[Richa Roy is a Partner, Shreya Garg is a Principal Associate, and Akanksha Oak is an Associate, at Cyril Amarchand Mangaldas.
This post is part of the IndiaCorpLaw Blog Symposium on ‘Corporate Law and Climate Change: Indian and Comparative Perspectives’.]
In February 2026, the European Central Bank (ECB) imposed periodic penalty payments of €7,551,050 on Crédit Agricole for failing to conduct a materiality assessment of its climate-related and environmental (C&E) risks, months after Spain’s ABANCA became the first bank ever fined by the ECB for a climate-related supervisory failure. Climate risk, in the ECB’s view, is a prudential risk. India, meanwhile, ranked 176th out of 177 countries in the 2026 Environmental Performance Index. Embedding climate change in financial regulation is difficult because of the radical uncertainty associated with a phenomenon that is constantly changing and involves complex chain reactions. The Network of Central Banks and Supervisors for Greening the Financial System (NGFS), of which the Reserve Bank of India (RBI) is a member, has called for a “whole-of-economy effort” in which financial institutions factor climate risks into strategy. Beyond that consensus, there is no agreement on whether central banks should play a proactive, facilitative role or a reactive, supportive one in scaling up green finance; and any such role must sit within their legal mandates.
The RBI has begun to acknowledge this challenge. In its June 2025 Financial Stability Report, the RBI identifiedclimate risk as a potential risk to financial stability. In May 2025, the RBI announced the Reserve Bank–Climate Risk Information System (RBI-CRIS), a two-pronged data platform intended to bridge persistent gaps in climate-related financial information.
In November 2025, it issued three sets of master directions (Directions) on climate finance and the management of climate change risks, covering commercial banks, small finance banks, and non-banking financial companies (NBFCs). The RBI’s framework for accepting ‘green deposits’ has now been withdrawn as a standalone framework and has been integrated into the Directions for different categories of lenders.
This post makes two arguments. First, while the Directions are binding instruments, the activity they govern, raising green deposits, is entirely voluntary, and the framework is too thin on supervisory consequences, disclosure standards, and Board-level integration to draw in either depositors or institutions. Second, the RBI’s statutory mandate sits more comfortably with a prudential approach to climate risk than with the promotional one it has chosen, and the durability of the framework may turn on that choice.
Legal Mandates for Climate Finance
According to a leading study, out of 135 central banks across the world, only 12% have explicit sustainability mandates, while 40% are mandated to support the government’s policy priorities, which may include sustainability goals. Jurisdictions like Russia, Singapore, South Africa, Czech Republic, Fiji, Gambia, Georgia, Hungary, Iraq, Liberia, Malaysia, Nepal, Philippines, and Tanzania have statutory mandates that include an explicit objective for the promotion or support of “sustainable” economic growth or development. Others refer to supporting the general economic policies of their governments.
In some instances, central banks, such as the Bank of England, did not have the explicit statutory power to direct, regulate or supervise on sustainability goals, and such actions were considered “mission creep”. However, the Bank’s mandate obliges it to support the government’s economic policy and objectives for growth, which are set out in HM Treasury’s Annual Remit for the Monetary Policy Committee.
The RBI has wide-ranging powers in respect of the entities regulated by it. The preamble to the Reserve Bank of India Act, 1934 (RBI Act) directs the RBI “generally to operate the currency and credit system of the country to its advantage”, with price stability as the primary objective of monetary policy. Sections 21 and 35A of the Banking Regulation Act (BR Act) permit directions to banking companies in the public interest or in the interest of banking policy, and Section 45JA of the RBI Act confers comparable powers over NBFCs.
These powers are wide but not insulated from judicial review. There have been at least two recent instances where the judiciary has questioned or struck down the vires of the RBI’s circulars. In Dharani Sugars and Chemicals Ltd v. Union of India (2019), the Supreme Court set aside the RBI’s 12 February 2018 circular on resolution of stressed assets because it did not follow the procedure in the provision under which it was issued. In Internet and Mobile Association of India v. RBI (2020) (IAMAI), the Court struck down a circular ring-fencing the banking sector from crypto assets, holding that although the circular was within the RBI’s power, it did not meet the proportionality test in respect of the harm it sought to address.
Neither the BR Act nor the RBI Act specifically enumerates ‘sustainability’ as a factor for the RBI to consider in policy making; nor do the mandates of SEBI, IRDAI or even the IFSCA Act, 2019. Two consequences follow. First, a prudential role, under which the RBI measures climate risk and requires regulated entities to disclose and manage it, sits squarely within Sections 21, 35A of the BR Act and Section 45JA of the RBI Act, because macroprudential and microprudential risk is what those provisions protect. A promotional role, under which the RBI creates a new product and steers credit towards sustainable projects and away from “brown” ones, rests on weaker footing. The RBI has directed credit before through priority sector lending, but that has a long policy history. A green mandate does not have a similar provenance and would be exposed to the proportionality review applied in IAMAI. Second, the Tinbergen rule holds that each policy objective needs a commensurate instrument. A promotional objective grafted onto prudential tools risks ending up with neither outcome.
The Directions have this risk as they are binding instruments issued under Section 35A of the BR Act, but what they govern is optional: no regulated entity is required to raise green deposits, and only those that choose to do so must follow the prescribed framework.
