Legal Framework For Green Finance And Climate-Responsible Investment In India - Challenges And The Way Forward

Author: LawSphereX

Category: Environmental Law

Published: 2026-08-23T20:30:27.343054+00:00

Updated: 2026-08-26T17:10:42.594+00:00

LEGAL FRAMEWORK FOR GREEN FINANCE AND

CLIMATE-RESPONSIBLE INVESTMENT IN INDIA:

CHALLENGES AND THE WAY FORWARD

Bhushan Madhukar Kathar, Research Scholar, MNLUA, Aurangabad

ABSTRACT

Green finance and climate-responsible investment have emerged as essential tools for achieving sustainable development, addressing climate change, and promoting low-carbon economic growth. In the Indian context, the relevance of green finance is underscored by the country’s vulnerability to climate risks, its ambitious commitments under the Paris Agreement, and the pressing need to balance economic growth with ecological sustainability. This paper explores the evolving legal and regulatory landscape governing green finance and sustainable investment in India, critically analysing the opportunities and identifying the systemic gaps that hinder its full potential.

India has made considerable progress by initiating regulatory frameworks through institutions such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Ministry of Environment, Forest and Climate Change (MoEFCC). Key instruments like the green bond framework, ESG-related disclosures under the Business Responsibility and Sustainability Reporting (BRSR) system, and the RBI’s guidelines on climate-related financial disclosures represent steps toward institutionalising environmental responsibility in the financial sector. However, the absence of a unified legal definition of green finance, the lack of a national taxonomy, inconsistent ESG standards, and limited coverage of unlisted entities reveal critical regulatory deficiencies.

This paper also examines India’s constitutional and judicial perspectives on environmental protection, highlighting the legal underpinnings of sustainability under Articles 21, 48A, and 51A(g). Comparative insights from global jurisdictions, particularly the European Union and China, offer lessons in harmonising regulatory standards and strengthening enforcement. The study concludes by recommending the adoption of a national green finance law, expanded ESG obligations, clearer disclosure norms, and institutional coordination to effectively channel capital into climate-resilient development. In doing so, the paper advocates for a robust and coherent legal framework that not only facilitates green finance but ensures accountability, transparency, and environmental justice in the transition to a sustainable economy.

Keywords: Green Finance, Sustainable Investment, ESG Regulation, Climate-Responsible Capital, Environmental Law in India

1. INTRODUCTION

The escalating global climate crisis has brought to the forefront the urgent need for economic models that are both inclusive and ecologically sustainable. Traditional growth paradigms fueled by carbon-intensive industries and unsustainable resource exploitation have proven inadequate in addressing the multifaceted environmental challenges of the 21st century. In this context, green finance and climate-responsible investment have emerged as pivotal mechanisms to reorient financial flows toward environmentally sustainable and low-carbon development pathways. These mechanisms not only reflect the growing environmental consciousness among policymakers and investors but also signal a systemic shift in global finance toward long-term sustainability.

For a country like India, which stands at the confluence of ambitious development goals and escalating climate vulnerabilities, the evolution of a robust legal and regulatory framework for green finance is both a necessity and an opportunity. Green finance refers to the financial support extended for activities that promote environmental sustainability, reduce greenhouse gas emissions, and support climate adaptation. It encompasses a broad range of financial instruments and investments, including green bonds, ESG-linked loans, sustainability-focused mutual funds, and climate risk insurance. Closely related is the concept of climate-responsible investment, which integrates environmental, social, and governance (ESG) factors into financial decision-making, thereby aligning profit motives with broader public interest imperatives.

Together, these frameworks seek to redirect capital flows away from environmentally harmful sectors and into sustainable infrastructure, renewable energy, climate-resilient agriculture, pollution control, and biodiversity conservation. India’s tryst with green finance has gained momentum in recent years, particularly after the country’s ratification of the Paris Agreement (2015) and its commitment to achieve net-zero carbon emissions by 2070. India’s Nationally Determined Contributions (NDCs), Sustainable Development Goals (SDGs), and the National Action Plan on Climate Change (NAPCC) provide strategic frameworks that require significant financial investments in green sectors. According to estimates by the International Finance Corporation (IFC), India needs over USD 2. 5 trillion in green investments by 2030 to meet its climate targets.

Mobilising this scale of finance cannot rely solely on public sector funding it requires robust participation from private capital markets, institutional investors, and international

climate finance mechanisms. Hence, the role of legal frameworks becomes central in shaping, guiding, and regulating the green finance ecosystem. Over the last decade, India has made tangible progress in building the institutional and regulatory architecture for green finance. The Securities and Exchange Board of India (SEBI) has introduced guidelines for green bonds and mandated Business Responsibility and Sustainability Reporting (BRSR) for the top 1000 listed companies. The Reserve Bank of India (RBI) has recently issued a framework for climaterelated financial disclosures and incorporated sustainability considerations into its prudential regulation. Further, the Ministry of Environment, Forest and Climate Change (MoEFCC) and the Ministry of Finance have supported green financing initiatives through climate adaptation funds and public-private partnerships.

