CHAPTER 6

Development of Environmental,
Social, and Governance
Financial Markets
Fabio Natalucci and Rohit Goel

INTRODUCTION
Sustainable finance is growing in importance globally, as is the focus on the
related financial stability risks. India has significant issues related to climate and
sustainability, and green finance can play an important role in mitigating these
risks and strengthening the financial sector.
Sustainable finance is defined as the incorporation of environmental, social,
and governance (ESG) principles into business decisions, economic development,
and investment strategies. Recent work and research have well established that
sustainable finance can generate public-good (Principles for Responsible
Investment 2017; Schoenmaker 2017; United Nations 2016) in which actions on
an extensive set of issues generate positive impacts on society. It also plays a sig-
nificant role in global financial stability issues (October 2019, October 2020, and
October 2021 Global Financial Stability Report).
Sustainability dynamics impact financial stability through multiple channels:
(1) Environmental risk exposures can lead to large losses for firms, and climate
change may entail losses for financial institutions, asset owners, and firms
(October 2020 Global Financial Stability Report). (2) Governance failures at
banks and corporations have contributed significantly to past financial crises, as
was evident during the global financial crisis in 2008. (3) Social risks in the form
of inequality may contribute to financial instability by triggering a political
response of easier credit standards to support consumption, despite stagnant
incomes for middle- and lower-income groups (Rajan 2010). On the other end
of the spectrum, analysis also shows that participation in these markets can spur
positive changes. For instance, firms borrowing in green bond, green loan, and

The data in this chapter is as of the end of 2021.

107

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108 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

sustainability-linked borrowers lower their emission intensity over time faster

than other firms (Schmittmann and Han Teng 2021).1
Participants in sustainable finance are focusing significantly on climate-related
issues globally (October 2021 Global Financial Stability Report). Globally, the
financial sector has recognized climate change as a systemic risk to financial sta-
bility (Bolton and others 2020), with the climate change risks being classified into
(1) physical risks and (2) transition risks (TCFD 2017).2 The Network for
Greening the Financial System (NGFS), a group of central banks and financial
supervisors, has expressed concern that financial risks related to climate change
are not fully reflected in asset valuations and has called for integrating these risks
into financial stability monitoring (NGFS 2019).
These issues are becoming increasingly important for emerging markets,
which has led to 2021 being a breakout year for the sustainable finance markets
in emerging markets (Gautam, Goel, and Natalucci 2022; Goel, Natalucci, and
Gautam 2022). These issues are also particularly relevant for India. Studies have
shown that India is ranked the fifth most vulnerable nation to the effects of cli-
mate change, with 2.5–4.5 percent of its GDP at risk annually. As a result, India
has pledged to reduce the carbon intensity of its GDP by 45 percent by 2030
from its 2005 levels (MoEFCC, 2022). The World Bank estimates that,
unchecked, climate change will reduce India’s GDP by nearly 3 percent and
adversely affect the living standards of almost half the country’s population by
2050 (Mani and others 2018). Another study shows how economic losses due to
extreme weather have been drastically increasing over the years and stood at
$45 billion in 2008–17 versus $20 billion over 1988–2007 (Singh 2019).
To achieve this target, India needs to mobilize a total of $2.5 trillion over
2016–2030 (MoEFCC 2015). The financial sector can play a vital role in miti-
gating the overarching climate change risks by diverting capital from the
carbon-emitting sectors to the carbon-mitigating sectors (Krogstrup and Oman
2019). In 2021, India pledged to reduce carbon intensity—that is, the amount of
goods produced per unit of energy—by 45 percent by 2030 (from 2005 levels)
and to achieve carbon neutrality by 2070. Green finance could be one of the
primary mechanisms to achieve this,3 allowing the financial sector to strategically
increase capital allocation to climate mitigation and adaptation measures that
would achieve the most environmental, social, and economic benefits. While efforts
to promote ESG in finance started some 30 years ago, they have accelerated more

1
The authors note that a likely interpretation of the results is that green debt issuers pursue green debt
to signal their green credentials, as argued by Flammer (2021) for green bonds. Other reasons could
be for engagement with investors, organizational learning, and mainstreaming of green considerations
and may potentially play a role as well.
2
Physical risks arising from climate change can be event-driven or occur as longer-term shifts in cli-
mate patterns. This could result in direct damage to assets or cause indirect impacts through supply
chain disruptions and resource unavailability. Transition risks refer to the potential risks incurred by
the financial system due to policy, regulation, legal, and market changes in a country that is transi-
tioning toward a low-carbon economy.
3
Green finance refers to the financial arrangements specific to the use for environmentally sustainable
projects or projects that adopt the aspects of climate change.

