RBI’s Climate Risk Disclosure Regime: A Green Turn For Indian Banking

In a significant and forward-looking move, the Reserve Bank of India (RBI) is set to unveil a comprehensive climate risk disclosure framework for banks and non-banking financial companies (NBFCs). This marks a pivotal moment not just in the evolution of financial regulation, but also in India’s broader strategy toward climate resilience and sustainable development. As the country faces rising climate-related vulnerabilities—from floods and droughts to heatwaves and sea-level rise its financial institutions are being called upon to play a more active role in assessing, disclosing, and eventually mitigating such risks.

The proposed framework is expected to be rolled out in phases, with voluntary adoption starting in FY 2027 and mandatory compliance by FY 2028. At its core, the regime will require banks to undertake regular assessments of climate-related risks across their loan books, disclose emissions associated with their operations and financed activities, and conduct climate stress testing. These requirements aim to help banks understand the exposure of their portfolios to both physical risks (like floods or cyclones) and transition risks (such as policy shifts or changing market preferences toward cleaner energy and technologies).

One of the most ambitious aspects of the framework is the expected disclosure of Scope 1, 2, and 3 emissions covering everything from direct emissions to those indirectly caused by clients. While this mirrors global best practices, such as the Task Force on Climate-Related Financial Disclosures (TCFD), it presents a steep learning curve for Indian banks, many of which still lack access to reliable environmental data and trained risk analysts.

The rationale behind this shift is multifaceted. On the one hand, it empowers banks to make more informed lending decisions, especially in sectors like infrastructure, real estate, and manufacturing that are more vulnerable to climate change. On the other, it nudges borrowers especially large corporates and MSMEs to start monitoring and improving their environmental performance in order to maintain access to affordable credit. In the long term, climate-aligned credit practices could reshape sectoral investment patterns, pushing capital away from carbon-intensive activities and toward green alternatives.

However, the transition won’t be easy. Industry insiders have already flagged several challenges. A senior public sector banker, quoted anonymously in a recent Reuters report, acknowledged that while many institutions have begun ESG data collection, integrating this into credit risk models remains a complex and underdeveloped area. Another challenge is the lack of standardized metrics across borrowers, especially in small and medium enterprises, which make it difficult to ensure uniform disclosures.

Legal and compliance professionals, too, will need to adapt. Credit agreements may soon include environmental covenants, ESG-linked warranties, or penalties tied to sustainability non-compliance. Risk and compliance teams will need upskilling, and internal systems must evolve to track not just financial KPIs but environmental indicators as well.

Despite these hurdles, the RBI’s move should not be viewed merely as a regulatory burden. It is, in fact, an opportunity for India’s financial ecosystem to lead by example aligning finance with planetary limits while boosting transparency, investor confidence, and long-term financial resilience.

In sum, the climate risk disclosure regime is not just a technical reform it is a moral and strategic pivot. Banks that act early will not only protect their balance sheets but also contribute meaningfully to India’s climate goals. For lawyers, bankers, and regulators alike, the message is clear: the era of climate-conscious finance has arrived, and it’s time to prepare.