Despite these promising developments, the legal framework governing green finance in India remains fragmented, inconsistent, and largely policy-driven rather than statute-based. A major challenge lies in the absence of a unified legal definition and taxonomy of green finance. While various agencies have issued sector-specific guidelines, there is no consolidated legal framework that defines the scope, eligibility criteria, monitoring mechanisms, or enforcement standards for green financial products. This regulatory ambiguity creates confusion among issuers, investors, and regulators and leaves the sector vulnerable to greenwashing the practice of falsely presenting projects or investments as environmentally beneficial without credible verification.

Moreover, ESG disclosures are largely restricted to listed companies, leaving out a vast number of small and medium enterprises (SMEs), private companies, and unregulated entities that also have significant environmental footprints. Another critical issue is the lack of coordination among regulatory bodies. Green finance intersects with multiple domains corporate governance, environmental regulation, financial services, and public policy yet there is limited institutional synergy among key regulators such as SEBI, RBI, and MoEFCC. The absence of a central authority or nodal agency to oversee green finance leads to overlaps, compliance gaps, and weak enforcement. Furthermore, there are no binding standards for third-party certification, impact evaluation, or investor grievance redressal, which weakens the integrity of green financial instruments.

The Indian judiciary, while progressive on environmental protection, has not yet developed a comprehensive jurisprudence around green finance. However, there is a strong constitutional foundation to support legislative action in this domain. Article 21 of the Indian Constitution guarantees the right to life, which has been interpreted to include the right to a clean and healthy environment. Articles 48A and 51A(g) enjoin the State and citizens to protect and improve the environment. These provisions, read with India’s obligations under international environmental

agreements, provide a compelling rationale for enacting legally enforceable norms to govern green and climate-conscious finance. At the international level, countries like the European Union and China have taken significant steps toward legal codification of green finance. The EU has implemented a Green Taxonomy Regulation, Sustainable Finance Disclosure Regulation (SFDR), and corporate sustainability due diligence laws to combat greenwashing and promote standardised ESG reporting. China has developed a comprehensive Green Credit Policy and integrated climate risk into its banking regulations. These models offer valuable lessons for India in building a legal framework that is credible, transparent, and future-ready. This paper aims to critically analyse the current legal and regulatory regime for green finance and sustainable investment in India.

It explores the roles played by key financial regulators, evaluates the effectiveness of existing disclosure and reporting mechanisms, and identifies institutional and legal gaps that hinder climate-aligned capital mobilisation. It also examines judicial and constitutional perspectives that support the case for stronger environmental compliance in financial markets. Drawing on comparative experiences from other jurisdictions, the paper proposes a set of policy and legal reforms to enhance the coherence, transparency, and impact of green finance in India. As India stands at a critical juncture in its economic and environmental journey, the need for a comprehensive, enforceable, and participatory legal framework for green finance has never been greater. The transition to a green economy is not merely a matter of fiscal strategy but a constitutional, ethical, and ecological imperative.

By aligning its financial laws with its climate commitments, India can not only safeguard its natural capital but also lead by example in shaping the global sustainable finance agenda.

2. GLOBAL EVOLUTION OF GREEN FINANCE

Green finance has emerged over the past two decades as a critical response to the growing awareness of climate change, biodiversity loss, and the unsustainable use of natural resources. The transformation of traditional financial systems to incorporate environmental sustainability began with the recognition that long-term financial risks and opportunities are increasingly shaped by environmental factors. This evolution has been driven by a combination of international agreements, regulatory initiatives, investor demands, and corporate accountability movements. The roots of green finance can be traced back to the 1992 Rio Earth Summit, where the idea of integrating environmental considerations into economic policy and financial decision-making was first articulated on a global platform.

However, it was the Kyoto Protocol (1997) and its market-based mechanisms, such as emissions trading and the Clean

Development Mechanism (CDM), that gave formal impetus to financial instruments tied to environmental performance. These developments laid the foundation for what would eventually become known as green finance. The 2007–2008 global financial crisis marked a pivotal turning point, as it exposed the systemic risks inherent in short-term, unregulated capital flows and highlighted the need for more resilient and responsible financial systems. In its aftermath, financial regulators and multilateral institutions began to consider the long-term impacts of climate-related risks on the stability of global financial systems. This culminated in a growing consensus that climate change presents not only an environmental challenge but also a significant financial risk particularly through stranded assets, physical climate risks, and transition risks.

The Paris Agreement (2015) significantly accelerated the global momentum for green finance. Article 2(1)(c) of the Agreement explicitly calls for “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. ”1 This provision created a legal and moral obligation for governments and financial institutions to redirect capital away from high-carbon sectors toward green technologies, infrastructure, and adaptation mechanisms. Following the Paris Agreement, several countries and regional blocs began to institutionalize green finance through national policies and legal instruments. The European Union launched an ambitious sustainable finance agenda, which includes the EU Green Taxonomy Regulation,2 the Sustainable Finance Disclosure Regulation (SFDR),3 and the Corporate Sustainability Reporting Directive (CSRD).

