Executive Summary
Climate change is now recognized as a material financial risk with direct implications on balance sheets, capital allocation, and systemic stability, rather than a peripheral sustainability or reputational concern. Climate-related shocks can disrupt lending, insurance, and financial markets, elevating climate risk to a core concern for financial institutions worldwide.
In response, the Reserve Bank of India (RBI) is aligning its regulatory approach with global frameworks, including the Basel Committee and the Task Force on Climate-related Financial Disclosures (TCFD). This shift strengthens governance and disclosure expectations, improves risk assessment, increases capital allocation to genuinely sustainable activities, and mitigates greenwashing. This emphasis has moved decisively from environmental intent to financial risk discipline.
RBI’s climate risk journey has evolved steadily over the past few years. After joining the Network for Greening the Financial System (NGFS) in 2021 and establishing a Sustainable Finance Group in 2022, RBI issued a framework for green deposits in 2023 and released draft climate-related financial disclosure in 2024 , alongside the RBI’s explicit recognition of climate change as a financial risk. In 2025, the launch of the RBI–Climate Risk Information System and the issuance of final directions on Climate Finance and Climate Risk Management marked a critical step in embedding climate risk into India’s financial regulatory architecture.
These Directions underscore RBI’s intent to promote credible, transparent, and scalable climate finance, while protecting depositors and maintaining trust in the financial system. Climate considerations are now expected to be embedded across governance, risk management, product design, and disclosures.
RBI’s Master Directions
Climate Finance and Management of Climate Change Risks
Overview
The Directions operationalize climate risk management across the financial sector, combining mandatory governance, disclosure, and operational requirements. They also established safeguards to prevent greenwashing and to channel credible finance to climate-aligned activities.
The three parallel Directions titled “Climate Finance and Management of Climate Change Risks” targeted towards:
- Commercial Banks
- Non Banking Financial Companies (NBFCs)
- Deposit-taking NBFCs (NBFC-D) registered under the RBI Act, 1934
- Deposit-taking Housing Finance Companies registered under the National Housing Bank (NHB) Act, 1987.
- Small Finance Banks
Foundational Drivers and Key Themes
Recasting Climate Change as a Core Financial Risk
Climate change is explicitly recognized as a Prudential Financial risk, necessitating its integration into core risk management, governance, and supervisory processes. Climate finance and green deposits are no longer voluntary ESG initiatives but Board-accountable regulatory obligations aligned with NGFS and Basel expectations.
Board Accountability as the Anchor of Climate Governance
Boards are expected to move beyond symbolic oversight and assume responsibility for the effective implementation of climate-related policies. This includes regular review, gap identification, corrective actions, and robust governance controls.
From Green Intent to Governed Capital Allocation
Green financing must be planned, tracked, and governed from inception, with emphasis on robust processes and traceability rather than ad-hoc or retrospective green labeling. To safeguard the integrity of green finance and mitigate greenwashing risks, the directions prescribe clear definitions, use-of-proceeds criteria, and exclusion, shifting focus from sustainability claims to demonstrable end-use integrity and outcomes.
Mandating Transparency through Public Disclosure and Assurance
Structured public disclosures and independent assurance are mandated. The disclosures are intended to be accessible to investors, depositors, and other stakeholders, and not confined to regulatory reporting alone. By subjecting climate-related policies, allocation of proceeds, and impact outcomes to external visibility and assurance, the framework seeks to reinforce market discipline and accountability, complementing supervisory oversight with informed stakeholder scrutiny.
Indian Green Taxonomy as the Allocation Anchor
Green finance allocation must align with the Indian Green Taxonomy, once finalized. This taxonomy-led approach provides a consistent reference point, reduces interpretational ambiguity, and strengthens credibility and comparability across the market.
Integration With Existing Regulations
Climate finance is embedded within the existing prudential framework, with explicit linkages to Priority Sector Lending (PSL), Asset–Liability Management (ALM), High Quality Liquid Assets (HQLA), the Deposit Insurance and Credit Guarantee Corporation (DICGC), and financial statement disclosures, thereby reinforcing its integration with core banking regulation.
Principles-Based Regulation with Strong Supervision
While the Directions are principles-based and do not prescribe explicit penalties for non-allocation, compliance remains subject to supervisory review and regulatory interpretation by RBI.
Key Operational Provisions
- Regulated entities may finance eligible green activities or projects regardless of whether green deposits are raised; however, green deposits shall not be raised retrospectively for activities or projects already undertaken.
- The issuance of green deposits is not mandatory; however, where an entity chooses to raise them, it shall comply with the framework prescribed under the Directions.
- Green deposits may be issued as cumulative or non-cumulative deposits and, upon maturity, shall be renewed or withdrawn at the depositor’s option.
- Green deposits shall be denominated only in Indian Rupees and shall not be issued in any foreign currency.
- Interest on green deposits shall be paid in accordance with the agreed terms and applicable directions, irrespective of the allocation or utilization of the proceeds.
- Premature withdrawal of green deposits shall be permitted without restriction and governed by the applicable deposit directions, without affecting the financed green activities or projects.
- Pending allocation, proceeds of green deposits may be temporarily parked in liquid instruments with a maximum maturity of one year.
