Synopsis: The authors have penned down their thoughts on how will India commit to achieve net zero emissions by 2070 and how the Indian regulatory framework for sustainable finance is at an early stage of development. The existing framework is primarily focused on sustainable finance for energy, but work is underway on disclosure standards and other aspects, and Indian regulators have introduced rules and guidelines on incorporation of environmental, social and governance (ESG) standards in the operation of corporate entities and certain other specific aspects of sustainable financing. To date, the Indian regulatory framework on sustainable finance does not expressly address just the transition of the Indian economy to net zero emissions. Please read more by clicking on the document.
I. INTRODUCTION
At the United Nations Climate Change Conference in Glasgow in November 2022 (COP26), India committed to achieve net zero emissions by 2070. Following the COP26, India updated its nationally determined contributions (NDCs). It is estimated that to achieve its NDCs, India requires capital flow of approximately US$2.5 trillion from 2015 to 2030, or roughly US$170 billion per year in clean energy, clean transport and energy efficiency.
Indian regulators and government organisations have over the past few years constituted several committees and published reports, which include a comparative study of practices in sustainable finance of various global regulators and banks and have provided recommendations to develop a similar sustainable finance regulatory framework in India.
The Indian regulatory framework for sustainable finance is at an early stage of development. The existing framework is primarily focused on sustainable finance for energy, but work is underway on disclosure standards and other aspects, and Indian regulators have introduced rules and guidelines on incorporation of environmental, social and governance (ESG) standards in the operation of corporate entities and certain other specific aspects of sustainable financing. To date, the Indian regulatory framework on sustainable finance does not expressly address just the transition of the Indian economy to net zero emissions.
II. YEAR IN REVIEW
There is an increased focus by the government and Indian regulatory authorities on environmental, social and governance (ESG) matters generally, and on sustainable finance in particular.
In the past year:
(a) The government has announced that it will issue sovereign green bonds for mobilising resources towards green infrastructure and has introduced incentives for the manufacture of high-efficiency modules. The government has also announced plans to promote thematic funds for blended finance for encouraging the development of important sunrise sectors including climate action, which will have a certain amount of government ownership and will be managed by private fund managers.
(b) The Bureau of Energy Efficiency (BEE), a statutory body under the Ministry of Power, has released a draft blueprint on the National Carbon Market for consultation. The Indian Parliament has also passed the Energy Conservation (Amendment) Bill, 2022 (ECA Amendment Bill) to, inter alia, establish a framework for a carbon credit trading scheme, in India.
The Securities and Exchange Board of India (SEBI), the Indian securities regulator, has:
The Reserve Bank of India (RBI), the Indian central bank, has released a report setting out the results of a survey conducted in relation to the climate risk and sustainable finance policies of several commercial banks in India (RBI survey), which is intended to help in shaping RBI’s regulatory and supervisory approach to climate risk and sustainable finance. Following the RBI survey and recognising the need for a governance framework to address transition risks associated with climate change in the financial system, RBI has released a discussion paper on climate risk and sustainable finance (RBI discussion paper).
The International Financial Services Centres Authority (IFSCA), which is the unified authority for development and regulation of financial products, financial services and financial institutions for the International Financial Services Centre (IFSC) in India,15 has released a committee report (IFSCA committee report) to formulate a plan for development of IFSC as international hub for sustainable finance and recommend a short, medium and long-term roadmap on sustainable finance.
III. REGULATION AND POLICY
i. Governance regime
At the COP26, India presented the five elements of India’s climate action plan:
These targets and NDCs have not been directly incorporated in any legal framework but the following key laws and policies have been formulated on certain aspects of sustainable finance.
Key laws and regulations in relation to sustainable finance
(Indian) Companies Act, 2013 (CA2013)
The Ministry of Corporate Affairs (MCA), which monitors and administers all companies and limited liability partnerships incorporated in India, introduced the concept of corporate social responsibility (CSR) in the (Indian) Companies Act, 2013 (CA2013). The CA2013 requires that companies with a certain specified net worth must constitute a CSR committee and formulate a CSR policy, and ensure that they spend at least 2 per cent of their average net profits made during the three immediately preceding financial years on CSR activities as per their CSR policy.