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 109

recently (October 2019 Global Financial Stability Report). The Reserve Bank of
India (RBI 2019) has also acknowledged that climate change risks could under-
mine the stability of India’s financial system and the important role the RBI needs
to play in disclosures and prudential regulations (RBI 2019). The central bank
further states that green finance could be an opportunity to diversify financial
assets and enable mobilization of private capital for sustainable development in
India. This was reflected in India issuing its inaugural sovereign green bond in
January 2023 and raising $1 billion.
This chapter is one of the first studies to look at the evolution of green finance
in India and to benchmark it for other emerging markets. In this chapter, the first
section discusses the evolution of the ESG financial markets in India. The second
section analyzes the key characteristics of the Indian green bond market. The
third section compares the Indian green bond market with other emerging mar-
kets, on size as well as the key characteristics. The fifth section discusses key
development areas in the Indian sustainable finance market, including ESG score
and data disclosure-related issues. The final section concludes with a few policy
implications and the latest guidelines from Indian regulators.

EVOLUTION OF THE ESG FINANCIAL

MARKETS IN INDIA
The growing recognition of sustainability linked assets has also led to a gradual
development of ESG-related financial subsectors in India. Assets under manage-
ment of ESG-related equity funds have picked up sharply in the last few years.
Related funds (as per the EPFR database) now number 16, with total assets under
management crossing $2 billion (Figure 6.1, panel 1).4 ESG-related products
have also been increasing in Indian bond markets. While yearly issuance levels are
volatile (and contingent on the external risk sentiment), 2021 has seen a sharp
acceleration with almost $8 billion in issuance in year to date. This has led to
cumulative issuance of almost $20 billion since the first ESG-related bond issu-
ance in 2015 (Figure 6.1, panel 2). This is equivalent to 1 percent of the total
bond issuance since 2015 but amounted to almost 2 percent of the total bond
issuance in 2021—reflecting the escalation recently.
The development of the Indian ESG financial market is also supported by ESG
outperformance of regular assets, in both equities and bonds. The ESG version of
the Indian equity index has outperformed the broader index (Figure 6.1, panel 3)
by 2 percentage points (annualized) in the last five years, with this outperformance
accelerating in the last two years (to 4 percentage points per year). This is also
evident in the credit market, where green bonds have traded at a notable premium
to the regular version from the same issuer.5 Trends are broadly consistent with

4
These numbers are based on the EPFR data and are likely to underreport the actual data given the
sample and reporting issues.
5
Other analysis shows that this greenium (premium for green bonds) exists for other major emerging
markets as well (JP Morgan 2021).

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110 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Figure 6.1. Development of Green Finance in India

1. ESG-Related AUMs for Indian Equity 2. Indian ESG Bond Issuance
Funds and the Number of Such Funds (Billions of dollars)
(Billions of dollars; number, right scale)
2.5 18 8 25
Total net assets Yearly issuance
Count of funds 16 7 Cumulative issuance
2.0 (right scale) 14 (right scale) 20
6
12
1.5 5 15
10
4
8
1.0 3 10
6
4 2
0.5 5
2 1
0 0 0 0
2014 15 16 17 18 19 20 2015 16 17 18 19 20 21
3. Indian Equity Performance: 4. Proportion of ESG Issuance across the
ESG vs. Regular Index Various Categories
(Annualized returns) (Percent)
ESG version NIFTY index Green Sustainability Social
12.8 12.7 100
12.6 90
12.4 80
12.4
12.2 70
60
12.0
99 50
11.8 87
80 40
11.6 30
11.4 20
11.2 10
11.0 0
Last five years Total 2016–18 2019–21
5. Number of Entities That Have Issued Bonds
(Number)
35 33
30

25

20

15

10

5 3 2
0
Green Sustainability Social
Sources: Bloomberg L.P.; and authors’ calculations.
Note: AUMs = assets under management; ESG = environmental, social, and governance.

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 111

global developments, where ESG-related assets have been the source of notable
outperformance. Despite this outperformance, green bonds are issued at signifi-
cantly higher financing costs in India versus the other nongreen issuers (RBI
2019), which points to the ongoing challenges in developing this market.
As the name suggests, the ESG segment has multiple sectors covering green
bonds, as well as social and sustainability-linked bonds, with corresponding
subsectors (ESG Risk AI 2021). The Indian ESG bond market has been domi-
nated by green bonds,6 which accounted for almost 100 percent of total issuance
in 2016–19. More recently, though, that share has fallen, with other subsectors,
such as social and sustainability-linked bonds, comprising almost 20 percent of
total issuance in 2019–21 (Figure 6.1, panel 4). This trend is in line with what
we saw in the rest of the emerging markets (October 2021 Global Financial
Stability Report). Despite the rising penetration in total issuance, very few
corporates (Figure 6.1, panel 5) have participated in these markets (low single
digits for social and sustainability-linked bonds as compared with almost 30 for
green bonds).
The next section describes characteristics of the Indian green bond market.

