ABSTRACT
The redistribution of resources for climate change mitigation and adaptation purposes is among the most pressing frontiers in modern environmental law and sustainable development. Although green financial tools such as sovereign green bonds, green debt securities, and ESG finance arrangements are essential to achieve Sustainable Development Goals and net-zero targets set forth in international agreements, their effectiveness depends on the existence of an effective regulatory structure. In the absence of a universal regulation, green finance becomes fragmented, inefficient, and unreliable due to greenwashing practices on the part of corporations. An analysis of corporate legal duties, micro-and macro-prudential supervision of the Reserve Bank of India (“RBI”), information requirements prescribed by SEBI (“Securities and Exchange Board of India”), and international climate instruments reveals the need to convert principles of environmental law into financial regulations.
INTRODUCTION
Conventionally, the realm of environmental law had been largely premised on command and control laws in order to ensure compliance with environmental laws. But today’s environmental problem calls for a new approach which considers capital as not only a business deal but also as a means of ensuring that the environment is protected. In the context of modern environmental law, green finance involves the legalization of ESG in law and financial legislation. The aforementioned paradigm shift is an essential step towards ensuring that the fantasies of soft laws come to reality, as seen in the Rio Declaration and sustainable development.[1]
The above has been facilitated by the mandate of constitutionally and judicially sanctioned process in the Indian legal system. The Supreme Court of India, through its jurisprudence, has widened the interpretation of Article 21 of the Constitution of India[2], which includes the fundamental right to a clean and healthy environment. Through incorporation of customary international laws, the Indian judiciary has included the Precautionary Principle and Polluter Pays Principle in the Indian jurisprudence. In the case of Vellore Citizens’ Welfare Forum v. Union of India[3], the Supreme Court noted that sustainable development is an intrinsic part of constitutional law and mandates institutions and the market to take a precautionary approach before any environmental project is initiated. If the above concept of constitutional obligation is applied in capital markets, then a similar approach must be followed in investments and resources allocation.
THE REGULATORY AND STATUTORY FRAMEWORK FOR GREEN FINANCE IN INDIA
The Indian regulatory regime for green finance witnessed a crucial evolution from the loose promotional guidelines to the legislated and supervised system for directing funds toward sustainable development. An essential feature of this evolution lies in the integration of climate risk management into the microprudential and macroprudential supervisory systems of the Reserve Bank of India (RBI). The Framework for Acceptance of Green Deposits[4] was implemented through the RBI to provide a set of strict statutory allocation criteria where the regulated entities were obliged to use the proceeds of green deposits exclusively on certain predefined environmentally sustainable sectors through regulated tracking methods. Also, the realignment of Priority Sector Lending (PSL) guidelines was made with a view to ensuring credit flow into sectors such as renewable energy, grids, and sustainable agriculture.
Concurrently, the Securities and Exchange Board of India (SEBI) developed a market conduct and disclosure framework for fostering green bond issuances and protecting investors. Under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021[5], and regulatory circulars thereafter, SEBI amended the definition of eligible green projects and imposed rigorous deployment monitoring measures to protect against greenwashing in corporate debt instruments. In order to improve transparency on both the primary and secondary capital markets, SEBI implemented the Business Responsibility and Sustainability Reporting (BRSR) framework[6], which was further bolstered by BRSR Core requirements. Thus, SEBI has mandated mandatory third-party reasonable assurance for large listed companies concerning specified Key Performance Indicators (KPIs) and value chain environmental impacts.
At the macro-regulatory level, sovereign debt instruments as well as market-based regulatory instruments make the foundation of the decarbonization strategy in India. As a result, the Framework for Sovereign Green Bonds enables the process of public capital mobilization through allocation criteria, third-party validation of green projects, and legislative supervision of green expenditures in state programs. Besides these public finance instruments, the adoption of the Energy Conservation (Amendment) Act, 2022[7] created a statutory basis of Carbon Credit Trading Scheme (CCTS) by section 14(w). Indeed, it gives the Central Government the power to specify carbon trading schemes and non-fossil energy consumption obligations for particular industrial consumers.
INTERNATIONAL LEGAL INSTRUMENTS & COMPARATIVEFRAMEWORKS
International climate law is gradually embracing the importance of ensuring that there is alignment between the private and public financial flows to ensure climate stabilization in the world. Article 2(1)(c) of the Paris Agreement[8] set an important international legal precedent as it was the first international treaty to recognize the alignment of financial flows with low greenhouse gas emission and climate resilience as one of the objectives of the agreement besides mitigation and adaptation goals. Besides multilateral treaties, there are soft law mechanisms that have influence on the governance standards for banking institutions. Through the United Nations Environment Programme Finance Initiative (UNEP FI)[9], there are principles such as the Principles for Responsible Banking (PRB) that are used to guide financial institutions who are signatories to align their commercial interests, risk management and capital allocation with UN Sustainable Development Goals[10] and Paris Agreement targets[11].
Comparatively speaking, the European Union created a full benchmark for defining green capital through Regulation (EU) 2020/852 called the EU Taxonomy Regulation. According to the EU Taxonomy[12], there is a science and law-based framework for establishing six environmental objectives and categorization of economic activities depending on their contribution to one of the objectives without doing significant harm to other environmental objectives. The EU Taxonomy creates regulatory lessons to be considered in developing countries on issues of accuracy, standardization of disclosures and avoiding market segmentation.[13] Nevertheless, strict application of taxonomy in emerging economies needs some degree of adaptation. Developing countries have to balance the investment for net zero transformation and socio-economic development interests.