These instruments aim to standardize what constitutes “green” or “sustainable” finance, mandate ESG disclosures, and prevent greenwashing through transparency and accountability. China, one of the early movers in integrating green finance into national policy, introduced the Green Credit Guidelines in 2012,4 and later the Green Bond Endorsed Project Catalogue in

2015. These guidelines were complemented by the creation of green banks and regulatory

mandates on banks to evaluate the environmental impact of their lending. China also co-chaired the G20 Green Finance Study Group, which laid the groundwork for global consensus on sustainable financial practices. At the multilateral level, the Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board (FSB) in 2015, 1 Paris Agreement, art. 2(1)(c), Dec. 12, 2015, U.N. Doc. FCCC/CP/2015/10/Add.1, 55 I.L.M. 740 (2016). 2 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the Establishment of a Framework to Facilitate Sustainable Investment, 2020 O.J. (L 198) 13.

3 Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on

Sustainability‐Related Disclosures in the Financial Services Sector, 2019 O.J. (L 317) 1. 4 China Banking Regulatory Commission, Green Credit Guidelines (CBRC Order No. 6 of 2012), available at http://www.cbrc.gov.cn.

played a vital role in developing voluntary, consistent climate-related financial risk disclosures for use by companies, banks, and investors. 5 These recommendations have now been adopted or adapted by several countries as part of their national regulations. Additionally, the emergence of Environmental, Social, and Governance (ESG) investing has transformed the global asset management industry. Institutional investors, including pension funds and sovereign wealth funds, are increasingly demanding climate-conscious investment portfolios. This shift has prompted the development of ESG indices, green exchange-traded funds (ETFs), and impact investment models. By 2022, global ESG assets under management had exceeded USD 40 trillion. 6 Despite these advancements, challenges persist.

The lack of a universal definition of green finance, the proliferation of competing ESG standards, and the absence of a binding international green finance treaty contribute to market confusion and regulatory arbitrage. Nevertheless, global efforts continue to coalesce around the goal of aligning financial systems with climate objectives and sustainable development. The global evolution of green finance thus represents a paradigm shift in how capital is deployed no longer solely for profit but also for planetary and societal well-being. It has transitioned from a voluntary, marketdriven initiative to a regulated, mainstream financial practice supported by national and international legal frameworks.

For countries like India, understanding and aligning with these global developments is crucial to attract international capital, meet climate goals, and ensure financial stability in the face of environmental disruptions.

3. LEGAL AND INSTITUTIONAL FRAMEWORK IN INDIA

India’s journey toward integrating environmental concerns into the financial system has accelerated in recent years, particularly in response to its international commitments under the Paris Agreement and the Sustainable Development Goals (SDGs). While green finance in India has grown primarily as a policy and market-driven initiative, legal and regulatory institutions have begun to formalize its structure through a series of guidelines, reporting mandates, and policy statements. However, the absence of a unified legislation governing green finance continues to be a major constraint. 5 Task Force on Climate-related Financial Disclosures (TCFD), Recommendations of the TCFD (June 2017), https://www.fsb-tcfd.org. 6 Global Sustainable Investment Alliance, Global Sustainable Investment Review 2022, https://www.gsialliance.org/wp-content/uploads/2023/04/GSIR-2022.pdf.

3.1. Securities and Exchange Board of India (SEBI)

SEBI has played a pioneering role in promoting transparency and responsible investment practices in Indian capital markets. In 2017, it issued Disclosure Requirements for Issuance and Listing of Green Debt Securities, creating a regulatory framework for green bonds in India. 7 The framework defines green bonds as those raised for financing projects relating to renewable energy, sustainable water management, pollution prevention, and climate adaptation, among others. Further, SEBI introduced the Business Responsibility and Sustainability Reporting (BRSR) mandate in 2021, replacing the earlier Business Responsibility Report (BRR). 8 The BRSR is now compulsory for the top 1,000 listed companies by market capitalization and requires extensive ESG disclosures, including metrics on environmental impact, resource use, and climate risk.

Additionally, SEBI has proposed a framework for ESG rating providers and sustainability-focused mutual funds. 9 These steps are aimed at curbing greenwashing and improving investor trust in ESG-labelled financial products.

3.2. Reserve Bank of India (RBI)

The RBI has recognized climate change as a systemic financial risk and has made early efforts to incorporate sustainability into India’s banking sector. In 2021, the RBI included climate and environmental risks in its Report on Trend and Progress of Banking in India, signalling a policy shift toward sustainable finance. 10 In April 2023, the RBI issued a Framework for Acceptance of Green Deposits by regulated entities. 11 This circular lays down principles for the use of green funds, verification of green activities, third-party impact assessment, and annual disclosures. RBI has also signaled interest in adopting climate-related financial risk assessment frameworks akin to those recommended by the Task Force on Climate-related Financial Disclosures (TCFD).

Although green loans or climate-related capital requirements are not yet mandated, 7 Securities and Exchange Board of India, Circular on Disclosure Requirements for Issuance and Listing of Green Debt Securities (May 30, 2017), https://www. sebi. gov. in. 8 Securities and Exchange Board of India, SEBI (Listing Obligations and Disclosure Requirements) Regulations,

2015 (as amended in 2021), https://www.sebi.gov.in.

