Climate-related financial risk: RBI to release guidance notes on scenario analysis, stress testing
Notable because
The RBI has proactively taken steps to address climate risk and guide the financial sector in making climate-aligned investments. This will be the RBI’s fifth document addressing climate risk. The guidance on scenario analyses and stress testing are forward-looking tools, as mentioned in the Discussion Paper on Climate Risk and Sustainable Finance released in July 2022. They can be used to identify and assess the vulnerabilities of financial institutions in managing both physical and transition risks.
What to look out for in the months ahead
The discussion paper released in July 2022 mentioned ‘plausible scenarios’ and referenced NGFS scenarios, although it did not specify details. Will the upcoming guidance include detailed scenarios and methodologies? The draft disclosure framework published in February 2024 outlined a list of applicable entities (such as SCBs and NBFCs). Which entities, will be covered by this guidance note?