KEY CHARACTERISTICS OF THE INDIAN GREEN

BOND MARKET
Currency Denomination
Green bond issuance in India has primarily been denominated in US dollars, with
cumulative issuance in local currency down to about 10 percent in 2021, from
around 25 percent in 2016 (Figure 6.2, panel 1). This partly reflects the stage of
development of the Indian green bond market. The difference in the two seg-
ments is also reflected in issuance characteristics. While the maturity profile is
broadly similar between US dollar–denominated and local currency–denominat-
ed issues, coupon rates differ notably, at 4.8 percent and 7.9 percent, respectively
(Figure 6.2, panel 2). This is in line with the experience in other countries at the
same stage of bond market development and might partially explain the inclina-
tion to issue more in US dollar denominations. The liberalized External
Commercial Borrowings (ECB) norms of RBI have enabled Indian renewable
energy companies and other firms to tap the ECB route for raising finance
through green bonds and sustainable bonds, reflecting the growing attractiveness
of this route for raising finance.

Credit Rating Profiles of Issuers

Issuers across rating profiles have tapped the green bond market in India.
However, profiles have changed, reflecting rising market access from even

6
Green bonds are bonds issued by any sovereign entity, intergovernmental group or alliance, and
corporates that aim to use proceeds for projects classified as environmentally sustainable.

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112 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Figure 6.2. Key Characteristics of the Green Bond Market in India

1. Green Bond Issuance by Currency 2. Key Metrics for the Indian Green Bond
Denomination Issuance by Currency Composition
(Percent, cumulative since 2015) (Percent; number of years)
Dollars Indian rupees Coupon Tenor
100 9
90 7.9
8
80 6.9
6.3 7
70 6
60 4.8 5
50
4
40
30 3
20 2
10 1
0 0
2015 16 17 18 19 20 21 Dollars Indian rupees
3. Green Bond Issuance by the Rating of the 4. Key Metrics for the Indian Green Bond
Issuer Issuance by Currency Composition
(Percent) (Percent; number of years)
BBB− BB+ BB BB− NR Coupon Tenor
100 9.5 10
90 9
80 7.5 8
70 7
60 5.7 5.8 6
5.3
50 4.9 5
4.4 4.4
40 4
30 3
20 2
10 1
0 0
Total 2016–18 2019–21 BBB− BB+ BB BB−
5. Green Bond Issuance by Type of 6. Key Metrics for the Indian Green Bond
Issuer Issuance by Type of Issuer
(Percent) (Percent; number of years)
Government-related Corporate Coupon Tenor
100 6.6 7
6.3
6
80 5.2
4.6 5
60 4

40 3
2
20
1
0 0
Total 2016–18 2019–21 Government-related Corporate

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 113

Figure 6.2 (continued)

7. Green Bond Issuance by the Sector 8. Key Metrics for the Indian Green Bond
(Percent) Issuance by the Sector of the Issuer
(Percent; number of years)
Utilities Financials
Industrials Energy 7.0
Utilities
6.5
Financials
21% Energy 6.0

4% 5.5
54%
5.0
Industrials
21% 4.5

4.0
3 4 5 6 7
Sources: Bloomberg L.P.; and authors’ calculations.
Note: NR = not rated.

lower-rated issuers (Figure 6.2, panel 3). Higher-rated issuers (proxied through
BBB– and BB+ ratings) accounted for almost 50 percent of total issuance over
2016–18. However, these issuers accounted for a marginal 10 percent of total
issuance over 2019–21, with lower-rated issuers comprising a significant propor-
tion.7 Expanding market access is encouraging and highlights improving investor
comfort in this nascent segment. As expected, investors continue to differentiate,
across issuers, as the lower-rated issuers pay a much higher coupon (Figure 6.2,
panel 4). Average coupon rate for a BB-rated issuer is 5.8 percent, versus 4.8 per-
cent for a BBB-rated issuer. Differentiation exists across the maturity profile, with
lower-rated issuers having significantly lower tenors (at 5.3 years for BB-rated
issuers vs. 7.6 years for BBB-rated issuers).

