Green Finance Law: Legal Frameworks for ESG Investing and Sustainable Bonds in India

Green Finance Law in India is rapidly evolving to support the nation’s commitment to sustainable development and climate goals. It provides the essential legal structures and regulations that govern ESG investing and the issuance of sustainable bonds. These rules ensure transparency, accountability, and environmental integrity. Bodies like SEBI and RBI issue important guidelines to support this framework. Key provisions under the Companies Act also play a vital role. Together, they help India build a strong ecosystem for green finance. This framework enables businesses to channel investments into projects promoting renewable energy, pollution control, sustainable water management, and other eco-friendly initiatives. For Indian companies, understanding and complying with these laws is crucial. Doing so helps attract ESG investments, avoid legal risks, and contribute to a greener future.

The Evolution of Green Finance Law in India

India’s journey towards green finance began with early green bond issuances by private banks around 2015 and gained momentum with SEBI’s official Green Bond Guidelines in 2017. The issuance of the first sovereign green bonds by the Indian government in 2022-23 marked a significant policy milestone, signaling strong governmental support for impact investing and sustainable economic growth.

The legal framework governing sustainable bonds has evolved through key regulations and policy shifts led by SEBI, RBI, and the Companies Act, 2013, shaping India’s position as a growing hub for green finance.

1. Key Legal Frameworks Shaping Green Finance Law in India

• SEBI and Green Debt Securities

SEBI regulates Green Debt Securities (GDS) under the SEBI (Issue and Listing of Green Bonds) Regulations, 2017, and the updated Non-Convertible Securities Regulations, 2021. These rules align with international standards such as the ICMA Green Bond Principles and require:

1. Use of Proceeds: Funds must be exclusively allocated to green projects, including renewable energy, clean transportation, sustainable water management, pollution prevention, energy efficiency, waste management, and biodiversity conservation.
2. Project Evaluation: Issuers must disclose clear criteria for selecting and evaluating projects based on environmental impact.
3. Disclosure Requirements: Detailed disclosures about the green objectives, fund tracking, and project specifics must be provided in offering documents and continuous reporting.
4. External Review: Appointment of third-party reviewers or certifiers is mandatory, particularly for new categories like “blue bonds,” “yellow bonds,” and “transition bonds,” to prevent greenwashing and validate environmental claims. Initially, this is on a “comply or explain” basis, easing adoption.

• Business Responsibility and Sustainability Reporting (BRSR)

SEBI’s BRSR framework mandates the top 1,000 listed companies (by market cap) to disclose comprehensive ESG data, including greenhouse gas emissions, sustainable sourcing, and social metrics. This enhances transparency and accountability, encouraging Indian companies to embed ESG principles deeply into their business strategies.

• Companies Act, 2013: Stakeholder-Centric Governance

Section 166(2) of the Companies Act imposes a duty on directors to act in good faith, protecting not just shareholders but also the environment and community. This judicially reinforced “stakeholder-centric” governance model underpins ESG investment by making environmental protection a core corporate responsibility.

• Reserve Bank of India (RBI)

The RBI integrates green finance into banking by including green bonds under priority sector lending and mandating climate risk disclosures for financial entities. These steps push banks and financial institutions to support sustainable projects, making green finance mainstream.

2. Common Legal Challenges in Green Finance Law and How to Address Them

Despite the robust framework, Indian companies face legal challenges in sustainable finance:

• Why Legal Issues Occur Frequently

1. Fragmented ESG Standards: Though improving, ESG frameworks still lack complete harmonisation across sectors, complicating compliance.
2. Data Challenges: MSMEs and complex supply chains struggle with accurate data collection for sustainability reporting.
3. Greenwashing Risks: Some companies overstate environmental benefits, risking penalties and reputational harm.
4. Awareness Gap: Many businesses and investors still lack deep knowledge of evolving green finance rules.

3. Actionable Steps for Indian Companies

• Adopt BRSR Compliance Early and Seriously: Integrate sustainability reporting as part of core business strategy rather than just compliance. Use data management tools and audits for credible disclosures.
• Engage Expert Legal Counsel: Work with legal experts like LawCrust Legal Consulting to ensure regulatory compliance during sustainable bond issuances, including mandatory third-party verification and project evaluation.
• Prioritise Transparency and Impact Measurement: Go beyond minimal disclosures. Track funds, measure real environmental impact, and communicate results clearly to stakeholders.
• Stay Updated on Regulations: Green finance laws evolve quickly. Regularly monitor SEBI, RBI, and Ministry updates to stay ahead.
• Educate Stakeholders: Train board members, management, and employees on ESG principles and legal requirements to embed a culture of sustainability.

4. Important Judgments Impacting Green Finance Law in India

• M.K. Ranjitsinh v. Union of India (2021): The Supreme Court reinforced that directors must act for environmental protection under Section 166(2) of the Companies Act, making ESG a legal duty, not an option.
• Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd. (2021): The Court emphasised social accountability, broadening corporate duties beyond profit, which strengthens the legal basis for ESG compliance.
• Aam Janta v. State of M.P. (NGT Rulings): The National Green Tribunal consistently demands that companies integrate environmental and social objectives, directly influencing eligibility criteria for sustainable bonds.

These rulings send a clear message: Indian companies must embed genuine environmental and social responsibility to avoid legal consequences and build long-term value.

The Outlook for Green Bonds & Sustainable Finance in India

India’s green finance law landscape is poised for rapid growth and increased sophistication:

• Regulatory Enhancements: SEBI and RBI are expected to refine ESG disclosure rules, introduce new bond categories (e.g., social bonds), and finalise a national climate taxonomy.
• More Sovereign Green Bonds: Following successful issuances, India will expand sovereign green debt to set market benchmarks and boost confidence.
• Innovative Financing Models: Blended finance combining public and private funds will grow, reducing risks and attracting more impact investors.
• Technology Integration: AI, blockchain, and data analytics will revolutionise ESG reporting and green bond issuance processes.
• Expanded ESG Reporting Scope: SEBI plans to extend BRSR to include value chain disclosures. This will require companies to manage sustainability risks across their supply chains starting FY25-26.
• Rising Investor and Civil Society Scrutiny: There is growing demand for accountability. This may lead to more ESG-related litigation. Companies must maintain authentic ESG commitments to meet these expectations.

Conclusion

India’s green finance law is no longer a niche subject; it is a vital part of corporate strategy and governance. By understanding regulatory frameworks, embracing transparent disclosure requirements, and learning from landmark judgments, Indian companies can mitigate legal risks, enhance investor trust, and secure competitive advantages in ESG investment.

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