The world is moving at a pace where it wants to be inclusive of everything possible and provide exclusive services at the same time. However, the inclusivity approach calls for various acts and needs to be eliminated which in turn could lessen the exclusivity. One of the most conversed topics in this inclusivity trend has been the green finance and environmental governance model. Emerging as one of the priorities for public policy, green finance refers to such financial arrangements which are specific to the use and wants of environmentally sustainable projects or projects that fall well within the scope of climate change1.

Famous economist Nassim Nicholas Taleb in his book Skin in the Game mentions the approach of going green to be emerging aggressively as it is financially beneficial in numerous sectors. For instance, in the hospital industry, not changing sheets, reusing towels, and reducing the number of plastic water bottles in itself would save millions that are spent on dry cleaning such sheets or towels and procurement.

The McKinsey Global Survey on valuing ESG2 programs found that 83% of C-suite leaders and investment professionals strongly believe that ESG programs shall contribute more to shareholder value in five years' time. Not limited to this, these leaders and professionals are those willing to invest a 10% median premium in companies which hold a positive ESG record as compared to companies which have negative ESG parameters3.

However, ESG is not limited to the developed western countries but has been making rounds in the Asian finance sector becoming a buzzword for everyone involved in the economic ecosystem. Thus, India is neither lagging behind in ESG policies nor is unaware of the developments in ESG.

India and environmental, social and governance — Introduction

The Environmental Kuznets Curve hypothesis4 suggests that environmental pollution increases at the beginning of economic growth. However, when it passes a certain level of income, economic growth allows environmental remediation. In simpler words, this hypothesis suggests that economic growth initially causes a negative ecological impact but increases as the economy grows until a turning point after which the environmental damage stabilises and begins to fall while economic growth continues5.

Various economists have suggested that India reached the said turning point some time ago, but the Indian economy needs the final push to reach the other side. This statement can be strongly corroborated by the Oil Change International Report (2021) according to which Indian banks globally rank in the fourth position in financing coal plants, providing nearly 155.6 billion USD in loans between the years 2012 and 20196.

The emphasis on the need to increase green finance and ESG financing practices is strongly being made pointing out the practical issues that hinder the progress of ESG financing practices. Investors are concerned about the sustainability-related risks that may arise and their financial implications on their business decisions, however, the lack of a strong framework to address the same issue is not working in ESG practice favour.

Through this article, we aim to address some of the key issues surrounding green finance and ESG in India from an investor's perspective vis-à-vis the cogitation of private equity and acquisitions practitioners.

ESG — A brief introduction

The International Development Finance Club (IDFC) defines green finance as a broad term that can refer to financial investments flowing into sustainable development projects and initiatives, environmental products and policies that encourage the development of a sustainable economy. Green finance includes climate finance, biodiversity finance7, and finance for other environmental objectives8.

The G20 Green Finance Study Group, formulated for the purpose of identifying country-specific institutional and market barriers for improving the mobilisation of capital for green finance, has defined it as financial investments that provide environmental benefits in the broader understanding of sustainable development9.

Further, the Organisation for Economic Cooperation and Development (OECD) refers to green finance as achieving economic growth while reducing pollution and greenhouse gas emissions, minimising waste, and improving efficiency in the use of natural resources10.

On the prima facie, the understanding of green finance laid down by these international organisations is somewhat similar in nature, however, the lack of a consistent and uniform framework makes the process to collect comparable data and estimate the overall progress of green finance arduous.

On a practical note, there are two ways in which a company could go about ESG finance. Firstly, issuing a single mandate under the broader framework or secondly, adopting a holistic approach, wherein the entity would engage only in business practices which are both environmentally and socially sustainable. To understand this in a better manner, take the example of Nestle, whose net profit was more than INR 500 crores last year in India, which started working in the direction of aligning itself with UNs Sustainable Development Goals (SDGs) by the year 203011. On the international level, Microsoft is considered the best ESG company and has been carbon neutral across the globe since the year 2012 and commits to being carbon negative by 2030, and by the year 2050 it aims to completely remove all the carbon it has been emitting either directly or indirectly since 197512.

Investor verification on the green finance and ESG — Underlying issues

The lack of a proper definition of ESG and green finance raises the issue of investors not being able to comprehend whether it is being compliant or not and the process of verifying the same. Taking note of India, it cannot be denied that the environmental jurisprudence is still in a developing stage and largely depends on judicial precedents thus levying a limited burden on the companies for compliance.

Landmark judgments such as Narmada Bachao Andolan v. Union of India13 where the Supreme Court allowed for the construction of a dam along with certain mitigating measures like the creation of a continuous rehabilitation of the affected population and establishing Grievance Redressal Authorities (GRA) at every State involved in the project through the application of the sustainable development principle, whereby steps to offset the environmental issues are taken arising from a project whose effects are known cannot be forgotten as they are leading the way to develop an exhaustive environmental jurisprudence in India.

Further, provisions such as Section 13514 of the Companies Act, 201315 mandate companies fulfilling certain criteria to invest 2 per cent of average net profits of three immediately preceding financial years in order to achieve corporate social responsibility (CSR) illustrated through the same provision. To achieve the same, the disclosure made by the directors in the annual report of the company plays a vital role. However, there are no statistics present that state the actual number of companies that have fulfilled CSR.