Types of Issuers
Within total issuance in India, 45 percent of the total issuance has been dominat-
ed by quasi-sovereign corporates,8 reflecting the significant role played by public
sector entities in the Indian financial sector. However, trends have changed over
time. While quasi-sovereigns accounted for almost 70 percent of total issuance in

7
The findings are true even adjusting for the nonrated category.
8
There is no green bond sovereign issuance in India. However, it was announced in the February 2022
budget speech that the government would issue sovereign green bonds in the domestic market as part
of its overall market borrowing program for the 2022–23 fiscal year. As announced in the Issuance
Calendar for Marketable Dated Securities for H1:2022–23, the government and the RBI are working
jointly in bringing out a framework for issuance of sovereign green bonds. Issuance of sovereign green
bonds is likely to take place in H2:2022–23 (October 2022–March 2023) after finalization of the
sovereign green bond framework.

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114 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

2016–18, their share dropped to just 30 percent in 2019–21 (Figure 6.2,

panel 5). The increasing role played by the nonquasi corporates also corroborates
the finding that market interest and access for sustainable finance have improved
over the last few years. Investor differentiation, as with previous characteristics, is
also evident in key metrics. Quasi-sovereigns, as expected, enjoy much better
coupon rates (at 4.7 percent vs. 5.5 percent for nonquasi corporates) even though
the maturity profile seems broadly similar for both (Figure 6.2, panel 6).

Economic Sectors of Issuers

While market access is improving across categories, only a handful of economic
sectors have issued green bonds, with utilities, energy, and financials accounting
for 49 percent, 24 percent, and 23 percent of total green bond issuance, respec-
tively (Figure 6.2, panel 7). Green bond markets differ slightly from the overall
corporate bond market, where the financial sector accounts for over 80 percent of
issuance (see Chapter 5 on India’s corporate bond markets). Within these catego-
ries, around 55 percent of issuance is dominated by companies associated with
renewable sectors, in line with their core business models. However, this also
implies that a significant number of firms not directly related with sustainable
finance are issuing green bonds to venture into sustainable finance activities and
to tap into a new investor base. These economic sectors, however, differ signifi-
cantly with respect to the trade-off between average tenor and the average coupon
rate (Figure 6.2, panel 8). Financials have the lowest coupon rate, with a signifi-
cantly longer maturity profile. This contrasts with the industrial sector, which has
the lowest tenor and the highest coupon rate.

INDIAN GREEN BOND MARKET, BENCHMARKED

VERSUS OTHER EMERGING MARKETS
Benchmarking in Terms of Size
While the green bond market has been developing steadily in India, it accounts
for a small proportion (about 7 percent) of the emerging-market-wide green
bonds, dominated by China, which accounts for 75 percent of the total
(Figure 6.3, panel 1). However, most of China’s dominance is because of its issu-
ance in local currency. The US dollar–denominated green bond market
potentially plays a more important role for global investors. India accounts for a
relatively meaningful 20 percent of total issuance, while China accounts for closer
to half (Figure 6.3, panel 2). India’s importance in the emerging market green
bonds can also be seen through the numbers of issuers participating. While India
has the third-largest number of issuers, it remains low compared with some major
advanced economies, indicating the still-relative underpenetration (Figure 6.3,
panel 3). In relation to its size, India has issued 0.5 percent of GDP equivalent in
green bonds. While this is lower than Chile’s and China’s issuance of 3.5 percent
and 1 percent, respectively, it is higher than most other emerging markets
(Figure 6.3, panel 4).

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 115

Figure 6.3. Comparison of Indian Green Bond Market vs. Other Emerging
Markets—Size
1. Composition of the Total Emerging Market 2. Composition of the Total Emerging Market
Green Bond Issuance Green Bond Issuance, Denominated in
(Percent) Dollars
(Percent)
India Brazil Chile China India Brazil Chile China
Mexico Poland Others Mexico Poland Others
3% 3% 0%
3%
5% 6% 7%
4% 16%
8%

6%

9%

53%
76%

3. Number of Issuers in the Green Bond 4. Total Green Bond Issuance, as a Percent
Space of GDP
(Number; billions of dollars on right scale) (Percent)
300 Number of issuers 1.8 5.0
Issuance/issuer 4.5
260 (right scale) 1.6
1.4 4.0
220
3.5
1.2
180 3.0
1.0
140 2.5
0.8
100 2.0
0.6
1.5
60 0.4 1.0
20 0.2 0.5
–20 - 0.0
Brazil
India

Indonesia

Chile
South Africa
Peru
Colombia
Russia
Malaysia
Mexico
Türkiye

Poland

Chile
China
Poland
Colombia
Mexico
India
Peru
Brazil
Indonesia
Malaysia
Russia
South Africa
Türkiye
China

Sources: Bloomberg L.P.; and authors’ calculations.

Benchmarking on Key Characteristics

It is also useful to benchmark India on key features.

