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The global landscape for climate disclosures and environmental, social and governance (ESG) reporting is rapidly evolving from predominantly voluntary to a mandatory reporting paradigm.
With the problem of opacity addressed, regulators are now asking financial institutions to incorporate material ESG issues in their risk assessment and management frameworks to ensure long-term sustainability and resilience of their loan/investment portfolios.
The foundation of every reliable ESG risk assessment is transparent ESG disclosures. In addition to broader ESG reporting, specific climate impact disclosures are increasingly vital for businesses and financial institutions due to the growing recognition of climate-related risks and opportunities, and its disproportionate impact on corporate financials.
Transparent reporting on greenhouse gas (GHG) emissions, climate change-related risks, and adaptation strategies enables stakeholders to assess companies' resilience to climate change impact and their ability to monetise emerging opportunities in net zero transition. Investors increasingly consider climate disclosures when making investment decisions, seeking to mitigate climate-related financial risks and capitalise on emerging opportunities in the transition to a low-carbon economy.
Evolution and alignment
On February 28, the Reserve Bank of India (RBI) unveiled draft guidelines on the disclosure framework for climate-related financial risks for regulated entities (REs). These guidelines mandate REs to disclose information regarding their ability to both identify and manage climate-related financial risks and opportunities in their credit portfolios. Last year, the Securities and Exchange Board of India (Sebi) developed the Business Responsibility and Sustainability Reporting (BRSR) to mandate the top 1,000 Indian companies (by market cap) and their value chain to disclose critical information on various ESG factors. Sebi has also released guidelines for ESG funds and ESG rating providers.
Globally too regulations have been rapidly evolving; while the European Union has had some of the most evolved reporting requirements, in 2024, the United States’ Securities and Exchange Commission (SEC) adopted rules to enhance and standardise climate-related disclosures for investors in the US, along with a few others such as Australia and Singapore. A review of the India disclosure requirements vis-à-vis the global requirements, indicates a high degree of alignment, along with emphasis on issues pertinent to India.
Regulations shaping exports
Regulations often impact businesses beyond local geographic boundaries. For instance, carbon tax regulations like the EU’s CBAM will require Indian companies in certain sectors such as steel to pay carbon taxes if their Scope 1 and Scope 2 emissions are beyond EU thresholds. The SEC climate disclosure rule will also impact global Asia Pacific companies as they are part of global supply chains. This rapid introduction of regulations means that companies and financial institutions will need to quickly adapt and prepare for the mandatory disclosure environment.
Hence India has done well to align its disclosure standards with global disclosure requirements, ensuring Indian companies are measuring and reporting their performance on the relevant ESG parameters.
Enter fintechs and climate-techs
From the perspective of banks and financial institutions, integrating ESG and climate disclosures requires increased investment in building integrated risk management frameworks, acquiring good quality data, and hiring and training ESG experts who understand the domain.
Fintech and climate-tech ventures are revolutionising this space; through innovative technologies such as AI and machine learning (ML), fintech firms offer accurate and efficient ESG data curation, scoring and assessment tools.
Data on underlying companies is a key ingredient for risk assessments, and it requires accurate and timely information for research. Fintech companies, with the use of ML models and domain experts, can accurately capture large sets of data and scale coverage. Some startups also have developed analytical platforms that help financial institutions undertake ESG research of various alternative asset classes, including private companies and convert this research to stakeholder reports.
Banks will need to integrate climate risk into their credit decision-making process and perform various climate scenario analyses on their portfolios. A few startups have built platforms that can help banks and financial institutions with end-to-end solutions, significantly reducing ESG research costs for financial institutions.
Conclusion
As the demand for ESG and climate disclosures grow, financial institutions must adapt swiftly to incorporate ESG risks in portfolio section and maintenance. Fintech and climate-tech ventures play a pivotal role in reshaping ESG risk assessment, offering innovative solutions that assist in risk evaluation and integration of ESG risks in credit assessments. By leveraging advanced technologies and expertise, these companies empower financial institutions to integrate ESG and climate considerations into their decision-making processes effectively, enabling them to navigate the evolving landscape of sustainable finance and contribute to a more resilient and sustainable future.
(Ramnath Iyer is Co-Founder and CEO, ESGDS)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.