LEGAL CHALLENGES: GREENWASHING, LIABILITY AND GOVERNANCE
While there is growing momentum on green finance instruments, enforcement of green regulations remains legally challenging, especially owing to the problem of “greenwashing.” Greenwashing is a case of the violation of statutory reporting requirements, a misleading business practice, and an act of unfair trade in capital markets. Greenwashing will therefore expose companies to civil and criminal penalties for defaulting managers.[14] Material misrepresentation in a prospectus or financial disclosures with regard to environmental compliance will attract criminal liability of corporate fraud under Section 447 of the Companies Act, 2013[15]. The regulation on anti-greenwashing guidelines by SEBI further prohibits debt issuers from making use of green bond issuance for any unapproved purpose. This is market manipulation according to the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.[16]
In order to prevent corporate structure fraudulent practices, legal frameworks that require the participation of third-party validators, ESG rating agencies (ERAs), and sustainability audits ought to be established. Greenwashing through information asymmetries in unregulated ESG scoring is not only a direct cause but also an indirect factor that leads to “green-hushing,” which can be described as an attempt at understating sustainable practices of corporations.[17] As part of green-hushing, the corporation consciously underreports any environmental data and under-discloses their climate policies in order to avoid any regulatory action. Regulation of ESG Rating Providers by SEBI solves the issue of green-hushing through mandatory ESG ratings following specific procedure of rating.[18]
Last but not least, management of climate risks calls for an updated view on fiduciary responsibilities of directors. Section 166(2) of the Companies Act, 2013[19] explicitly stipulates that a director must perform his duties in good faith to promote the objects of the company for the benefit of its members in the best interests of the company, its employees, the community, and environmental protection. Interpretation of corporate governance law in judicial decisions makes it the affirmative responsibility of directors to consider systemic climate risks. Failure to incorporate environmental stewardship in capital allocation strategy amounts to breach of fiduciary duty.
CONCLUSION
Green finance has evolved beyond its initial nature as a CSR activity and become an indispensable component of environmental law and sustainable development. As evident in both national and international legal regimes, the effectiveness of any green finance tool, from green bonds issued by states to securities linked to ESG, largely depends on an enforceable regulatory regime. In the case of India, the constitutional widening of Article 21,[20] along with the supervisory functions of the RBI[21] and SEBI with strict disclosure norms through the BRSR guidelines, signifies an essential shift from soft law to hard law.[22] Through imposition of liability for misrepresentation of facts by corporations under Section 447 of the Companies Act,[23] regulation of ESG ratings agencies for tackling greenwashing and green hushing, and the enforcement of directors’ duties under Section 166(2),[24] the legal framework underscores the need for holding the allocation of capital responsible for ecological well-being.
[1] United Nations Conference on Environment and Development, Rio Declaration on Environment and Development, U.N. Doc. A/CONF.151/26 (Vol. I), annex I, principle 15 (Aug. 12, 1992).
[2] INDIA CONST. art. 21.
[3] Vellore Citizens’ Welfare Forum v. Union of India, (1996) 5 SCC 647.
[4] Reserve Bank of India, Framework for Acceptance of Green Deposits, Notification No. RBI/2023-24/14 (Apr. 2023).
[5] Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021, The Gazette of India, pt. III sec. 4 (Aug. 9, 2021).
[6] Securities and Exchange Board of India, BRSR Core – Framework for Assurance and ESG Disclosures for Value Chain, Circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 (July 12, 2023).
[7] The Energy Conservation (Amendment) Act, 2022, § 14(w), No. 19, Acts of Parliament, 2022 (India).
[8] Paris Agreement art. 2(1)(c), Dec. 12, 2015, T.I.A.S. No. 16-1104, 3156 U.N.T.S. 79.
[9] Council Regulation 2020/852, On the Establishment of a Framework to Facilitate Sustainable Investment, and Amending Regulation (EU) 2019/2088, arts. 3, 9, 17, 2020 O.J. (L 198) 13, 20–22 (EU).
[10] G.A. Res. 70/1, Sustainable Development Goals, Goal 13 (Sept. 25, 2015).
[11] Supra 8.
[12] U.N. Env’t Programme Fin. Initiative, Principles for Responsible Banking: Guidance Document 4–12 (Sept. 2019).
[13] Supra 9.
[14] Securities and Exchange Board of India, Dos and Don’ts for Issuers of Green Debt Securities to Prevent
‘Greenwashing’, Circular No. SEBI/HO/DDHS/DDHS-RACPOD1/P/CIR/2023/023 (Feb. 3, 2023).
[15] The Companies Act, 2013, § 447, No. 18, Acts of Parliament, 2013 (India).
[16] Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, The Gazette of India, pt. III sec. 4 (July 17, 2003).
[17] Xavier Font et al., Greenhushing: The Deliberate Under-Reporting of Sustainability Practices, 8 Int’l J. Hosp. Mgmt. 1, 2–5 (2020).
[18] Supra 14.
[19] The Companies Act, 2013, § 166(2), No. 18, Acts of Parliament, 2013 (India).
[20] Supra 2.
[21] Supra 4.
[22] Supra 6.
[23] Supra 15.
[24] Supra 19.
Author SAKSHI JAIN | 3rd Year BBA LLB (Hons.) student at NMIMS School of Law