GREEN FINANCE TAXONOMY IN INDIA

Article submitted by Aishwarya

• Introduction:

A green finance taxonomy is a classification framework that defines and categorizes investments based on their environmental and social sustainability criteria. It serves as a standardized tool to guide investors in identifying, assessing, and distinguishing investments that contribute to environmental and social sustainability from those that do not. In 2017, SEBI formalised the disclosure requirements for the issuance and listing of green debt securities in its attempt to fill in sustainable finance in India. It defined broad areas where funds may be allocated to qualify a debt security as green, including renewable energy and clean transportation. This was later subsumed into the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 and the definition expanded in 2024 to include blue bonds, yellow bonds and transition bonds as sub-categories of green debt securities.

SEBI Recognition

Regulation 2(q) of Securities and Exchange Board of India (Issue And Listing Of Non-Convertible Securities) Regulations, 2021 specifies Green debt security.    It refers to a debt security issued for the purpose of raising funds, where the proceeds are to be utilized exclusively for project(s) and/or asset(s) that fall under any of the following specified categories, subject to the terms and conditions as may be prescribed by the Board from time to time to:

• renewable and sustainable energy including wind, bioenergy, other sources of energy which use clean technology,
• clean transportation including mass/public transportation,
• climate change adaptation, including efforts to make infrastructure more  resilient  to  impacts of  climate  change  and  information  support  systems  such as  climate  observation  and  early warning systems,
• energy efficiency including efficient and green buildings,
• sustainable waste management including recycling, waste to energy,  efficient  disposal  of wastage,
• sustainable land use including sustainable forestry and agriculture, afforestation,
• biodiversity conservation,
• pollution prevention and control (including  reduction  of  air  emissions,  greenhouse  gas control, soil  remediation,  waste  prevention,  waste  reduction,  waste  recycling  and  energy efficient  or emission  efficient  waste  to  energy)  and  sectors  mentioned  under  the  India Cooling Action Plan launched by the Ministry of Environment, Forest and Climate Change.
• circular economy adapted products,  production  technologies  and  processes  (such  as  the design  and  introduction  of  reusable,  recyclable  and  refurbished  materials,  components  and products, circular tools and services) and/or eco efficient products.

• BLUE BONDS which comprise of funds raised for sustainable water management including clean water and water recycling, and sustainable maritime sector including sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy and ocean mapping;

• YELLOW BONDS which comprise of funds raised for solar energy generation and the upstream industries and downstream industries associated with it;

• TRANSITION BONDS which comprise of funds raised for transitioning to a more sustainable form of operations, in line with India’s Intended Nationally Determined Contributions.

RBI Draft Framework

Recognizing the critical impact of climate-related risks on financial stability, RBI has introduced a draft disclosure framework, 2024 for Regulated Entities (“RE”) [To visit : Draft Disclosure framework on Climate-related Financial Risks, 2024] It mandates REs to disclose information on their climate-related financial risks and opportunities, promoting early assessment and management. This approach aims to ensure consistent and comparable disclosures, mitigating the mispricing of assets and the misallocation of capital and fostering market discipline.

The RBI framework mandates the following REs to disclose information on climate-related financial risks and opportunities:

1. All Scheduled Commercial Banks (SCB), excluding Local Area Banks, Payments Banks, and Regional Rural Banks.
2. All Tier-IV Primary (Urban) Co-operative Banks (UCBs).
3. All All-India Financial Institutions (AIFI), (viz. EXIM Bank, National Bank for Agriculture and Rural Development (NABARD), National Bank for Financing Infrastructure and Development (NaBFID), National Housing Bank (NHB), and Small Industries Development Bank of India (SIDBI)).
4. All Top and Upper Layer Non-Banking Financial Companies (NBFCs).

Adoption of these guidelines remains voluntary for entities other than those specified in the above.. However, foreign banks must make disclosures specific to their operations in India.

The REs must disclose under the following four key thematic schemes, which include, Governance, Strategy, Risk Management and Metrics and Targets. The RBI seeks disclosures on a two-tier level: (a) baseline; and (b) enhanced disclosures. These disclosures highlight accountability and demand a potential shift in the corporate governance process.