Currency Denomination
More than 90 percent of Indian green bonds are denominated in US dollars, com-
pared with 60 percent for other emerging markets (excluding China and India).

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116 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

The emerging market universe is also more diversified because of issuance denom-
inated in euros (24 percent of total issuance) and others (including Swiss francs,
Hong Kong dollars, and others). Local currency denominations account for
75 percent of issuance in China, almost 15 percent in other emerging markets, and
just 8 percent for India (Figure 6.4, panel 1). This potentially reflects the stage of
development of the Indian green bond market. It could also indicate the fact that
sustainable finance is a nascent though growing asset class. Thus, global investors
provide a better pool for the issuers to tap into. Second, the higher-risk premiums
in the local bonds, especially for a new asset class, might result in the dollar bonds
becoming a relatively cheaper source of funding.

Sectoral Composition
Utilities comprise almost 50 percent of total green bond issuance in India, with
the rest broadly divided into energy and financials. The high sectoral concentra-
tion contrasts sharply with other emerging markets, which are a lot more diversi-
fied (Figure 6.4, panel 2). This may also reflect corporates continuing to rely
primarily on bank loans instead of the bond market. This is also true for overall
corporate bonds in India, where issuance is concentrated in just a few sectors,
unlike the rest of the emerging markets.

Tenors
Indian green bonds, with an average maturity of 6.4 years, are of significantly
lower tenor than the rest of the emerging markets (excluding China), where the
average tenor is 12.2 years (Figure 6.4, panel 3, y-axis).

Coupon Rate
India green bonds are launched at a relatively higher coupon rate of 4.9 percent,
which compares with the emerging market (excluding China) average of
4.2 percent (Figure 6.4, panel 3, x-axis). The findings remain consistent even
when analyzing different currency denominations (Figure 6.4, panel 4). For local
currency–denominated issuance, Indian green bonds pay an average 7.9 percent
coupon, one of the highest among emerging market peers (except Türkiye and
South Africa). The divergence is relatively less stark for US dollar–denominated
issuance, where Indian green bonds have an average coupon rate of 4.8 percent,
which is broadly in line with the median of emerging market peers.
Analysis notes that Indian green bonds are issued at a comparatively higher
coupon and at significantly lower tenors. This could be due to multiple reasons:
(1) Indian corporate bonds generally embed significantly higher risk premiums
than other emerging markets, reflecting the comparatively weaker fundamentals of
the corporates (October 2019 Global Financial Stability Report); (2) India’s credit
rating is also weaker than an average emerging market, which might explain the
overall higher risk premiums; (3) the Indian green bond market is at an early stage
of development; and (4) investor base difference between the various emerging
markets might also play a very important role in driving these decisions. Lack of

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 117

Figure 6.4. Indian Green Bond Market vs. Other EMs—Key Characteristics
1. Comparison of India with Other Major 2. Comparison of India with Other Major
Emerging Markets—on the Currency Emerging Markets—on the Sectoral
Composition of the Issuance Composition of the Issuance
(Percent) (Percent)
Dollars Euros Utilities Energy Financials
Local currency Others Industrials Others
100 100
80 80
60 60
40 40
20 20
0 0
India Key EMs Key EMs China
Malaysia
South Africa
Poland
Colombia
Russia
China
Türkiye
Chile
Brazil
Mexico
India
Peru
Indonesia
EMs (ex. CHN, IND)

(ex. China)

3. Average Tenors and Coupons for Green 4. Coupon Rates for USD and Local Currency
Bond Issuances across the Major Issuance
Emerging Markets (Percent)
(Percent; number of years–Red dot is India)
25 4.8 5.7 5.7 5.0
5
20
0
Average tenor

15 EM ex. China –5
average
10 7.9 8.1 –10
India for dollar issuance
5 –15
19.9 for LCY issuance
0 –20
1 3 5 7 9
India
Malaysia
Brazil
Türkiye
Indonesia
Chile
China
South Africa
Peru
Mexico
Poland
Colombia
Russia

Average coupon

5. Comparison of India with Other Major Emerging Markets—on the Type of Corporates
(Percent) Government-related Corporate
100
80
60
40
20
0
Türkiye

Brazil

Malaysia

India

China
South
Africa
Poland

Indonesia

Chile

Peru

Mexico

Colombia

EMs
(ex. CHN)
Russia

Sources: Bloomberg L.P.; and authors’ calculations.

Note: CHN = China; EMs = emerging markets; ex. = excluding; IND = India; LCY = local currency.

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118 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

data precludes us from doing a detailed deep dive on this topic, reiterating the
importance of increased data transparency.