SEBI regulations
SEBI has mandated that the top 1,000 equity listed entities by market capitalisation must issue a business responsibility and sustainability report (BRSR), which must include disclosure of ESG-related information, aimed at helping market participants to assess sustainability-related risks and opportunities; and certain granular and quantifiable metrics seeking disclosures on listed entities’ performance, against the nine principles of the National Guidelines on Responsible Business Conduct (as published by MCA).
SEBI in 2017 prescribed a framework for issuance of green debt securities and has specified disclosure and reporting requirements and responsibilities of issuers of such green debt securities. This framework is under review, and SEBI is also consulting on the introduction of a framework for blue bonds in India and has sought views on solutions against greenwashing in the SEBI sustainable bonds consultation paper.
SEBI has also recently introduced a framework for SSE, which is intended to provide not-for-profit organisations and social enterprises an alternate platform to raise funds from institutional and retail investors and attract CSR funding with transparency.
RBI regulations
RBI in 2007 issued a note aimed at creating awareness among banks of their role in relation to CSR, sustainable development and non-financial reporting. RBI also mandates financial institutions to allocate a certain percentage of their adjusted net bank credit to certain priority sectors, which include social infrastructure and renewable energy.
Other regulations
IFSCA has notified regulations on issuance and listing of ESG debt securities including green bonds, social bonds, sustainable bonds and sustainability-linked bonds with the intent of attracting international capital towards sustainable sectors.
Recent government policies
In September 2022, the government announced that it will issue sovereign green bonds for an aggregate amount of 160 billion rupees to mobilise resources towards green infrastructure, the proceeds of which will be deployed in public sector projects that help in reducing the carbon intensity of the economy. Further, an additional allocation of 195 billion rupees for production-linked incentives for the manufacture of high efficiency modules has also been announced. The government is also finalising the national policy on blue economy for India.
Partnerships with international organisations
India is a member of the International Platform on Sustainable Finance, which has encouraged India to introduce laws to increase accountability and increase transparency in the area of sustainable finance.
The Green Growth Equity Fund, a joint India-United Kingdom fund, has also been established and aims to make equity investments in green infrastructure projects in India.
Pursuant to the EU-India Connectivity Partnership, the European Investment Bank (EIB) and the State Bank of India (SBI) have agreed to back an initiative of €100 million for new high-impact climate action and sustainability business financing. EIB had also invested in the construction of metro lines in some Indian cities for green and affordable transport. In December 2021, the Asian Infrastructure Investment Bank approved the Chennai City Partnership: Sustainable Urban Services Programme aimed at strengthening institutions and improving the quality and financial sustainability of selected urban services in the city of Chennai.
Public and private institutions in India
The government has established organisations such as the Indian Renewable Energy Development Agency Limited (IREDA). Rural Electrification Corporation (REC) and National Bank for Agricultural and Rural Development (NABARD) for providing finance for the renewable energy sector and for the promotion of sustainable and equitable agriculture. The Small Industries Development Bank of India (SIDBI) has introduced a range of financing instruments to support investments for environmentally and socially positive purposes.
Other private financial institutions also offer various financial services in relation to renewable energy in India.
Most of these public and private organisations in India have sustainable finance schemes that offer concessional rates of lending if certain specified sustainability linked criteria are established. Such lending is generally enabled through bilateral lines of concessional credit from international agencies and funds.
A number of large financial institutions in India follow the International Finance Corporation’s Environmental and Social Performance Standards and certain global sustainability reporting frameworks like the Global Reporting Initiative and the CDP reporting framework. However, the RBI survey notes that climate and sustainability-related risks and opportunities are still not being discussed at the board level of most financial institutions, and that a majority of the surveyed banks have not yet quantified their portfolio in relation to climate-related risks.