9 Securities and Exchange Board of India, Consultation Paper on ESG Rating Providers for Securities Markets (Jan. 2022), https://www.sebi.gov.in. 10 Reserve Bank of India, Report on Trend and Progress of Banking in India 2020–21, https://www.rbi.org.in. 11 Reserve Bank of India, Framework for Acceptance of Green Deposits (Apr. 11, 2023), https://www.rbi.org.in.

the RBI’s evolving regulatory narrative shows increasing alignment with global sustainable finance norms.

3.3. Ministry of Environment, Forest and Climate Change (MoEFCC)

The MoEFCC plays a key role in defining India’s Nationally Determined Contributions (NDCs) and in negotiating climate finance under international mechanisms such as the UNFCCC and the Green Climate Fund (GCF). While it does not regulate financial markets directly, it plays a strategic role in designing and executing environmental projects eligible for green financing. For instance, under the Perform, Achieve and Trade (PAT) and Renewable Energy Certificates (REC) mechanisms—both regulated in part by MoEFCC—the ministry collaborates with energy and finance departments to create tradable instruments linked to environmental performance.12

3.4. Ministry of Finance

The Ministry of Finance has worked with international agencies to develop climate finance strategies and co-leads India’s representation in multilateral financial forums such as the G20 Sustainable Finance Working Group. It has also encouraged state governments to explore green budgeting practices and develop green public financial management systems, though these efforts remain at the pilot stage. Importantly, the Finance Ministry launched India’s first Sovereign Green Bonds in 2023, raising ₹16,000 crore to finance environmentally beneficial projects.13 These bonds are issued under a Green Bond Framework that aligns with international standards such as the International Capital Market Association’s (ICMA) Green Bond Principles.

3.5. Other Institutions

Entities like the Indian Renewable Energy Development Agency (IREDA) and Small Industries Development Bank of India (SIDBI) have emerged as key institutional players in channelling finance into renewable energy and sustainable enterprises. Some banks and

12 Bureau of Energy Efficiency, Perform, Achieve and Trade (PAT) Scheme Guidelines (2020),

https://beeindia.gov.in.

13 Ministry of Finance, Government of India, India’s Sovereign Green Bonds Framework (Nov. 2022),

https://dea.gov.in/sites/default/files/SGBFramework.pdf.

NBFCs have begun to include ESG considerations in credit appraisals and sustainability-linked loans, though this remains largely voluntary. Challenges in the Current Legal Framework Despite these initiatives, India's green finance ecosystem is still developing and suffers from several legal and institutional gaps: • There is no comprehensive legislation governing green finance or climate-responsible investment. • Regulatory efforts remain fragmented across different agencies without a unified policy or nodal regulator. • Green taxonomies—defining what qualifies as a green project—are yet to be adopted formally, increasing the risk of greenwashing. • ESG disclosure obligations apply only to listed entities, leaving out thousands of private and unlisted businesses.

• The absence of a climate-specific risk management framework in banking regulation continues to limit systemic responses to environmental risks. A coherent legal framework would help define standards, ensure inter-agency coordination,

penalize non-compliance, and build investor confidence in green financial instruments.

4. CLIMATE-RESPONSIBLE INVESTMENT: CONCEPTS AND PRACTICE

As the global economy increasingly recognizes the material impact of environmental degradation, climate change, and social inequalities, investors and financial institutions are transitioning from profit-centric models to climate-responsible investment strategies. These strategies integrate environmental, social, and governance (ESG) considerations into capital allocation decisions. In the Indian context, such investments are gaining regulatory and institutional support, though the sector still faces definitional, disclosure, and accountability challenges.

4.1. ESG Investing and Fiduciary Duties

Environmental, Social, and Governance (ESG) investing is a form of sustainable investing that evaluates companies based on non-financial factors that may affect their long-term performance. ESG investing serves as a tool for promoting climate-responsible investment, particularly by identifying businesses with lower environmental risk exposure, better governance structures, and socially responsible practices. 14 Fiduciary responsibility, traditionally focused on maximizing returns for beneficiaries, is now being interpreted to include long-term risk mitigation, including climate risks. This shift reflects a growing recognition that ignoring climate-related financial risks may breach fiduciary duties.

In 2018, a landmark report by the United Nations Environment Programme Finance Initiative (UNEP FI) concluded that “integrating ESG considerations is consistent with fiduciary duty in Indian law. ”15 Courts and regulators globally, and increasingly in India, are beginning to view climate-related disclosures and governance as falling within the scope of duty of care and duty of loyalty. As fiduciaries, asset managers and company directors may be held accountable for failure to consider climate risks in investment strategies and board decisions. 16

4.2. SEBI’s Framework on ESG Ratings

In response to the growing market for ESG-labelled funds and concerns about greenwashing, the Securities and Exchange Board of India (SEBI) has taken several steps to regulate ESG ratings and sustainable finance disclosures. In March 2023, SEBI released a Consultation Paper on ESG Rating Providers (ERPs), proposing a formal framework for accrediting and supervising entities that assign ESG scores to companies.17 The paper outlines requirements related to transparency, conflict of interest mitigation, and standardization of methodology. It proposes that ESG rating agencies should disclose: 14 Principles for Responsible Investment (PRI), What Is Responsible Investment?, https://www.unpri.org.