Types of Issuers
Emerging markets vary remarkably in type of issuer, and India is broadly in line
with the median emerging market peer with an almost equal participation from
quasi and nonquasi corporates (Figure 6.4, panel 5).

KEY DEVELOPMENT AREAS

The following are a few key areas for development that may help further deepen
and broaden the development of the sustainable finance market in India:
• Promoting the adoption of green bond principles. The International
Capital Market Association’s Green Bond Principles (ICMA 2022) are vol-
untary guidelines that recommend transparency and disclosure and promote
integrity in the development of the green bond market.9 The proportion of
India’s green bond issuance adhering to these principles has declined over the
last few years, on three of four major metrics (Figure 6.5, panel 1). This
could be because more, lower-rated issuers are accessing the green bond
market (see the section on benchmarking on key characteristics), or because
there are less bond disclosures in general. India also scores less favorable on
all of these parameters when compared to other emerging markets
(Figure 6.5, panel 2). For project selection and reporting, India is at the lower
end of the interquartile range, reflecting significant scope for improvement.
While adherence to these principles is voluntary, it can help develop the
market in multiple ways: (1) aiding investors by promoting availability of
information to evaluate environmental impact of green bond investments,
and (2) assisting underwriters by offering vital steps to facilitate transactions
and market integrity.
• Strengthening Data Disclosure. A key challenge with the development of
green bond markets globally is progress on data disclosure. Reliable and
comparable data are crucial for financial sector stakeholders to assess finan-
cial stability risks, properly price and manage ESG-related risks, and take
advantage of opportunities arising from the transition to a green economy
(NGFS 2021). Figure 6.6, panel 1, plots the extent of data disclosure by
major corporates across a few economies. With a median ESG disclosure

9
(1) Project selection: The issuer of a green bond should outline the decision-making process it
follows to determine eligibility of the projects. (2) Management of proceeds: The net proceeds of the
green bond should outline the decision-making process it follows to determine the eligibility of the
projects. (3) Assurance: The issuer should obtain third-party verification of green credentials as either
a second-party opinion, third-party certification, green bond audit, or green rating. (4) Reporting:
Issuers should report on the projects financed, project performance, and, preferably, environmental
impact at least once a year.

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 119

Figure 6.5. Key Issues Part 1: Green Bond Principles

1. Proportion of the Issuance That Has 2. Comparison with the Major EMs
Disclosures on the Usage Metrics of the (Percent; pink area of figure is the
Project over Time interquartile range across EMs)
(Percent)
100 2016–18 100
2019–21

80 80

60 60
EM interquartile range
EM median
India

40 40
Assurance

Management
of proceeds

Project
selection

Reporting

Assurance

Management
of proceeds

Project
selection

Reporting
Sources: Bloomberg L.P.; and authors’ calculations.
Note: EMs = emerging markets.

score of 25, Indian corporates lag major advanced economies (e.g., the
United States at 40, the euro area at 60, and the United Kingdom at 45).
They lag even those of EMs (Goel, Gautam, and Natalucci 2022). Securities
and Exchange Board of India’s (SEBI) latest set of guidelines (Business
Responsibility and Sustainability Reporting [BRSR]; refer to Box 6.1) are a
very helpful next step to address this issue. Within the disclosure metrics in
India, it is highest for the governance segment followed by the social seg-
ment (Figure 6.6, panel 2). Disclosure metrics related to the environment
are notably lower, which is especially relevant given the significant cli-
mate-related risks India faces (ranked fifth most vulnerable nation to effects
of climate change, with 2.5–4.5 percent of GDP at risk annually; see Jena
and Purkayastha 2020). Data by the company ESG Risk AI show a very
strong correlation between data disclosure transparency and actual ESG
scores (Figure 6.6, panel 3). This may show that firms with weak progress
on the ESG front also do not disclose these metrics, which may potentially
amplify the investor concerns and risk premiums in these markets.
• Achieving Higher ESG Scores. Corporates are also scored on the various
ESG-related parameters (e.g., external corporates by JP Morgan 2021, overall
corporates in India by ESG Risk AI 2021). JP Morgan’s data on external
corporates show that the ESG score for India has declined sharply in the last
few years and is touching historical lows (Figure 6.7, panel 1). The decline
potentially reflects the challenged fundamentals of Indian corporates

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120 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Figure 6.6. Key Issues Part 2: ESG-Related Data Disclosures

1. ESG Disclosure Score: Comparing India 2. ESG Disclosure Score within India across
with Major AEs the Major Segments
(Index; area is the interquartile range (Index; area is the interquartile range
across firms) across firms)
70 90
80
60
70
50
60
40 50

30 40
30
20
20
10
10
0 0
India United Euro UK ESG Governance Social Environment
States area disclosure
3. ESG Score vs. ESG Disclosure
800

700

600
ESG risk score

500

400

300

200

100 R 2 = 0.7708
0
0 20 40 60 80 100
Average transparency
Sources: Bloomberg L.P.; ESG Risk AI; and authors’ calculations.
Note: AEs = advanced economies; ESG = environmental, social, and governance.

