Fragmented rules, missing incentives hold back India's green finance growth

The devastating floods that swept through Nepal in August 2026 did more than displace communities and disrupt cross-border trade. They served as a stark reminder that climate risk is no longer a distant, abstract concern, but a reality at India’s doorstep. Events of this magnitude necessitate a hard look at how we are funding our climate response.

 

Over the last decade, sustainable finance has moved into the mainstream of global capital markets. Green bonds, green deposits; and environmental, social, and governance (ESG)-labelled loans are now supported by thick layers of regulation and third-party verification. Yet, India’s share of the global green finance market remains an underwhelming one per cent. In stark contrast, the European Union (EU) dominates with a 45 per cent share, having successfully created an ecosystem that attracts robust private capital.

 

The Reserve Bank of India (RBI) has issued climate-finance directions for banks and non-banking financial companies (NBFCs), while the Securities and Exchange Board of India (Sebi) regulates green debt securities. The Ministry of Corporate Affairs has also pushed for greater transparency through its business responsibility and sustainability reporting framework. However, the intent is often overshadowed by the implementation, which has unwittingly become a deterrent for market participants.

 

A key challenge stunting India’s green finance is a fragmented regulatory landscape. Regulators are operating through disparate rules and supervisory expectations rather than a cohesive policy framework. The most glaring gap is the absence of a finalised, statutory national green taxonomy. While the European Union’s taxonomy provides a uniform set of criteria to determine sustainable activities, India continues to rely on interim lists.

 

This absence of an anchor taxonomy forces issuers to seek bespoke legal opinions on eligibility for every green issue. It also creates a gap in documentation, as definitions linked to an official taxonomy are missing. The regulatory architecture demands extensive upfront disclosures, ongoing post-listing updates, and third-party impact reporting. Without Sebi or RBI-approved model documents or standard loan clauses, drafting these regulatory obligations into transaction documents is time-consuming and inconsistent. For smaller issuers, this multiplies legal review costs and acts as a severe barrier to entry.

 

To fix this, India needs scaled disclosures. The rules currently apply uniformly to all issuers regardless of size. Exploring a reduced pre-listing and post-listing disclosure regime for smaller issuances could heavily incentivise participation. Standardised template covenants for green financing would also ensure greater efficiency and enable quicker legal sign-offs.

 

Another major bottleneck is the lack of fiscal or prudential carrots. It is a common misconception that regulatory frameworks inherently offer financial perks for green initiatives. In reality, the RBI has not built prudential concessions into its climate finance directions. There are no relaxations on the cash reserve ratio (CRR) or statutory liquidity ratio (SLR) for green lending.

 

Green deposits are placed on the exact same commercial footing as ordinary rupee term deposits. Because current regulations expressly forbid a differential interest rate, there is no tangible “greenium” to attract depositors or lower the cost of capital for borrowers. ESG ratings are also not yet a mandatory input into credit decisions for banks in India; a higher ESG rating does not automatically equate to a lower cost of capital. Therefore, the pricing incentive for a borrower with strong environmental credentials currently lives in loan documentation rather than systemic regulation.

 

Permitting differential interest rates on green deposits would encourage both investors and borrowers to participate in the green debt market. Furthermore, the introduction of dedicated green alternative investment funds (AIFs) under the current Sebi regime would ensure a disciplined approach to the green use of proceeds.

 

India has successfully laid the foundation for a sustainable finance ecosystem. However, the next leap requires moving away from overlapping regulations towards regulatory harmonisation. A unified green taxonomy, standardised legal documentation, and tangible economic incentives are urgently needed. A well-intentioned regulatory framework without matching financial rewards is like an engine without fuel. If India wants to secure its position in the global green finance landscape, it must ensure the rules actually encourage the market to move. ______________________________________________________________________________________________________

 

The writer is founder & chairman, SNG Partners, Advocates & Solicitors