15 UNEP FI & The Generation Foundation, Fiduciary Duty in the 21st Century: India Roadmap (2018),

https://www.unepfi.org/wordpress/wp-content/uploads/2019/01/FD21-India-Roadmap.pdf. 16 See Divya Narain, Climate Change and Corporate Fiduciary Duty: The Indian Perspective, 2 J. Env’t L. & Pol’y Rev. 35, 45 (2021).

17 Securities and Exchange Board of India, Consultation Paper on ESG Rating Providers (Mar. 2023),

https://www.sebi.gov.in/reports-and-statistics/reports/mar-2023.

The weightage of E, S, and G parameters • Data sources and scoring frameworks • Sector-specific risk assessments SEBI also mandated that ESG ratings be company-specific rather than instrument-specific, helping investors understand a company’s overall sustainability profile.18 This is crucial for enabling genuine climate-responsible investment rather than relying on potentially misleading product labeling. In tandem, SEBI has made Business Responsibility and Sustainability Reporting (BRSR) mandatory for the top 1000 listed companies.19 The BRSR format includes reporting on: • Greenhouse gas (GHG) emissions • Energy consumption and intensity • Water management • Biodiversity impacts • Social equity, inclusion, and diversity metrics The objective is to create decision-useful, comparable ESG data for investors, ensuring transparency and informed capital flows toward sustainable businesses.

4.3. Role of Institutional Investors and Climate Funds

Institutional investors such as pension funds, insurance companies, mutual funds, and sovereign wealth funds play a crucial role in scaling up climate-responsible investment. Their long-term investment horizons and large capital pools make them natural allies in financing green infrastructure, renewable energy, and sustainable development projects. In India, a growing number of institutional investors are incorporating ESG screening and impact investing principles into their portfolios. Notably, mutual fund houses like SBI Mutual Fund and Axis Mutual Fund have launched ESG-focused funds that prioritize companies with strong

18 Id

19 Securities and Exchange Board of India, BRSR Format for Listed Entities (2021), https://www.sebi.gov.in.

sustainability credentials. 20 However, ESG investment is still a niche segment, with only a small fraction of total Assets Under Management (AUM) being ESG-linked. The National Investment and Infrastructure Fund (NIIF) and India Infrastructure Finance Company Ltd (IIFCL) have also committed to financing climate-aligned infrastructure projects. These government-backed institutions are exploring partnerships with climate funds like the Green Climate Fund (GCF) and Global Environment Facility (GEF) to leverage concessional financing and de-risk private capital flows. Additionally, several international institutional investors have signed on to the Principles for Responsible Investment (PRI) and pledged to align their Indian investments with ESG norms.

The rise of blended finance, combining public and private sources, is emerging as a promising model to fund high-impact, low-return green sectors. Despite this momentum, major challenges remain. Many Indian institutional investors lack in-house ESG capacity, and ESG scoring methodologies remain inconsistent. The absence of a common Indian ESG taxonomy creates confusion and restricts market development. Climate-responsible investment in India is at a critical juncture. With increasing regulatory clarity, global investor interest, and alignment with fiduciary norms, ESG investing is evolving from a voluntary initiative to a financial necessity. However, without unified ESG taxonomies, robust rating oversight, and capacity building among institutional players, the promise of climate-aligned capital may remain underutilized.

Strengthening legal mandates, improving standardization, and promoting investor education are vital to ensure that India’s investment ecosystem supports both sustainable profits and planetary well-being.

5. CONSTITUTIONAL AND JUDICIAL PERSPECTIVES

As India continues to build its green finance and sustainable investment architecture, the Constitution of India and its judicial institutions offer powerful normative and institutional foundations. Unlike many jurisdictions where sustainability is a policy-driven objective, Indian environmental governance including aspects of climate finance is grounded in constitutional obligations and judicially enforceable rights. The interpretation of environmental protection as a facet of fundamental rights, coupled with proactive judicial intervention and the creation of dedicated institutions like the National Green Tribunal (NGT), underscores India’s unique legal 20 Business Standard, ESG Funds in India: Still a Nascent Market (Apr. 3, 2023), https://www.businessstandard.com.

commitment to sustainable development.

5.1. Articles 21, 48A, and 51A(g): Constitutional Mandate for Environmental Protection

The Indian Constitution does not explicitly mention "green finance" or "sustainable investment. " However, key constitutional provisions form the legal bedrock upon which environmental and climate governance, including financial instruments linked to sustainability can be justified and enforced. • Article 21 guarantees the right to life and personal liberty, which has been expansively interpreted by the Supreme Court to include the right to a wholesome environment, clean air, and ecological balance. 21 In Subhash Kumar v. State of Bihar, the Court held that the right to pollution-free water and air is part of Article 21. 22 • Article 48A, part of the Directive Principles of State Policy, directs the State to “protect and improve the environment and to safeguard the forests and wildlife of the country.

” Though not justiciable by itself, it guides legislative and executive action and is often read in harmony with fundamental rights. • Article 51A(g) imposes a fundamental duty on every citizen “to protect and improve the natural environment including forests, lakes, rivers and wildlife. ” This provision places environmental responsibility not just on the State but also on individuals and corporate entities. Together, these articles establish a constitutional imperative for the State and the private sector to actively promote environmental protection. In the context of green finance, this means that the legal system implicitly supports frameworks where public and private capital is steered toward environmentally sound and climate-resilient investments.