(GFSR 2019). India has significant room to improve compared with other
emerging markets and is at the lower end of the interquartile range (Figure 6.7,
panel 2). In addition, data show a considerable heterogeneity across corpo-
rates, as seen through the wide kernel distributions in Figure 6.7, panel 3. The
heterogeneity is particularly notable across the environment and government
categories (standard deviations of 66 and 60, respectively) versus the social
category (standard deviation of 48)—potentially reflecting the different eco-
nomic sectors (and private vs. public ownership) corporates are involved in.
Variation is also notable across the three categories, with corporates scoring

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 121

Figure 6.7. Key Issues Part 3: Weak ESG Scores

1. ESG Score 2. ESG Score vs. Other Emerging Markets
(Index) (Index)
65 80
EM interquartile range
EM median 70
60 India
60

55 50

40
50 30

20
45
10

40 0
2016 17 18 19 20 21 Brazil
China
Russia
India
Mexico
Indonesia
Türkiye
South Africa
Poland
3. ESG Score across Different Categories
0.012
Environment kernel
Government kernel
0.010 Social kernel

0.008
Density

0.006

0.004

0.002

0.000
–40 0 40 80 120 160 200 240 280 320 360 400 440
Sources: Bloomberg L.P.; ESG Risk AI; JPMorgan Chase; and authors’ calculations.
Note: EM = emerging market; ESG = environmental, social, and governance.

weakest on the environment category and highest on the government

category. This reiterates the potential risk that issues related to climate (and
environment) can pose for Indian corporates and financial stability.

KEY POLICY RECOMMENDATIONS

• Data disclosure requirements are critical to enable investors to price risks
appropriately and develop the sustainable finance market in India. In this
respect, the latest BRSR guidelines in India are encouraging (see Box 6.1)

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122 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

Box 6.1. New Set of Guidelines Help with the Disclosure Requirements
Earlier in 2021, India’s security market regulator (SEBI) introduced new guidelines to extend
the corporate environmental, social, and governance (ESG) disclosure requirements. The
new guidelines (called Business Responsibility and Sustainability Reporting [BRSR]) will
replace the current business sustainability report and are mandatory from 2022 to 2023.
The move from Business Responsibility Reporting (BRR) to BRSR is expected to provide
greater transparency in companies’ sustainability risk management practices and extend
the current framework on multiple dimensions (ESG Risk AI 2021). See Figures 6.8 and 6.9.
• Firm coverage: Contrary to the business sustainability report requirements, which
mandated the disclosure for the top-100 listed firms, BRSR mandates it for the top
1,000 National Stock Exchange of India–listed companies, which will include many
small to medium-sized firms as well. This has made India one of the few countries
with an explicit taxonomy and mandated disclosures.
• Closer to the global standards: While BRR India’s existing reporting standards cover
a good part of the Global Reporting Inititive standards, BRSR brings India’s sustain-
ability reporting closer to Global Reporting Inititive’s global reporting standards and
shows a meaningful improvement.
• Wider coverage: Multiple new areas have been integrated into the framework,
including board diversity, ESG reporting, board structuring, and functioning, among
others.
• Deeper coverage: BRSR covers more data points than BRR, especially in the gover-
nance category. It covers 2 percent more in the environment, 6 percent more in the
social, and 2 percent more in the governance categories, as well as 88 percent
data points.

but also highlight areas for improvement. For instance, mandatory disclo-
sures on both targets as well as the performance against these targets will be
especially helpful for industries with high emissions and water consumption/
pollution. Data from ESG Risk AI show that industries that are water and
carbon intensive have an average overall transparency of 56 percent. In con-
trast, transparency in nonintensive sectors like the financial industry (not
water or energy intensive) is considerably better at 77 percent.
• RBI 2019 also notes that higher financing costs for green bond issuers is a
significant impediment to market development, and information asymme-
try is a key reason behind that. In line with other major economies (Shen
and others 2020), India could develop a better information management
system that may help reduce maturity mismatches and borrowing costs and
lead to a more efficient resource allocation in this segment.
• Company disclosures will also expand policy and research analysis. As
Schmittmann and Han Teng (2021) noted, most research and analysis so far
are focused on green bond markets. Data constraints prevent analysis of
bank-based green products and issuer-based instruments.
• A formal green finance definition could also mitigate the risks of
“greenwashing” and bring better reporting and disclosure to investors and
financiers (European Commission 2017). NGFS 2019 also notes that a
definition would also improve the financial sector’s ability, in general, to

