India, the world's third-largest emitter of greenhouse gases, has set ambitious climate goals, including achieving net-zero emissions by 2070 and meeting 50% of its electricity requirements from renewable sources by 2030. To realize these targets, the country needs an estimated USD 10.1 trillion in cumulative investments by 2070, with nearly USD 2.5 trillion required by 2030 alone, according to reports from the Council on Energy, Environment and Water (CEEW) and the International Energy Agency (IEA). Despite this urgent capital requirement, green finance—comprising green bonds, ESG funds, and climate-aligned investments—accounts for a fraction of India's total financial flows.
While there has been notable progress, including the issuance of sovereign green bonds worth INR 16,000 crore in 2023-24 and the launch of instruments like the Green Credit Programme and carbon markets, systemic challenges persist. These include fragmented regulations, limited legal clarity, underdeveloped enforcement mechanisms, and a lack of robust financial instruments to mitigate risks.
This article examines the critical legal and regulatory gaps in India's green finance landscape. It argues for the creation of a coherent, comprehensive legal framework to enable efficient mobilization, deployment, and governance of green capital on scale.
1. Absence of a Unified Legal Definition of Green Finance
A foundational challenge in India's green finance landscape is the lack of a standardized legal definition of "green finance." While institutions like the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) have issued guidelines for green bonds and ESG disclosures, there is no overarching legislative framework that codifies what qualifies as "green" across sectors and financial instruments. This ambiguity leads to inconsistencies in project classification, reporting, and monitoring, complicating investor efforts to evaluate the true environmental impact of their portfolios.
Recognizing this gap, the Indian government released a draft framework for India's Climate Finance Taxonomy on May 7, 2025. This taxonomy aims to identify financial activities aligned with India's climate goals and green transition roadmap, thereby enhancing clarity and direction in sustainable financing.
2. Weak Enforcement Against Greenwashing
Greenwashing—where companies make exaggerated or misleading environmental claims—remains a significant threat to the integrity of the green finance market. While SEBI has established disclosure requirements for ESG funds and green bond issuers, enforcement mechanisms are still evolving. India currently lacks a specialized regulatory body tasked with auditing green claims or penalizing non-compliance. This regulatory gap erodes investor trust and undermines the credibility of green financial instruments, stalling momentum in climate-aligned investment flows.
3. Inadequate Risk Mitigation Instruments
Green projects, particularly in emerging sectors such as green hydrogen, electric mobility, and climate-resilient agriculture, are often capital-intensive and marked by uncertain payback periods. Yet, India does not have comprehensive legal provisions to support risk mitigation tools like green guarantees, insurance mechanisms, or blended finance models. Without such legal instruments to de-risk investment, private sector participation, especially from risk-averse institutional investors, remains limited.
In response, the government has introduced measures such as Viability Gap Funding (VGF) to support offshore wind energy projects and increased allocations to the Sovereign Green Fund, signaling a commitment to enhancing financial resources for green initiatives.
4. Limited Access for Subnational Governments
State governments are at the forefront of climate adaptation and mitigation initiatives, yet they face significant legal and financial constraints in mobilizing green finance. Provisions under the Fiscal Responsibility and Budget Management (FRBM) Act limit subnational borrowing, while the absence of climate-specific fiscal incentives further impedes resource mobilization for green infrastructure. Moreover, there is no legal obligation for integrating climate considerations into state-level budgeting, planning, or procurement processes, leading to a fragmented and inconsistent approach across regions.
5. Misalignment with Global Standards
India's green finance ecosystem is not fully harmonized with international frameworks such as the EU Taxonomy, the Task Force on Climate-related Financial Disclosures (TCFD), or the International Sustainability Standards Board (ISSB) guidelines. This misalignment creates entry barriers for foreign investors who seek regulatory clarity and alignment with global norms. As a result, cross-border capital flows into Indian green projects remain suboptimal despite the country's massive green investment potential.
6. Lack of Legal Incentives for Innovation
India's legal framework provides limited support for early-stage green innovation. Startups working on clean technologies—such as carbon capture, sustainable construction, and circular economy solutions—often struggle to access targeted tax incentives, patent protections, or regulatory sandboxes. Without strong legal mechanisms to encourage and de-risk innovation, India risks lagging behind in developing the very technologies needed to meet its climate goals.
Unlocking the full potential of green finance in India requires more than piecemeal reforms; it demands a cohesive and forward-looking legal architecture. The following policy interventions are imperative:
- Enactment of a Green Finance Act: Establishing a legal definition of green finance, mandating uniform disclosures, and creating a statutory enforcement mechanism.
- Creation of a Centralized Green Finance Authority: Coordinating efforts across ministries, financial regulators, and state governments.
- Introduction of Climate-linked Fiscal Incentives: Enabling states and municipalities to access targeted funds for green infrastructure and resilience projects.
- Alignment with Global Sustainability Frameworks: Ensuring consistency with international standards to attract foreign capital and foster investor confidence.
India stands at a critical inflection point in its development trajectory. Bridging the legal gaps in green financing is not merely a regulatory challenge — it is a strategic imperative for achieving sustainable, inclusive, and climate-resilient growth. A robust legal framework will not only safeguard the integrity of the green finance market but also catalyze transformative investments for a greener future.
References
1. Government releases draft framework of India's Climate Finance Taxonomy. Times of India. May 7, 2025.
2. Finance Ministry unveils draft framework of Climate Finance Taxonomy. The Economic Times. May 8, 2025.
3. India's renewables sector falling far short of needed investment surge. Financial Times. March 2025.
4. India cenbank devolves 70% of new green bonds, cutoff below 10-year note. Reuters. November 29, 2024.
5. Centre may shift to conventional securities for green financing. Mint. February 7, 2025.
6. Green investments to rise 5x to ~Rs 31 lakh crore through 2030. CRISIL. January 15, 2025.
7. World Energy Investment 2024 – India. International Energy Agency. 2024.
8. Union Budget 2024-25: Climate Finance Taxonomy. ET EnergyWorld. August 5, 2024.
9. Budget 2024: Key sustainability and energy initiatives. The Economic Times. July 23, 2024.
10. India Budget 2024: Fueling Green Growth. Nishith Desai Associates. 2024.
11. Renewable energy in India. Wikipedia. October 2024.
12. Green Credit Programme. Wikipedia. October 2023.
13. Carbon market in India. Wikipedia. September 2024.
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