5.2. Judicial Activism and Sustainable Development

Indian courts especially the Supreme Court and High Courts have been proactive in enforcing environmental norms and upholding the doctrine of sustainable development. The judiciary

21 Virender Gaur v. State of Haryana, (1995) 2 SCC 577.

22 Subhash Kumar v. State of Bihar, AIR 1991 SC 420.

has repeatedly emphasized that economic growth must be balanced with ecological preservation. The landmark case of Vellore Citizens Welfare Forum v. Union of India23 introduced the principles of sustainable development, polluter pays, and precautionary principle into Indian environmental jurisprudence. The Court held that development must not come at the cost of future generations' rights, essentially adopting the intergenerational equity principle. Similarly, in MC Mehta v. Union of India,24 the Supreme Court has laid down important precedents on environmental compliance by industries, vehicular emissions, and urban pollution. These judgments have indirectly influenced how businesses conduct their operations, pushing them toward cleaner technologies and better compliance.

While these cases are not directly about green finance, they establish a legal environment in which sustainability is not a voluntary goal but a constitutional and judicial obligation. Financial institutions and businesses are expected to internalize environmental costs and adopt sustainable practices, failing which they may face judicial scrutiny or public interest litigation. Furthermore, the courts have recognized that financial and corporate practices can no longer ignore their environmental consequences. This emerging jurisprudence offers an opportunity to judicially validate climate-aligned investments and hold financial actors accountable for facilitating environmentally harmful projects.

5.3. Role of the National Green Tribunal (NGT)

The National Green Tribunal Act, 2010, established the NGT as a specialised body for expeditious and technical adjudication of environmental matters.25 With its wide jurisdiction, the NGT has become central to enforcing environmental laws and reviewing the environmental impact of public and private projects, including those financed by major institutions. Although the NGT does not regulate green finance directly, its orders have financial consequences, often requiring polluting industries to pay compensation, halt environmentally damaging projects, or modify their business practices. In doing so, the NGT indirectly influences the risk profile of projects, making them less attractive for investors or financial institutions. It has also ordered

23 Vellore Citizens Welfare Forum v. Union of India, (1996) 5 SCC 647.

24 MC Mehta v. Union of India, AIR 1987 SC 1086.

25 National Green Tribunal Act, No. 19 of 2010, Acts of Parliament, 2010 (India).

environmental audits, cost-benefit analysis, and sustainability reporting, all of which are central to climate-responsible investment. 26 For example, in the Sterlite Industries case,27 the NGT ordered the closure of a copper smelting plant in Tamil Nadu due to massive pollution, underscoring that non-compliance with environmental norms can result in major financial liabilities and loss of investor confidence. The NGT thus acts as both a regulatory deterrent and accountability mechanism, ensuring that environmental externalities are internalized by industries and, by extension, their investors. It creates legal pressure on corporates to align with ESG principles and helps create a regulatory atmosphere conducive to responsible investment. India’s constitutional framework and judicial philosophy provide a robust foundation for the promotion of green finance and sustainable investment.

Articles 21, 48A, and 51A(g) enshrine a duty to protect the environment, which extends implicitly to corporate actors, investors, and financial institutions. Judicial activism, particularly in the form of sustainable development jurisprudence, reinforces this obligation by requiring environmentally responsible business conduct. The National Green Tribunal adds another layer of enforcement, indirectly influencing financial decisions through environmental liability and project scrutiny. While India has not yet legislated a comprehensive law on green finance, the existing constitutional and judicial ecosystem supports such a framework, making it both desirable and legally defensible. Future regulatory developments in ESG investing, green bonds, and sustainability-linked finance can and should draw strength from this deep legal heritage.

6. CHALLENGES AND GAPS IN THE LEGAL FRAMEWORK FOR GREEN

FINANCE IN INDIA

Despite India’s growing regulatory interest in sustainable finance, the legal and institutional framework for green finance and climate-responsible investment remains underdeveloped and fragmented. While regulators like SEBI and the RBI have introduced ESG disclosures and green bond frameworks, several fundamental challenges hinder the mainstreaming of green finance into India’s financial architecture. These challenges affect not only regulatory coherence and market confidence but also the ability to align India’s financial system with its

26 Almitra Patel v. Union of India, NGT (Order dated Aug. 2017), addressing solid waste management

accountability. 27 Sterlite Industries (India) Ltd. v. Tamil Nadu Pollution Control Board, NGT Chennai, Appeal No. 19/2013(SZ).

national climate targets and global commitments under the Paris Agreement.

6.1. Absence of a Unified Green Taxonomy

A central obstacle to effective green finance regulation in India is the lack of a legally codified

green taxonomy a standardized classification system to determine which economic activities qualify as “green” or “sustainable. ” In the absence of such a framework, financial institutions, investors, and ESG rating agencies are left to interpret green criteria in an inconsistent and discretionary manner. 28 Without a taxonomy, it becomes difficult to: • Assess whether a project or asset truly aligns with environmental goals • Prevent “greenwashing” in capital markets • Compare green disclosures across sectors and instruments In contrast, the European Union’s Taxonomy Regulation provides a science-based standard for determining sustainability, thereby creating trust and transparency in green investing.