Alternative funding avenues like the National Clean Energy and Environment Fund and the National Adaptation Fund for Climate Change to fund innovative projects in clean energy technologies and build climate change resilience, respectively, have also been set up by the government.
ii. Regulators
RBI
In order to learn from and contribute to environmentally sustainable development, RBI has joined the Central Banks and Supervisors Network for Greening the Financial System (NGFS). RBI has also set up a sustainable finance group (SFG) within its department of revenue to lead efforts and regulatory initiatives in the area of climate risk and sustainable finance. RBI expects that the SFG will play a key role in suggesting strategies and evolving a regulatory framework, including appropriate disclosures, which could be prescribed for banks and other regulated entities in relation to sustainable practices and mitigation of climate-related risks in India.
From a social perspective, RBI has notified regulations and guidelines to deepen financial inclusion in India (including the setting up of small finance banks and payments banks), with the aim of enabling sustainable development by improving the quality of lives of poor and marginalised sections of Indian society.
SEBI
As highlighted above, SEBI has introduced guidelines for issuance and listing of green bonds in India, as well as disclosure requirements such as ESG disclosures in the form of BRSR reporting.
MCA
MCA has published the National Guidelines on Responsible Business Conduct (NGRBC) to meet its commitment to the United Nations Guiding Principles on Business and Human Rights and align with the United Nations sustainable development goals (SDGs). Recognising the significance of non-financial reporting, along with the formulation of the NGRBC, MCA has also constituted a committee on business responsibility reporting to frame business responsibility reporting formats that, inter alia, reflect SDGs for both listed and unlisted companies.
IFSCA
IFSCA has notified regulations on the issuance and listing of ESG debt securities including green bonds, social bonds, sustainable bonds and sustainability-linked bonds. These regulations require the appointment of an independent external reviewer to ascertain that such instruments are aligned with IFSCA Recognised Frameworks (as defined below), and also prescribe specific additional disclosures in the offer documents and post-listing continuous disclosures in relation to utilisation of proceeds and impact reports.
Other key government agencies
IREDA
The government established IREDA under the administrative control of the Ministry of New and Renewable Energy (MNRE). IREDA is engaged in promoting, developing and extending financial assistance for setting up projects relating to new and renewable sources of energy, energy efficiency and conservation. IREDA receives its funding from multilateral agencies (in many cases with guarantees by the government) and provides a range of financial products from project conceptualisation to post-commissioning in the renewable energy sector.
SIDBI
SIDBI is an accredited agency of the Green Climate Fund, a fund established within the framework of the United Nations Framework Convention on Climate Change, and promotes sustainable development through a series of schemes that seek to provide adequate and affordable energy efficiency and green finance as well as enhance awareness of benefits of climate control among small and medium-sized enterprises. SIDBI has launched a number of schemes to promote sustainable finance (such as the green finance scheme and the end-to-end efficiency scheme) and provides financial support to energy service companies.
IV. SUSTAINABLE FINANCE INSTRUMENTS
i. Types of sustainable finance instruments
As a general matter, Indian regulations as well as voluntary guidelines by various governmental authorities primarily deal with environment-focused sustainable finance instruments.
Indian laws do not regulate any specific aspect of sustainable financing through equity instruments. However, the general framework on equity investments applies to sustainable financing by way of equity as well. Foreign investors or persons resident outside India are also permitted to invest in up to 100 per cent equity of Indian companies operating in the renewable energy sector, without any prior government approval.
The following mechanisms for sustainable financing, through debt, have been specifically prescribed in the Indian legal framework:
Green debt securities
Issuance and listing of green debt securities is governed by SEBI through the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations), and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. NCS Regulations define a green debt security as a debt security issued for raising funds that are to be utilised for projects or assets, or both, falling under any of the following categories, subject to the conditions as may be specified by SEBI from time to time:
At present, green debt securities are the only expressly recognised and regulated instruments for sustainable financing in the Indian domestic market (excluding IFSCs).
Priority sector lending
RBI has issued priority sector lending (PSL) guidelines to channel lending for the achievement of SDGs and social and inclusive development. Under the PSL guidelines, RBI has identified eight priority sectors, which include renewable energy, education, housing and social infrastructure. RBI has set out different mandatory targets of lending in each priority sector for different categories of banks in India.
