India is poised to become one of the fastest growing economy in the world and is taking every right step required towards its goal of ‘Viksit Bharat’ by 2047. One of the most ambitious goal towards this direction is to mitigate climate change risk by achieving its ‘net zero’ emission target by 2070. The question that comes to our mind is—have we developed sufficient policies and regulations around Climate Finance/Sustainable Finance to help our country reach this target?
The drivers of Climate finance/sustainable finance are India’s banks and financial institutions that can fund climate friendly technologies that will help in reducing the carbon footprint and use of non-fossil fuels thereby reducing green house gas emission. Reserve Bank of India (RBI) has been instrumental in pushing banks and financial institutions (‘Regulated Entities/REs’) to do funding towards green finance especially focusing on Environmental, Social and Governance (ESG) standards including imbibing the climate finance risk within REs overall risk management framework. Towards this the RBI released the Draft Disclosure Framework on Climate-related Financial Risks, 2024. This framework mandates that Indian regulated entities (banks, financial institutions, and top non-banking financial companies) disclose information on their governance, strategy, risk management, and metrics and targets related to climate-induced financial risks and opportunities. The framework, built upon the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, aims to improve transparency, comparability, and the management of climate risks to ensure financial stability and sustainable finance in India.
Other than introducing a disclosure framework on climate related financial risks for REs, RBI has also introduced guidelines for ‘Green Deposits’. RBI’s Green Deposit Framework, originally introduced in April 2023 (now incorporated under RBI (Commercial Banks – Climate Finance and Management of Climate Change Risk) Directions, 2025). Green deposit framework is a regulation requiring REs to mobilize deposits for financing green projects, such as renewable energy, sustainable water management, and green buildings. This framework ensures that funds from these deposits are used for specific, eligible environment-friendly projects, preventing their use in activities like fossil fuel extraction or waste incineration. Key features include third-party audits for compliance, potential classification under Priority Sector Lending, and the use of India’s official Green Taxonomy to define eligible projects.
International Financial Services Authority (IFSCA) is another regulator that has played a significant role in introducing climate finance/sustainable finance and ESG initiatives for International Banking Units (IBUs) based out of GIFT city, Gandhinagar. IFSCA had issued a ‘Guidance framework on Sustainable and Sustainability linked lending by financial institutions (Guidance framework)’ on April 26, 2022, which provided guidance to entities (IBUs and FC/FUs) in IFSC for lending towards green/social/sustainable projects/purposes including short-term financing in such areas. IFSCA has recently on 21st January 2026 issued a ‘consultation paper on Guidance Framework on sustainable deposits and sustainable lending and investments’, where it proposes to supersede the earlier Guidance Framework issued in 2022. The key aspects covered under this proposed framework/modified circular are:
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IBUs to offer ‘Sustainable deposits’ as a distinct product offering;
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Providing IBUs guidelines for ‘investments in sustainable products’ such as ESG labeled debt securities;
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Providing IBUs guidelines to undertake ‘sustainable trade finance’
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Providing IBUs guidelines for ‘investments in sustainable products’ such as ESG labeled debt securities;
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Introducing a revised target under which IBUs are required to ensure that, in each financial year, an amount equivalent to at least 5 per cent of the aggregate loans disbursed and investments made (in debt securities and funds), in the immediately preceding financial year is deployed towards sustainable lending and/or sustainable investments, in accordance with the directions of the circular.
All of the above proposed product suites will have an alignment with the international guidelines/principles on green loans/social loans/sustainability linked loans issued by Asia Pacific Loan Market Association (APLMA)/Loan Market Association (LMA) and principles on sustainable trade finance issued by International Chamber of Commerce (ICC).
Now, the larger question is—how far these policies and guidelines will help the REs including IBUs to achieve their target towards green finance and ultimately towards India ‘net zero’ ambition?
It is important to note that India is still far way behind in terms of the regulatory developments that had taken place in countries like Europe, USA, UK and Singapore, where they are at such a stage that they have litigations or disputes around claims of ‘green washing’ (a term defined to mean, where you claim benefits under green finance but actually you don’t spend the funds towards a green purpose). These countries have already developed ‘taxonomies’ around climate finance that makes a clear glide path towards their transition to ‘net zero’. UK has a legislative framework, Climate Change Act 2008 establishing a legally binding framework to reduce greenhouse gas emissions and adapt to climate change by setting a net-zero by 2050 target. India has also recently issued a draft ‘Framework of India’s Climate Finance Taxonomy’ in May 2025 for public consultation. It is a framework to classify green investments, guiding funds towards climate goals like Net Zero by 2070 and ‘Viksit Bharat’ by 2047, covering mitigation (renewables, EVs), adaptation (resilient agriculture, nature-based solutions), and transition for hard-to-abate sectors (steel, cement). It aims to prevent greenwashing, attract green finance, and ensure a just transition by defining criteria for climate-aligned activities, supporting resource flow to green tech, and aligning with international standards like ASEAN taxonomies.
It would be a wait and watch approach for India now, as to how this new climate finance taxonomy and other policy guidelines would come into play and help push REs towards helping India achieve its ‘net zero’ emission target by 2070. Implementation will be the key!
The author is a Banking and Finance lawyer. His areas of expertise are Project Finance, Corporate Finance, Derivatives, International Banking, Institutional & Influence Banking and ESG and Sustainable Finance.
