is the most commercially significant specific disclosure challenge. A bank’s financed emissions — the greenhouse gas emissions attributable to the companies and projects in its loan portfolio — can dwarf the bank’s own operational emissions by several orders of magnitude. For a large Indian bank with significant lending to coal mining, thermal power, cement, and steel companies, the financed emissions figure, if publicly disclosed, would be very large. The Partnership for Carbon Accounting Financials (PCAF) standard provides a methodology for calculating financed emissions, but adoption by Indian banks has been limited.
The concentration risk in fossil fuel lending is a connected concern. Several large Indian public sector banks have substantial loan books in the coal and thermal power sectors. As global and domestic energy transition accelerates, the risk that these assets become impaired — through falling demand, carbon pricing, or stranded asset dynamics — is real and growing. The RBI’s 2024 disclosure framework does not yet require banks to disclose their exposure to climate-sensitive sectors in quantitative terms.
Comparative and International Perspective
The European Union’s Corporate Sustainability Reporting Directive (CSRD), which applies to large companies including banks, requires comprehensive climate risk disclosure under the European Sustainability Reporting Standards (ESRS). These standards require disclosure of the financial effects of climate-related risks on the balance sheet, income statement, and cash flows — a level of financial statement integration that Indian requirements do not yet contemplate.
Australia’s Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Act 2024 made climate risk disclosure mandatory for large financial institutions, requiring scenario analysis and Scope 1, 2, and 3 emission disclosures with independent assurance. Australia’s approach is notable for its legal liability implications: false or misleading climate disclosures in mandatory filings carry civil and criminal penalties, creating strong incentives for accuracy.
Practical and Policy Implications
For Indian banks, particularly the large public sector banks that dominate the financial system, the transition to mandatory quantitative climate risk disclosure will require significant investment in data infrastructure, climate modelling capacity, and internal governance. The climate risk governance requirements — board-level oversight, board-approved climate strategy, integration of climate risk into the Internal Capital Adequacy Assessment Process (ICAAP) — are achievable within existing institutional structures but will require commitment and capability building.
For borrowers — particularly in the infrastructure, energy, manufacturing, and agriculture sectors — mandatory climate risk disclosure by banks will increasingly affect credit availability and pricing. A borrower with high physical climate risk (an agricultural company in a flood-prone district, for example) or high transition risk (a coal mining company) may face higher credit costs as banks price climate risk into lending rates and require more frequent monitoring.
Suggestions and Reforms
The RBI should move to quantitative climate risk disclosure requirements on a specified timeline — with Scope 1 and 2 financed emissions disclosure required from 2026, and Scope 3 financed emissions from 2028, with specific sector concentration disclosures commencing in 2025. This phased approach gives banks time to build data infrastructure while creating regulatory certainty.
The BRSR framework should be expanded to include climate risk to the balance sheet — not just the bank’s own operational footprint — creating alignment between SEBI’s disclosure regime for listed banks and the RBI’s prudential requirements.
The RBI should conduct an annual climate stress test of systemically important banks, modelled on the ECB’s 2022 exercise, and publish aggregate results publicly.
Conclusion
Climate risk disclosure for banks is no longer a question of whether but of when, and on what terms. India’s current framework is a credible starting point but insufficient as a terminal destination. The gap between the current process-based voluntary disclosure and the quantitative, assured, and financially integrated disclosure that international standards now contemplate is substantial. Closing that gap will require regulatory ambition from the RBI, capacity investment from banks, and the political will to acknowledge that the financial sector’s fossil fuel exposure is a systemic risk — not merely an environmental preference.