Sustainable finance instruments recognised in IFSC
IFSCA regulations permit the issuance of green, social, sustainable or sustainability-linked debt securities. Such debt securities are defined as those securities that are intended to be utilised for financing projects aligned with the international frameworks, like the International Capital Market Association Principles and Guidelines, the Climate Bonds Standard, ASEAN Standards, European Union Standards and Taxonomy, any framework or methodology specified by a competent authority in India, or other international standards, as considered on a case-by-case basis by recognised stock exchanges or IFSCA (IFSCA Recognised Frameworks).
IFSCA had appointed a committee on sustainable finance. Among other things, the committee has recommended the issuance of sovereign green bonds in IFSC by the government and the introduction of sustainable finance mechanisms and products such as transition bonds, blended finance vehicles, weather derivatives and labelled bonds such as catastrophe bonds and green municipal bonds.
Impact bonds
There have been a few issuances of social impact bonds and development impact bonds in India. However, there is no specific legal framework that regulates the issuance of such bonds.
Other sustainable finance instruments
Other than the regulated instruments discussed above, there are various types of sustainable finance mechanisms and instruments voluntarily offered by financial institutions in India. The RBI survey notes that:
RBI in the RBI discussion paper has also highlighted the overall urgency of incorporating ideas of sustainability in business strategies and has encouraged banks to incorporate environmental and social assessments into financial decision-making and structuring products using the environmental and social lens.
The National Voluntary Guidelines for Responsible Financing, released by the Indian Banks’ Association, set out eight principles through which ESG factors should be integrated into business operations of banks. These principles encourage financial institutions to collaborate with government, investors and development finance institutions and offer diverse instruments to mobilise capital for green projects, and also encourage banks to support inclusive and social development by offering affordable and quality products for increasing access to finance.
ii. Consideration of just transition
The Indian legal framework on sustainable finance does not expressly address the ideas of transition to net zero and a socially inclusive resilient economy. However, the RBI survey does suggest that public and private sector banks could adopt a gradual and non-disruptive approach to transition away from high carbon-emitting or polluting businesses, keeping in mind the development imperatives of a growing economy such as India.
iii. Other aspects of the financial system
In an attempt to make fundraising for green projects attractive, India International Exchange has entered into a memorandum of understanding with the Luxembourg Stock Exchange to provide issuers the opportunity of dual listing. Further, an international sustainability platform has also been launched at GIFT-IFSC, India’s first IFSC. The major stock exchanges in India have also set up benchmark indices that assess the carbon performance of stocks and ESG risk score based on certain quantitative parameters.
Further, SEBI has introduced a framework for operation of SSE in India to enable not-for-profit organisations and social enterprises to raise capital (by way of equity, debt or units).
India does not at present have any specific framework for derivatives and aftermarket trading in relation to sustainable finance.
V. SUSTAINABLE DISCLOSURE REQUIREMENTS AND TAXONOMY
i. MCA
MCA released the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business in 2011. These guidelines were revised and named the National Guidelines on Responsible Business Conduct.
MCA also constituted a committee on business responsibility reporting (BRR Committee) to frame business responsibility reporting formats for listed and unlisted companies. This committee recommended two reporting frameworks, a comprehensive business responsibility and sustainability report consisting of three sections: general disclosures, management and process and principle-wise performance. The second reporting framework is a ‘lite’ version of a former format for smaller companies looking to start non-financial reporting. Currently, such business responsibility reporting is voluntary, but MCA has stated that it will make these mandatorily applicable to all companies in a staggered manner. MCA has also proposed that these formats will be used to develop a Business Responsibility-Sustainability Index, which will enable organisations, including the central and state governments, to give preference in their procurement processes to businesses that demonstrate responsible business conduct.
