Regulatory Frameworks for Green Finance in India

Green finance in India refers to the mobilization of public and private capital towards projects, investments, and financial products that promote environmental sustainability, mitigate climate change, and accelerate the transition to a low-carbon economy. India requires substantial financial resources to meet its Nationally Determined Contributions (NDCs) under the Paris Agreement and fulfill its target of achieving net-zero carbon emissions by 2070. To direct capital flows toward climate-resilient infrastructure, Indian financial regulators—including the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), and Insurance Regulatory and Development Authority of India (IRDAI)—along with key ministries, have established dedicated policy frameworks, disclosure standards, and specialized financial instruments.

Central Regulatory Architecture and Institutional Mandates

India’s green finance framework operates through a multi-regulator model where individual financial watchdogs enforce rules within their respective domain.

Reserve Bank of India (RBI)

The RBI drives climate finance initiatives within the banking sector. In 2021, the RBI set up a dedicated Sustainable Finance Group (SFG) within its Department of Regulation to lead regulatory interventions on climate risk and sustainable finance. The RBI is also a member of the Network for Greening the Financial System (NGFS), joining the global network of central banks in 2021.

Securities and Exchange Board of India (SEBI)

SEBI regulates capital markets and has introduced structural frameworks for issuing sustainable debt instruments, regulating Environmental, Social, and Governance (ESG) rating providers, and standardizing corporate sustainability disclosures.

Ministry of Finance and MoEFCC

The Ministry of Finance issues operational guidelines for public sovereign issuances, including the Sovereign Green Bond Framework. The Ministry of Environment, Forest and Climate Change (MoEFCC) sets foundational environmental policies and technical standards, including national carbon market architectures.

Key Regulatory Frameworks and Policies

Acceptance of Green Deposits Framework (RBI)

Issued by the RBI in April 2023, this framework applies to Scheduled Commercial Banks (including Small Finance Banks) and Deposit-taking Non-Banking Financial Companies (NBFCs). Regulated Entities (REs) raising green deposits must adhere to strict operational guidelines:

• Use of Proceeds: Funds raised via green deposits must be allocated exclusively to eligible green sectors such as renewable energy, clean transportation, energy efficiency, sustainable water management, pollution prevention, and green buildings.
• Excluded Sectors: Nuclear power generation, direct extraction of fossil fuels, biomass projects derived from deforestation, and hydropower plants larger than 25 MW are strictly excluded.
• Financing Framework & External Review: REs must formulate a Board-approved policy on green deposits, undergo independent third-party verification, and conduct annual impact assessments.
• Parking of Unallocated Proceeds: Pending deployment, unallocated funds can only be parked in liquid Level-1 High-Quality Liquid Assets (HQLA) like Treasury Bills.

Priority Sector Lending (PSL) Targets

The RBI introduced renewable energy into the Priority Sector Lending guidelines in 2015. Under current norms, commercial banks can classify credit provided for solar-powered systems, wind generators, micro-hydro plants, and biomass-based power generators up to a limit of ₹30 crore per borrower under PSL. For individual households, the loan limit for renewable energy setups is ₹10 lakh per borrower.

Framework for Green Debt Securities (SEBI)

SEBI first issued guidelines for issuing and listing Green Debt Securities in 2017, updating them in 2023 to expand the scope to “Green, Social, and Sustainable Debt Securities.”

• Definition & Scope: Covers debt instruments issued to finance climate change adaptation, clean transportation, circular economy products, and blue economy (ocean conservation) initiatives.
• Prevention of Greenwashing: Issuers must continuously monitor whether the utilization of proceeds aligns with stated objectives and appoint independent auditors to verify allocation, mitigating greenwashing risks.

Business Responsibility and Sustainability Reporting (BRSR)

SEBI replaced the Business Responsibility Report (BRR) with the Business Responsibility and Sustainability Reporting (BRSR) framework in 2021, making ESG disclosures mandatory for the top 1,000 listed entities by market capitalization.

• BRSR Core: Introduced in 2023, BRSR Core comprises a sub-set of Key Performance Indicators (KPIs) under nine ESG attributes, requiring mandatory third-party reasonable assurance.
• Value Chain Disclosures: Top listed entities are mandated to disclose ESG metrics for their upstream and downstream value chain partners, covering at least 75% of their purchases or sales by value.

Sovereign Green Bonds (SGBs) Framework

The Government of India launched its Sovereign Green Bond Framework in November 2022. The inaugural issuances occurred in early 2023, raising capital for public sector green projects.

• Green Finance Working Committee (GFWC): Chaired by the Chief Economic Adviser, the GFWC selects and evaluates eligible public projects for funding.
• SLR Eligibility: The RBI permits banks to count Sovereign Green Bonds toward their Statutory Liquidity Ratio (SLR) requirements.

Comparative Summary of Key Regulatory Mechanisms

Major Challenges in India’s Green Finance Architecture

Absence of a Comprehensive National Green Taxonomy

India lacks an officially finalized, legally binding green taxonomy that clearly categorizes economic activities based on environmental sustainability. Without a standardized taxonomy, financial institutions face ambiguities in defining green assets, which elevates the risk of greenwashing.

Asset-Liability Mismatch (ALM)

Green infrastructure projects, such as offshore wind farms or grid-scale energy storage, require long-term capital with tenor periods ranging between 15 to 25 years. Indian commercial banks rely primarily on short-to-medium-term deposits, leading to structural asset-liability mismatches when funding long-gestation green projects.

High Capital Costs and Risk Perceptions

Early-stage green technologies—including green hydrogen electrolyzers, grid-scale battery storage, and carbon capture units—carry high technology risks and capital costs. Commercial lenders remain hesitant without risk-mitigation tools like credit guarantees or blended finance structures.

Key Facts and Data Summary

• India set a target at COP26 to reach net-zero carbon emissions by 2070 and cut total projected carbon emissions by 1 billion tonnes by 2030.
• India’s updated NDCs commit to reducing the emission intensity of its GDP by 45% by 2030 from 2005 levels and achieving 50% cumulative electric power installed capacity from non-fossil fuel-based energy resources by 2030.
• The Reserve Bank of India joined the Network for Greening the Financial System (NGFS) as a member in April 2021.
• The RBI established a dedicated Sustainable Finance Group (SFG) within its Department of Regulation in May 2021.
• The Government of India issued its maiden Sovereign Green Bonds (SGBs) in two tranches in January and February 2023, totaling ₹16,000 crore.
• SEBI introduced the Business Responsibility and Sustainability Reporting (BRSR) framework in May 2021, replacing the Business Responsibility Report (BRR).
• BRSR Core mandates third-party reasonable assurance across 9 key ESG attributes for listed firms.
• The RBI’s Framework for Acceptance of Green Deposits came into effect on June 1, 2023.
• Under RBI Priority Sector Lending guidelines, bank loans up to ₹30 crore are eligible for renewable energy projects, and up to ₹10 lakh per borrower for individual household setups.
• Large hydropower projects above 25 MW capacity are excluded from utilizing proceeds raised via RBI-regulated green deposits.
• Nuclear power projects and direct fossil fuel extraction are completely excluded from the eligible activities under the RBI Green Deposit Framework.