- Any third-party verification or assurance shall not absolve the regulated entity of responsibility for the end-use of funds, which remains subject to internal checks, controls, and procedures applicable to other forms of lending.
- The Directions include repeal and savings provisions to ensure continuity and regulatory consistency.
What are the requirements?
Uniqus’ perspective
The Master Directions titled Climate Finance and Management of Climate Change Risks clearly establish that climate governance is now central to financial supervision. Climate risks and financing are expected to be managed like any other financial risk, with defined ownership, structured processes, and continuous oversight.
Strategic Upside
- The impact for banks and NBFCs is largely structural.
- The Directions provide much-needed clarity on what is expected, how climate-linked products should be governed, and how green claims should be supported.
- By setting clear rules on financing frameworks, disclosures, and assurance, the framework reduces greenwashing risk and improves discipline in how capital is deployed.
- Significant business opportunities for banks and NBFCs, enabling them to mobilize capital for green sectors, support client sustainability initiatives, and invest in Sovereign Green Bonds.
Execution challenges
- The challenges, however, are largely operational.
- Many institutions still face gaps in data availability, especially at the borrower and project level.
- Internal expertise on climate risk remains uneven, and responsibility for climate-related matters is often spread across multiple teams without clear ownership.
- Taxonomies and measurement methods continue to evolve, making implementation more complex.
RBI has intentionally avoided prescribing a single model for all institutions. The framework allows for proportional implementation, recognizing differences in size, complexity, and maturity. At the same time, supervisory expectations are clear. Institutions are expected to move forward, address gaps in a structured manner, and demonstrate steady progress, even if full maturity will take time.
Gearing up for compliance: How should banks and NBFCs respond?
Conclusion
The Directions require banks and NBFCs to embed climate risk and green finance within core governance and risk management processes. Strengthening accountability, and integrating climate considerations into credit appraisal and monitoring, and preparing for alignment with the Indian Green Taxonomy.
While the framework offers opportunities to diversify funding and enhance market credibility, it also exposes gaps in data, systems, and borrower-level capabilities. Early, structured action will be essential. Together with RBI’s proposed disclosure framework and the RBI–Climate Risk Information System, the Directions underscore the need for sustained investment in governance, data, and transparency to support long-term financial resilience.
Annexure
Eligible green activities/projects
(as provided under Clause 13 of the RBI Climate Finance and Management of Climate Change Risks Directions, 2025 applicable to NBFCs and Clause 14 of the Directions applicable to Commercial Banks and Small Finance Banks)
Until the Indian Green Taxonomy is finalized, proceeds from green deposits shall be allocated to eligible green activities and projects that promote energy efficiency, reduce greenhouse gas emissions, enhance climate resilience, and preserve or improve natural ecosystems and biodiversity.
Renewable Energy
- Solar / wind / biomass / hydropower energy projects that integrate energy generation and storage.
- Incentivizing adoption of renewable energy.
Energy Efficiency
- Design and construction of energy-efficient and energy-saving systems and installations in buildings and properties.
- Supporting lighting improvements (e.g., replacement with LEDs).
- Supporting construction of new low-carbon buildings as well as energy-efficiency retrofits to existing buildings.
- Projects to reduce electricity grid losses.
Clean Transportation
- Projects promoting electrification of transportation.
- Adoption of clean fuels like electric vehicles including building charging infrastructure.
Climate Change Adaptation
- Projects aimed at making infrastructure more resilient to impacts of climate change.
Green Buildings
- Projects related to buildings that meet regional, national, or internationally recognized standards or certifications for environmental performance.
Sustainable Water and Waste Management
- Promoting water efficient irrigation systems.
- Installation / upgradation of wastewater infrastructure including transport, treatment, and disposal systems.
- Water resources conservation.
- Flood defense systems.
Pollution Prevention and Control
- Projects targeting the reduction of air emissions and greenhouse gas.
- Control, soil remediation, waste management, waste prevention, waste recycling, waste reduction, and energy / emission-efficient waste-to-energy.
Sustainable Management of Living Natural Resources and Land Use
- Environmentally sustainable management of agriculture, animal husbandry, fishery, and aquaculture.
- Sustainable forestry management including, afforestation/reforestation.
- Support for certified organic farming.
- Research on living resources and biodiversity protection.
Terrestrial and Aquatic Biodiversity Conservation
- Projects relating to coastal and marine environments.
- Projects related to biodiversity preservation, including conservation of endangered species, habitats, and ecosystems.
Terrestrial and Aquatic Biodiversity Conservation
- Fossil fuel-based extraction, production, or distribution activities.
- Nuclear power generation.
- Direct waste incineration or landfill projects.
- Alcohol, weapons, tobacco, gaming, or palm oil industries.
- Biomass-based energy projects using feedstock from protected areas.
- Hydropower plants larger than 25 MW.
Impact Indicators
(as provided under Clause 16 of the RBI Climate Finance and Management of Climate Change Risks Directions, 2025 applicable to NBFCs and Clause 17 of the Directions applicable to Commercial Banks and Small Finance Banks)
Banks are required to annually assess and disclose the impact of green finance deployment through an Impact Assessment Report.