The CA2013 also prescribes certain mandatory disclosure requirements to be fulfilled by listed and unlisted companies, for responsible business conduct. For instance, the relevant companies are required to make mandatory disclosures in relation to the CSR actions undertaken by them. Further, companies are required to include a report by their board of directors on conservation of energy, along with annual financial statement.
ii. SEBI
In 2021, in line with the BRR Committee report, SEBI revised the ESG reporting structure in BRSR with the intent of collecting quantitative and standardised information on ESG parameters for comparative functionality of the data. BRSR does not recognise any specific international reporting framework but allows equity listed entities that submit reports to offshore investors in an internationally accepted framework to submit the same reports in India after cross-referencing the disclosures against requirements of BRSR. BRSR has been made mandatory for the top 1,000 equity listed companies based on market capitalisation from 2022 to 2023. Equity listed entities are also mandated to include disclosures on opportunities, threats, risks and concerns as part of their annual reports. To date, these disclosure requirements do not require companies to provide details about the process adopted to identify such opportunities or risks, or chart progress over time.
As highlighted under Section III.i, ‘Regulation and policy’, SEBI has prescribed additional disclosures in offer documents for issuance of green debt securities (including environmental objectives of the issuance and details of the project where proceeds are to be deployed), as well as post-listing continuous disclosures in relation to the utilisation of the proceeds, details of unallocated proceeds and performance of the project. SEBI has proposed aligning these disclosure requirements to the International Capital Market Association’s Green Bond Principles (ICMA Principles). SEBI has also proposed to introduce disclosure norms for domestic ESG mutual fund schemes.
iii. RBI
The RBI survey notes that a majority of the surveyed banks have not aligned their climate-related financial disclosures with the Task Force on Climate-related Financial Disclosures framework (TCFD). RBI has also emphasised the importance of disclosure of climate-related information by entities regulated by RBI in identifying and adapting to climate-related risks and has encouraged adoption of the TCFD by such entities.
iv. Sustainable finance taxonomy
The current Indian framework has limited definitions for sustainable finance taxonomy. In this regard, the SEBI sustainable bonds consultation paper proposes to expand and amplify the definition of green debt securities to include pollution prevention and control and circular economy-adapted products as green debt securities. SEBI also proposes to sub-categorise green bonds as per the ICMA Principles and introduce the concept of blue bonds in India.
Further, there is no definition of other sustainable finance instruments such as green equity or other kinds of ESG-linked bonds, which has resulted in a plurality of definitions of green finance and sustainable finance. The India-UK Sustainable Finance Working Group has recommended that the Indian taxonomy for sustainable finance should consider just transition, resilience and social objectives.
VI. ESG DATA AND REPORTING
Other than the disclosures covered in Section V, no other reporting requirements are required in relation to ESG matters. BRSR has made it mandatory for prescribed Indian companies to provide details of each of the Scope 1, Scope 2 and Scope 3 levels of emission intensity per rupee of turnover of the entity.
It has been noted that an ESG reporting mechanism will improve information management in India, which may further help in reducing maturity mismatches and borrowing costs, and improve efficiency in resource allocation in sustainable finance. Currently, a majority of Indian companies do not have a mandatory obligation to integrate ESG standards or report or disclose their performance in that aspect. However, as per the BRR Committee, in the near future, the BRSR report may be required to be mandatorily published by all companies.
VII. SUSTAINABLE FINANCE INCENTIVES
The government has introduced several schemes and production-linked incentives to promote investments in generation of renewable energy in India. The MNRE has introduced the ‘Preference to Make in India’ programme in the green energy sector, under which the government and government entities mandatorily prefer domestically manufactured goods and services for their renewable energy sector requirements. This preference for domestically manufactured goods and services along with other government incentives such as production-linked incentives for manufacturing of high efficiency modules in the renewable energy sector, and fiscal and infrastructure support for research and development in the green energy sector, is expected to boost investor confidence in sustainable finance in India.
Some other incentives for green finance include a subsidy offered to institutional, residential and social sectors on the installation costs of the rooftop solar panels, and schemes to encourage electric and hybrid vehicle purchase by providing financial support.
The government also provides financial support in infrastructure viability gap funding (VGF) for projects that are economically justified but commercially unviable due to large capital investment requirements, long gestation periods and the inability to increase user charges to commercial levels. The VGF scheme (as renewed until 2024/2025) also includes social sectors such as the waste-water treatment, water supply, solid waste management, health and education sectors.