29 India has begun discussions on taxonomy development through the International Platform on Sustainable Finance and the G20 Sustainable Finance Working Group,30 but a domestic statutory taxonomy remains pending.

6.2. Inadequate ESG Regulation for Private and Unlisted Firms

Current ESG disclosure mandates in India, such as SEBI’s Business Responsibility and Sustainability Reporting (BRSR), apply only to the top 1,000 listed companies by market capitalization.31 This regulatory approach ignores the vast ecosystem of private companies, MSMEs, and unlisted firms that contribute significantly to India's environmental footprint, especially in sectors like textiles, chemicals, construction, and logistics. This regulatory

28 International Platform on Sustainable Finance, Report on a Common Ground Taxonomy (Nov. 2022),

https://ec.europa.eu/info/publications/221102-sustainable-finance-platform-common-ground-taxonomy_en.

29 Regulation (EU) 2020/852 of the European Parliament and of the Council, 2020 O.J. (L 198) 13.

30 G20 Sustainable Finance Working Group, 2023 Roadmap for Sustainable Finance Implementation,

https://g20sfwg.org.

31 Securities and Exchange Board of India, BRSR Format under SEBI (LODR) Regulations,

https://www.sebi.gov.in.

exclusion creates a two-tier ESG economy, where listed companies are subjected to scrutiny while others operate without sustainability disclosures or compliance pressure. It also limits climate-related investment decisions for venture capital and private equity funds, which often operate in the unlisted space. Without a mandate for ESG disclosures across the corporate spectrum, climate-responsible investment remains constrained in scope and effectiveness.

6.3. Risk of Greenwashing and Lack of Enforcement

A significant threat to the credibility of green finance in India is the risk of greenwashing the

practice of misrepresenting products, services, or investments as environmentally sound without adequate evidence or performance verification. Greenwashing erodes investor trust and undermines the objectives of climate-aligned finance. Currently, India lacks a statutory framework or regulator with exclusive authority to define, monitor, and penalize greenwashing. ESG rating providers operate with minimal regulatory oversight, and while SEBI has proposed a regulatory framework,32 the rules remain in the consultation phase. The absence of uniform audit standards, verified impact metrics, and mandatory third-party evaluations further aggravates the problem. Moreover, enforcement mechanisms are weak or unclear.

While regulators can act under general securities laws or banking prudential norms, there is no climate-specific penalty system to deter misrepresentation or non-compliance with green disclosures. Without legal teeth, green finance risks becoming a formality rather than a transformative instrument.

6.4. Limited Green Disclosures and Weak Investor Protection

Although SEBI’s BRSR framework and green bond guidelines require sustainability-related disclosures, the quality, comparability, and materiality of this information remain inconsistent. 33Many disclosures are narrative rather than data-driven and lack assurance by external auditors. As a result, investors often cannot determine whether projects deliver genuine environmental benefits. Retail investors, in particular, face challenges in verifying the green credentials of mutual funds or bonds labeled as ESG. There is also no investor grievance mechanism specifically designed for ESG misrepresentation or green bond default. SEBI and RBI do not currently provide clear redressal pathways for disputes involving green financial 32 SEBI, Consultation Paper on ESG Rating Providers (Mar. 2023), https://www. sebi. gov. in/reports-andstatistics/reports/mar-2023.

33 CRISIL, ESG and BRSR Disclosures in India: Current Trends and Challenges (2023), https://www. crisil. com.

products. This lack of investor protection mechanisms hinders broader participation in green finance markets and may deter global institutional investors who demand higher due diligence and accountability standards. Compared to jurisdictions like the EU and UK, India’s disclosure ecosystem is still in a nascent phase. To unlock the full potential of green finance in India, addressing these legal and regulatory gaps is critical. The absence of a unified taxonomy, the exclusion of private companies from ESG mandates, the unchecked risk of greenwashing, and the limited scope of disclosures collectively reduce market efficiency and investor confidence. A comprehensive, enforceable, and transparent legal framework grounded in international best

practices but tailored to India’s realities is urgently needed. This framework should not only enhance compliance and market integrity but also align India’s financial system with its constitutional environmental mandates and international climate obligations. Only then can green finance serve as a robust instrument for achieving a truly sustainable and resilient economy.

7. RECOMMENDATIONS AND THE WAY FORWARD

7.1. Enact a Unified Green Finance Legislation and National Taxonomy

India urgently needs a comprehensive green finance law that defines climate-responsible investments, regulates green instruments, and ensures alignment with national and international environmental goals. Such a legal framework should institutionalize a sciencebased green taxonomy to clearly delineate what constitutes "green" economic activity, thereby eliminating ambiguity and reducing the risk of greenwashing. A statutory body such as a National Green Finance Authority could be established to coordinate inter-agency functions, oversee compliance, and streamline the flow of sustainable capital. Drawing from global models like the EU Taxonomy Regulation, India’s taxonomy must be contextually adapted to domestic sectors while maintaining global credibility.