Thematic Pillar	Description	Key Disclosure Requirements
Governance	Details the governance processes, controls and procedures used to manage climate-related financial risks and opportunities.	Board oversight of climate-related risks and opportunities.Senior Management’s role in assessing and managing climate-related risks and opportunities.
Strategy	Describes the RE’s strategy for managing climate-related financial risks and opportunities, including identification of risks and opportunities over different time horizons.	Identified climate-related risks and opportunities over short, medium, and long term.Impact of these risks and opportunities on business, strategy and financial planning.Resilience of the strategy under different climate scenarios.
Risk Management	Outlines the processes to identify, assess, prioritize, and monitor climate-related financial risks and opportunities and their integration into the overall risk management framework.	Policies and processes for identifying, assessing, prioritizing and monitoring climate-related financial risks.Processes used for managing climate-related risks.Integration of climate-related risk management into overall risk management processes.
Metrics and Targets	Details performance metrics related to climate-related financial risks and opportunities, including progress towards climate-related targets.	Metrics used to assess climate-related risks and opportunities.Scope 1, Scope 2and Scope 3 GHG emissions- Targets for managing climate-related risks and progress against these targets.Scope 1: greenhouse gas emissions are direct greenhouse gas emissions that occur from sources that are owned or controlled by the RE.Scope 2: greenhouse gas emissions are indirect greenhouse gas emissions from the generation of purchased or acquired electricity, steam, heating or cooling consumed by the RE. Purchased and acquired electricity is electricity that is purchased or otherwise brought into the RE’s boundary. These emissions physically occur at the facility where electricity is generated.Scope 3: greenhouse gas emissions” are indirect greenhouse gas emissions (not included in Scope 2 greenhouse gas emissions) that occur in the value chain of an entity, including both upstream and downstream emissions.

Green Finance and IFSC

In the recent years, environmental, social and governance (“ESG”) factors have emerged as the crucial pillar in guiding responsible and sustainable investments. TheInternational Financial Services Centres Authority (“IFSCA”) recognizing the significance of ESG initiatives in achieving sustainability and fostering economic growth, has taken proactive steps to integrate ESG initiatives within the Gujarat International Finance Tech-City (“GIFT City”)

IFSCA introduced the IFSCA (Issuance and Listing of Securities) Regulations, 2021,which lay down specific requirements for the listing of ESG debt securities labelled as “green,” “social,” or “sustainability” or “sustainability-linked” securities on recognized stock exchanges within the International Financial Services Centre (“IFSC”). The funds raised through these securities are directed toward projects adhering to recognized frameworks, thereby promoting responsible investments.

IFSCA (Issuance and Listing of Securities) Regulations, 2021 regulation 124 specifies that issuance of such debt securities is to be utilised for financing or refinancing projects and/or assets aligned with any of the following recognised frameworks:

1. International Capital Market Association Principles / Guidelines;
2. Climate Bonds Standard;
3. ASEAN Standards;
4. European Union Standards / Taxonomy;
5. Any framework or methodology specified by a competent authority in India
6. Other international standards.

IFSCA has taken a significant step towards promoting sustainability through the IFSCA (Fund Management) Regulations, 2022 (“FM Regulations”).

1. The FM Regulations require fund managers managing asset under management (“AUM”) exceeding USD 3 million to address material sustainability-related risk and opportunities in their investment decisions;
2. The regulations mandate such fund managers to establish policies governing the management of such material sustainability risks and opportunities along with making mandatory disclosures with respect to their processes for addressing and integrating ESG considerations and investment schemes related to ESG;
3. The FM Regulations require all fund managers (regardless of AUM or investment strategy) to clearly disclose in their private placement memorandum whether or not sustainability related risks are incorporated in the decision-making thereby providing transparency to investors.

IFSCA to promote consistency, reliability, and comparability in sustainability related disclosure concerning ESG schemes, issued a circular on January 18,2023, specifically for fund managers launching and managing ESG schemes. The circular mandates fund managers intending to launch and manage ESG schemes to make mandatory initial disclosures pertaining to nature and extent of the scheme’s ESG-related investment objectives, strategies and methodology for ESG investment.

IFSCA Guidance framework on Sustainable and Sustainability linked lending by financial institutions (“SF Framework”). SF framework promotes sustainable lending practices among financial institutions including all IFSC Banking Units and Finance Company/Finance Units operating in the IFSC.

1. The framework mandates lending institutions undertaking lending as one of the permitted activities to allocate a minimum of 5% of their gross loans and advances towards green, social, sustainable or sustainability-linked sectors/facilities.
2. This framework emphasizes mandatory development of a comprehensive Board-approved policy on sustainable and sustainability-linked lending.

Conclusion

The development of a green finance taxonomy in India marks a significant step towards aligning the financial sector with the country’s broader environmental and sustainability goals. SEBI’s recognition of green debt securities, along with the introduction of blue, yellow, and transition bonds, reflects the regulatory framework’s evolution to encompass a wider array of sustainable projects. Additionally, the RBI’s draft framework on climate-related financial risk disclosures reinforces the importance of transparent and consistent reporting, enabling informed decision-making by investors and other stakeholders. The proactive steps taken by IFSCA to integrate ESG considerations within GIFT City further demonstrate India’s commitment to fostering sustainable finance practices. A harmonized approach across regulators and institutions is critical for scaling green finance and achieving India’s climate commitments. The collaborative efforts of SEBI, RBI, and IFSCA in establishing regulatory frameworks, disclosure requirements, and sustainability-linked lending practices create a conducive environment for mobilizing capital towards green and sustainable investments. Going forward, continued capacity building, stakeholder engagement, and alignment with global standards will be key to strengthening India’s green finance ecosystem and driving the transition towards a more sustainable economy.