The Parliamentary Standing Committee on Energy has in its 21st report recommended that, among other things, the government should introduce innovative green financing mechanisms such as a green bank system and improve the borrowing flexibility of IREDA from RBI to enable it to support more sustainable investments.
VIII. GREEN TECHNOLOGY
i. Emerging green technologies, policies and funding
Carbon trading
For enhancing energy efficiency in certain designated energy-intensive industries, the Indian regulatory framework currently has a market-based mechanism of perform achieve and trade (PAT). Under the PAT scheme, the designated energy-intensive industries are mandated to reduce their specific energy consumption. These energy savings are then converted to energy saving certificates that are permitted to be traded on Indian energy exchanges, the Indian Energy Exchange and the Power Exchange India Limited.
The Parliament has also recently passed the ECA Amendment Bill, which establishes the framework for creation of the carbon credit market. This will enable domestic companies to trade carbon credits efficiently and help in meeting India’s energy transition goals (as per the updated NDCs) by encouraging private sector participation in combating climate change. Further, the BEE has also released a blueprint for the establishment of the Indian national carbon markets in a phased manner.
Emerging green technologies
The ECA Amendment Bill makes it mandatory for energy-intensive industries to use a share of non-fossil sources for energy and feedstock such as green hydrogen, green ammonia, biomass and ethanol.
In 2021, the government launched the National Hydrogen Mission, which has set a target of indigenously producing 5 million tonnes of green hydrogen by 2030. It is estimated that an investment of US$100 billion per year will be required to meet this target. Further, the MNRE provides infrastructural and fiscal support for development of green technology (including biogas and hydrogen), and has granted financial aid to a start-up for development of indigenous hydrogen sensing and analysis technology. Following such policy considerations, a number of Indian companies have announced significant investment plans for green and blue hydrogen and ammonia.
Development of the corresponding regulatory frameworks for emerging green technologies (such as hydrogen, ammonia and carbon trading) is at a nascent stage in India.
IX. CLIMATE CHANGE IMPACT
i. Climate-related risks
While India has not yet seen climate litigation against corporations, the principle of polluter pays has evolved significantly through various cases. In Indian Council for Environment-Legal Action v. Union of India, the defendant was ordered to pay compensation to the people affected by environmental deterioration following the absolute liability rule for the damage caused to the environment.
Following orders from the National Green Tribunal, the Central Pollution Control Board has released a report that lays down the methodology to assess and recover compensation for environmental damage through the polluter pays principle.
ii. Risk management
In one of its bulletins, RBI has identified fiscal policy tools (tax incentives, carbon pricing) and monetary policy instruments (subsidised liquidity support to banks, allocation of minimum credit to climate-friendly sectors) focused on green finance as significant mitigators of climate change risks.
From a regulatory perspective, climate risk management in India is at a nascent stage.
X. OUTLOOK AND CONCLUSIONS
The government has committed to achieving net zero emissions by 2070, and has highlighted five elements of its climate action plan and also updated its NDCs. Various government departments and institutions have announced schemes and plans towards achieving SDGs and India’s NDCs, and Indian companies have announced ambitious investment plans in renewable energy as well as in green ammonia and hydrogen. Indian regulators are increasing their focus on various aspects of sustainable finance, including the amplification of the current sustainable finance taxonomies and introduction of new and innovative market products to promote energy-efficient technologies. Specialised groups and committees have also been constituted to advise Indian regulators on various ESG-related matters and best practices for the development of sustainable finance.
A combination of clear and comprehensive sustainable finance taxonomy, mandatory ESG disclosures, government incentives, innovative financing instruments, deepening of the domestic debt securities market and a sustained policy focus will be required, and will together enable India to achieve SDGs and its NDCs. It is expected that the next few years will see significant developments in the regulatory framework for sustainable finance in India.
Authors: Rahul Gulati – Partner; Managing Associate – Saara Ahmed and Associate – Dwiti Goyal have contributed to the India Chapter of The Sustainable Finance Law Review, published by The Law Review
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