Although taking note of the same, India has adopted the US-enacted Sarbanes-Oxley 2002, which mandates financial disclosures and modified the Indian corporate governance disclosures. Despite the said steps taken, India still lags behind in incorporating mandatory compliance regarding the environmental and social obligations by the companies paving way for problems when an investor wants to invest in India. The investor while conducting due diligence faces the issue of not being able to have clarity on the stance that whether he is being compliant due to the absence of any statutory record or necessarily.

This leads us to understand the significance of the company's willingness and preparedness for pursuing ESG initiatives and green finance. Companies will have to take proactive measures, issue internal guidelines, and take the onus upon themselves to disclose ESG details and back them up with empirical or statistical reports to justify ESG compliance. The standalone point of self-regulation is gradually becoming a trend, however, the same has invited a plethora of cases16 in various High Courts and the Supreme Court of India, as a response to the notification issued on what should be included in the environmental impact assessment (EIA)17. This again is sub judice and the notification has been rolled back owing to the backlash it faced.

Issues with compliance – Giving rise to greenwashing

Greenwashing is the process of conveying a false impression or providing misleading information about how a company’s products are more environmentally sound. It is considered an unsubstantiated claim to deceive consumers into believing that a company’s products are environmentally friendly.

This phenomenon is not limited to checking on the compliance of Indian companies but companies around the globe have been found to be committing greenwashing. For instance, in Europe, there are companies which have committed to reducing their emissions in one country and moved and shifted manufacturing units to another country which is not part of the European Union instead of being compliant with the said environmental norms18. A similar issue arises for an investor who may be based in Europe or the USA. Such an investor faces a problem in confirming whether the foreign-based investment being made in Asia is compliant with the norms or not. To tackle situations like these, SEBI has proposed certain guidelines for increasing the reliability of the ESG rating providers, tackling the issues of misallocation of funds and greenwashing19. Through these guidelines, SEBI has suggested eligibility criteria for credit rating agencies and research analysts with a minimum net worth of INR 10 crores to be accredited as an ESG rating provider (ERP)20. Not limited to this, it has also been recommended that ERPs should always use appropriate terminology for the services offered to them. 21

Low-profit margin

It is assumed that if a company is environmentally compliant and is pursuing environmental finance, its expenditure would be higher than that of its other counterparts in the same region. Thus, leads to a situation where its profit or return on investment (ROI) committed to its investors would be less as compared to other counterparts. In order to tackle such a situation, investors would be required to be realistic in their expectations regarding ROI.

If this is complied with, companies adhering to suitable solutions to meet ESG obligations which do not contribute to the cost will be the winners of the game in the long term.


In order to achieve the dream of becoming inclusive of ESG finance, both the companies as well the investors would be required to put in a great deal of effort. Only through constant effort, ESG finance can be achieved in spirit and not just on paper. The incorporation of ESG compliance in a project should not be left to the task of a corporate lawyer drafting representations, warranties and indemnity or guarantees in an investor agreement only to justify that the project is ESG compliant although only on paper.

†Partner at AK & Partners. Author can be reached at <>.

†† 5th year BBA LLB student at Jindal Global Law School. Author can be reached at <>.

1. Saurabh Ghosh, Siddhartha Nath and Abhishek Ranjan, Green Finance in India: Progress and Challenges, RBI Bulletin January 2021.

2. Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behaviour used by socially conscious investors to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, etc.

3. Lindsay Delevingne, Anna Gründler, Sean Kane and Tim Koller, “The ESG Premium: New Perspectives on Value and Performance”, McKinsey Global Surveys, 12-2-2020, <>.

4. David I. Stern, “The Environmental Kuznets Curve: A Primer”, Australian National University, CCEP Working Paper 1404 (June 2014), <>.

5. Karishma K. Dalal and Nimit Thaker, “ESG and Corporate Financial Performance: A Panel Study of Indian Companies”, IUP J Corp Gov (Vol. 18), Issue 1 (Jan 2019) at p. 44.

ESG and Corporate Financial Performance: A Panel Study of Indian Companies – ProQuest.

6. Unused Tools: How Central Banks are Fueling the Climate Crisis.

7. Biodiversity finance includes financing water supply, wastewater treatment, biodiversity conservation and waste management.

8. IDFC Green Finance Mapping Report, 2021.

9. G20 Green Finance Synthesis Report (5-9-2016).

10. Green Finance and Investment | OECD iLibrary.

11. Contributing to Global Sustainability Goals | Nestlé Global.

12. Microsoft Will be Carbon Negative by 2030.

13. (2000) 10 SCC 664.

14. Companies Act, 2013, S. 135.

15. Companies Act, 2013.

16. Alembic Pharmaceuticals Ltd. v. Rohit Prajapati, (2020) 17 SCC 157, Vikrant Tongad v. Union of India, 2020 SCC OnLine Del 2552.

17. Draft Environment Impact Assessment Notification, 2020.

18. Policy Brief: EU Unveils Planned Carbon Tax on Imports Amid US, Japanese Concerns | SDG Knowledge Hub | IISD.

19. Consultation Paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets.

20. Consultation Paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets.

21. Consultation Paper on Environmental, Social and Governance (ESG) Rating Providers for Securities Markets.

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