Empowering the transition: key institutions in India’s climate finance landscape in 2025 #IndiaFinance

Vaibhav Pratap Singh and Sangeeth Raja Selvaraju outline the role of the Reserve Bank and Securities and Exchange Board of India in regulating to meet the country’s 2070 net zero target – and key developments to watch out for this year.

Recognising the threat of climate change to the world and its own territory, India has committed to achieving net zero emissions by 2070. Experts estimate the transition to net zero will cost India US$10–19 trillion by 2070. To catalyse this funding, the regulatory responsibility will fall to two key entities: the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Collaboration in 2025 between SEBI, RBI and the Ministry of Finance will be essential to deepen the bond market and create a robust framework for financing infrastructure and related projects to achieve India’s net zero goals. Below, we look at key climate-related issues for these institutions in more detail.

RBI and SEBI – main roles and responsibilities

The RBI is responsible for formulating and implementing monetary policy to ensure price stability and supervising the financial system. Under its management, the outstanding credit of scheduled commercial banks grew from INR 31 trillion in March 2010 to INR 164 trillion in March 2024 – a 5.3-times increase – without there being significant setbacks to the health of the banking system. Additionally, the credit exposure of non-bank financial companies (NBFCs) surpassed INR 36 trillion in December 2023.

The banking system is well-capitalised and positioned for growth, despite some challenges. Transition financing and the eventual need for regulated entities to undertake transition planning were among the key issues for the Indian banking and financial sector identified by the former governor of the RBI in an address at a summit last July.

In contrast, SEBI primarily focuses on protecting investor interests and regulating India’s securities market, including debt, equity and hybrids. With a total outstanding issuance of US$2.6 trillion, the bond market is a crucial source of debt for the government, public sector entities, banks and corporations. To that end, SEBI has released a variety of guidelines for Green, Social and Sustainability (GSS) bonds and other related bonds in the last few years.

The stock market enables companies to list shares and create tradable instruments. Since its establishment in 1988, SEBI has introduced new investment instruments, such as alternative investment funds and Infrastructure Investment Trusts (InViTs), which provide companies and investors with greater options for raising capital. These are instruments that many companies and even state governments have tapped to fund climate- and sustainability-related activities.

Facilitating the transition and managing risk

In this context, the RBI’s role in facilitating the transition to net zero will be pivotal as it is the regulator for all banks and NBFCs in the country. In this role it will need to promote the greening of debt capital inflows while continuing to meet essential credit needs for housing, infrastructure, agriculture and, particularly, small businesses. The RBI will also be responsible for ensuring financial stability, which includes managing transition and physical climate risks that banks and NBFCs may face. Similarly, SEBI must mitigate risks to investors arising from the transition and create the ecosystem for greater flows of green capital and access to financial instruments to support it.

To manage the transition risks associated with shifting to less carbon-intensive practices, regulators need to assess the exposure of the entities they oversee. In February 2024, the RBI released a draft framework for regulated entitiesincluding banks and NBFCs, to disclose climate-related financial risks. While we await the final framework guidance to understand its full implications, the draft indicates a focus on data collection and reporting of climate-related information about the credit portfolios of these institutions.

Furthermore, the country will require a transition plan to set long-term goals. These goals will help establish future baselines for the portfolios of various entities, enabling a better assessment of transition-related exposure. This baselining, akin to the EU Taxonomy, will  materialise in the form of a sustainable finance taxonomy that the Ministry of Finance is developing. Other governmental agencies are also creating transition roadmaps for various sectors, which could assist the RBI and SEBI in determining the future pathway and contribute to their respective efforts.

Increasing the supply of capital

SEBI could evaluate how it can play a greater role in collaboration with other relevant statutory bodies to expand segments such as mutual funds and other fund-based companies, credit insurance companies and financial auxiliaries. These entities currently represent roughly 22% of the total asset base of all non-bank companies including NBFCs, which is far below the global average of over 70%. These entities need a push. This expansion is crucial for increasing the supply of capital beyond traditional channels, especially for early-stage companies and technologies integral to the transition. Some of these technologies, for example, carbon capture and green hydrogen, could be vital for the deep decarbonisation of certain sectors, enabling them to scale up and become ready for debt financing.

Given India’s bond market is limited to credit ratings of AA and above, SEBI, RBI and the Ministry of Finance need to collaborate to increase the liquidity of the bond market and enabling the trading of lower grade bonds. This collaboration could facilitate the refinancing of existing debts from banks and NBFCs, thereby enabling lower-rated corporations and infrastructure projects such as renewables to access capital for operational projects while also reaching out to existing financiers such as banks and NBFCs for greenfield ones.

Furthermore, efforts are needed to enhance the debt market through structures like alternative investment funds and infrastructure debt funds, providing alternatives to traditional banks and NBFCs which are not suited to funding infrastructure projects. Greater collaboration between regulatory authorities, the ministry of Finance and other statutory bodies to create national green infrastructure banks could be a way to fill that gap. The country will require many more financial instruments, including specialised options in blended finance, to help manage the transition and potentially attract elusive foreign capital.

Mitigating physical risk

In addition to transition risk, climate change poses various physical risks. These include the impacts of acute extreme weather events like floods and droughts, which can disrupt businesses and communities. Last year the Deputy Governor of the RBI highlighted the challenge of loan losses from physical risks. There are also chronic risks, such as rising sea levels and shifts in precipitation patterns, that affect productivity and long-term livelihoods. It is important to assess and prepare for both acute and chronic climate-related risks.

A recent proposal by the RBI to create a Climate Risk Information System is a positive development. This system would serve as a repository for data related to local climate scenarios, forecasts and emissions. It would facilitate a thorough assessment of physical risks by banks and NBFCs. If designed effectively, this system could help evaluate exposure to physical risks affecting operations, crop damage and disruption to supply chains, ultimately influencing the creditworthiness of debtors.

Also on the watchlist for 2025 will be the specific measures the RBI and SEBI will implement to promote the greening of debt capital flows, and whether there might be any takers for the transition bonds for which SEBI released guidelines last year. Furthermore, it will be interesting to see what details will be included in the final framework for disclosing climate-related financial risks for regulated entities; and how transition plans for different sectors will be integrated into the broader strategy for achieving net zero emissions by 2070.

The authors would like to thank Georgina Kyriacou for editing this commentary. The views expressed here are the authors’ alone.