Fault Lines in the Regulatory Architecture
As the regime stands today, participation by the entities is voluntary. No regulated entity is required to raise green deposits, but those that choose to do so must follow the prescribed framework. The governance requirements are substantially identical across all three sets of Directions: a Board-approved policy, a Board-approved financing framework (Financing Framework), mandatory external review before that Financing Framework is implemented, third-party annual verification, and impact assessment. Some of these are discussed below:
Supervisory Review Without Content
The Directions provide that while no penalty is envisaged for non-allocation of proceeds (unlike under the ECB’s powers), non-allocation shall be subject to “supervisory review”. The formulation is identical across all three instruments and, in each case, is left entirely undefined.
A regulated entity cannot tell whether it means an inspection finding or a formal communication. Ambiguity invites minimum effort, and depositors are entitled to know what follows if allocation does not occur within the permitted twelve-month window.
The RBI does not lack penal tools. Section 47A of the BR Act empowers it to impose the monetary penalties prescribed in Section 46 for contraventions of its directions, with corresponding provisions in the RBI Act for NBFCs. The Directions do not specifically refer to these tools. Thus, we recommend a tiered approach: First, a caution notice upon non-allocation requiring a written explanation within a fixed period. Second, where the response is unsatisfactory, a formal feedback letter with institution-specific remediation timelines and stated consequences for failure to adhere; and stricter action thereafter.
The ECB’s practice shows how such a sequence works. Its 2020 Guide on Climate-Related and Environmental Risksset out supervisory expectations; a 2022 climate stress test and thematic review identified shortcomings; all significant institutions then received feedback letters with bank-specific staggered timelines; and the sequence culminated in enforcement, with ABANCA fined €187,650 for a 65-day delay in completing a materiality assessment.
Clarity from the RBI on what triggers supervisory engagement, over what timeframe, and with what range of responses would convert the current provision into a functioning accountability mechanism.
Inconsistent Disclosure
Banks must pay interest on green deposits as per agreed terms irrespective of whether the proceeds have been allocated, and the Financing Framework must cover allocation, reporting and disclosures, verification and impact assessment. But there is no specificity on what the disclosure must contain, whom it must reach, or when it must occur. One bank may publish detailed quarterly deployment updates directly to depositors while another may bury them in a general annual statement in a Board report. Both would be compliant. The quality of information available to a depositor therefore depends on which institution they choose, not on any minimum standard the regulator has set.
For the green deposits market to develop, depositors need to be informed investors. Research by the OECD has found that inadequate disclosure frameworks are a barrier to scaling green investment, precisely because investors cannot compare products, assess impact, or hold institutions accountable without standardised, accessible information.
Uniformity has precedent in Regulation (EU) 2023/2631 on European green bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds, whereunder issuers must publish an allocation report every 12 months until the proceeds are fully invested. Every investor, regardless of which EU issuer they hold, receives comparable information in a comparable form within the same timeline. The RBI should adopt an equivalent approach: prescribe minimum standards governing the content and frequency of depositor-facing disclosures, including on deployment status.
From Compliance to Practice
The Directions require annual independent verification of fund allocation but do not specify who may act as reviewer, prescribing only that the agency be “appropriate and reputed”. No qualification criteria are set, no minimum scope of inquiry is mandated, and no consequence follows where verification is later found inadequate. On Board-level accountability, a review report must be placed before the Board within three months of the end of each financial year, covering the amount raised, the activities funded and the findings of verification and impact assessment. This is a backward-looking compliance review; it does not require the Board to consider how climate considerations shape credit decisions, risk appetite or portfolio strategy going forward. Oversight and integration are not the same, and the Directions require only the former.
A few banks illustrate what integration looks like. Canara Bank has publicly reported district-wise climate risk heat maps identifying loan exposures vulnerable to cyclones and earthquakes, factored directly into its asset monitoring. ICICI Bank assesses physical risk for its top wholesale counterparties under a Climate Risk Management Framework, categorising borrowers by concentration in flood- and cyclone-prone regions. These are exceptions. A recent report by the think tank Climate Risk Horizons found that bank reporting is largely compliance-driven: only 34 banks reported Board-level oversight of climate issues, only 22 showed how that oversight affected credit decisions or risk appetite, and only 5 provided comprehensive sector-wise disclosures of sustainable lending.
Conclusion
The RBI has chosen a promotional, voluntary route to climate finance: it has created a product and invited regulated entities to adopt it. The fault lines identified above—an undefined supervisory consequence, no minimum disclosure standard are the predictable result of that choice. A voluntary framework must attract participants; this one gives depositors little assurance and institutions little reason to go beyond the minimum.
In a climate-vulnerable country like India, the RBI must instead focus on prudential risk: incorporating climate risk, and disclosure of it, into the regulation of the financial system, along the lines of the ECB’s approach. As the discussion of the RBI’s legal mandate above shows, that role is also the one more squarely within the RBI’s legal mandate. The promotional role of steering credit towards sustainable projects may face statutory limits and judicial scrutiny without legislative amendment, and, consistent with the Tinbergen rule, cannot be pursued effectively with tools designed for other ends.
– Richa Roy, Shreya Garg & Akanksha Oak