7.2. Extend ESG Disclosures to Unlisted and Private Companies

Currently, ESG reporting obligations in India are restricted to listed entities, leaving out a significant portion of private and unlisted companies that contribute heavily to environmental externalities. To promote economy-wide sustainability, ESG disclosure mandates should be extended to such entities based on parameters like turnover, sectoral exposure, and environmental risk rather than only market capitalization. Amendments to the Companies Act

and sectoral guidelines should ensure that banks, NBFCs, and private investors can evaluate ESG risks across all investment classes. This inclusivity will strengthen the ESG ecosystem and enable informed decision-making across both public and private capital markets.

7.3. Regulate and Certify ESG Rating Providers

The lack of regulation over ESG rating providers (ERPs) has led to inconsistencies in methodology, opacity in disclosures, and an increased risk of greenwashing. It is essential that SEBI’s proposed framework for ERPs be swiftly implemented to ensure uniform standards, accountability, and transparency in ESG scoring. Rating providers should be mandated to disclose their data sources, rating logic, and sectoral criteria. Additionally, India should establish independent, government-accredited agencies to certify green bonds and sustainability-linked instruments, thereby increasing investor confidence and market integrity.

7.4. Strengthen Enforcement and Investor Protection

Robust enforcement mechanisms are crucial for translating ESG norms into meaningful compliance. SEBI and RBI must be empowered to penalize misrepresentation in ESG disclosures and non-compliance with green finance regulations. Dedicated grievance redressal platforms should be created for investors to report issues related to ESG violations, especially concerning misleading green bond claims. Further, class action remedies under the Companies Act and the Consumer Protection Act should be expanded to cover climate-related financial fraud or neglect. These reforms will enhance legal deterrence and safeguard retail and institutional investors in India’s growing sustainable finance markets.

7.5. Build Institutional Capacity and ESG Literacy

The successful implementation of green finance policies hinges on the capacity of regulators, financial institutions, and corporate entities to understand and operationalize ESG frameworks. India must invest in dedicated training programs for financial professionals, corporate compliance officers, and regulatory personnel on ESG law, impact measurement, and climate risk. Academic institutions should introduce specialized courses on climate finance and sustainability reporting to nurture a future-ready workforce. These efforts, supplemented by knowledge partnerships with global institutions like UNEP FI and the World Bank, will help mainstream ESG practices in the Indian economy.

7.6. Foster Climate-Aligned Public Finance and Green Budgeting

To set a national precedent, India should mainstream green budgeting into its fiscal policy at both central and state levels. Public financial management systems must be recalibrated to integrate climate objectives, requiring departments to track the environmental footprint of public expenditure. Annual green budget statements should be published, outlining the proportion of climate-positive spending and evaluating its social and environmental impact. Such transparency will not only align public finances with sustainable development goals but also catalyze private sector confidence in India’s long-term climate strategy.

7.7. Encourage Blended Finance and De-Risking Instruments

India must scale up innovative financing models like blended finance to attract large-scale private investment in green infrastructure and low-carbon technologies. The government should create credit enhancement funds, green guarantees, and insurance mechanisms to mitigate perceived investment risks, especially in frontier areas like clean energy, sustainable agriculture, and climate-resilient infrastructure. Partnerships with global climate funds such as the Green Climate Fund (GCF) and the Global Environment Facility (GEF) can also unlock concessional capital, enabling financial institutions to support green projects that may not be immediately profitable but are crucial for long-term sustainability.

8. CONCLUSION

Law plays a foundational role in shaping how capital is mobilized and directed toward sustainable development. In the context of India’s green finance ecosystem, legal and regulatory frameworks act not merely as compliance tools but as instruments of transformation aligning economic growth with environmental protection. The Indian Constitution, particularly through Articles 21, 48A, and 51A(g), provides a rights-based and duty-based mandate for environmental stewardship, while the judiciary has reinforced these mandates through progressive interpretations and activist interventions. Building upon this constitutional ethos, financial regulators like SEBI and the RBI have taken significant steps to introduce ESG disclosures, green bond frameworks, and sustainability-linked instruments.

However, these measures, though laudable, remain fragmented, lacking a cohesive legislative vision and robust enforcement mechanisms. To move forward, India must adopt a holistic and inclusive approach to green finance, underpinned by a dedicated legal framework that incorporates global best

practices while being tailored to its domestic realities. The establishment of a national green taxonomy, regulation of ESG rating providers, and extension of ESG obligations to private and unlisted firms are essential first steps. Furthermore, there is a need to build institutional capacities, create climate-specific enforcement mechanisms, and ensure strong investor protection to enhance trust and accountability in sustainable financial products. Equally critical is the alignment of public finances through green budgeting and the promotion of blended finance models that can de-risk private capital and scale up green investments. Ultimately, the law must evolve from being reactive to visionary creating legal certainty, promoting environmental integrity, and enabling capital flows that are not only profitable but also equitable and climate-resilient.

By embedding sustainability within its legal and financial systems, India can transition toward a future where development is both economically inclusive and ecologically just. This transformation is not only necessary to meet global climate targets but is also imperative to secure the rights and well-being of current and future generations.