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 123

Figure 6.8. Extension of the Current Disclosure Guidelines by SEBI:

Difference between Old (BSR) and New (BRSR) Guidelines
BSR covers additional data points…

Extended producer responsibility, waste

Circular economy concepts
collection plan, social and environment
(Resource efficiency, waste, etc.)
risks, and ways to mitigate those

Community support and

Socially responsible investing performance
development

Responsible project
Revenue from Labeled Healthy and Nutrition
management

Retirement benefits and workforce

Employment quality
compensation

Fines paid in a fiscal year arising from

Business ethics
business malpractices

Functioning of the remuneration committee

Committee functioning
controversies

Shareholder rights Shareholder rights controversies

BSR covers additional areas…

Corporate governance Environmental

Board Board structure Management Management ESG reporting

diversity and functioning compensation structure transparency
• Board • Board size • Total • Total number • ESG report
gender strategy workforce of females • ESG report
diversity • Board salary forming part scope
compliance experience • Average of the key • ESG report
• Total female strategy workforce management scope
Board • Board size salary personnel percentage
members compliance • Key • Percentage • ESG report
• Percentage • Independent management of females assurance
of female directors personnel forming part
Board meeting compensation of the key
members compliance controversial management
• Board • Meetings of news personnel
gender Board
diversity compliance
controversy • Board
structure
controversy

Source: ESG Risk AI.

Note: BRR = Business Responsibility Reporting; BRSR = Business Responsibility and Sustainability
Report; ESG = environmental, social, and governance; SEBI = Securities and Exchange Board of India.

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124 India’s Financial System: Building the Foundation for Strong and Sustainable Growth

identify, assess, and control financial risks emanating from climate change.
Adherence to the International Capital Markets Association’s green bond
principles can also help strengthen investor confidence in these products
and establish a local market. SEBI’s recent consultation paper (SEBI 2022)
for ESG rating providers and the directives for issuance of green debt secu-
rities (SEBI 2017) are very helpful in this context.
• ESG issues can have a material impact on corporate risk profile and the
system’s financial stability (October 2019, October 2020, and October
2021 Global Financial Stability Report). The integration of ESG factors into
firms’ business models—prompted either by regulators or by investors—
may help mitigate some of these risks.
• There is a strong need to sensitize India’s financial sector about the impor-
tance of green finance and the need for accelerating capital. Only a handful
of institutions are participating in the sustainable finance market and are
signatories of the Principles for Responsible Investment, for instance.
• Incentivizing green projects can also help develop the market and the aware-
ness in the market. This can be achieved through subsidies or sanctions for
firms not aligned with the Paris Accords.

CONCLUSION
The Indian sustainable finance market is growing in size (for both equities and
fixed income) but remains smaller compared to other emerging markets (both in
absolute issuance and in the number of issuers). At the same time, the market is
expanding across multiple dimensions, indicating rising awareness and interest
among corporates and investors, in particular:
• In addition to green bond market, the issuance of social and sustainability
bonds is increasing.
• While primarily quasi-sovereigns dominated the market in the past, increas-
ingly private sector corporates issue green bonds.
• Lower and nonrated issuers are increasingly coming to the market.
A comparison with other emerging markets highlights some unique features of
the Indian green bond market (Figure 6.9). For example, Indian green bonds are
shorter in maturity and pay higher coupon rates, issuance is predominantly in US
dollars and its share significantly higher than in other emerging markets, and the
market is a lot more diversified. This is particularly notable, because the majority
of overall corporate issuance in India is in local currency (for more details, refer
Chapter 5 on India’s corporate bond market). The greater use of USD green
bonds is probably due to the larger offshore green bond market.
The chapter also notes a few development areas that can help further expand
the sustainable finance market in India, including promotion of green bond prin-
ciples, improvement of data disclosure requirements, and achievement of higher
ESG scores. SEBI’s new data disclosure framework (BRSR) (Figure 6.8) is a step

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 Chapter 6 Development of Environmental, Social, and Governance Financial Markets 125

Figure 6.9. Comparison between Indian ESG and Non-ESG Corporate Bond
Market: Proportion of Issuance in Different Currencies
(Percent of total issuance)
100
Dollars
Indian rupees
80 Other

60

40

20

0
ESG issuance Overall corporate issuance
Sources: Bloomberg L.P.; and authors’ calculations.
Note: ESG = environmental, social, and governance.

in the right direction that helps significantly improve the data disclosure require-
ments and granularity across a large number of corporates. More concrete
improvements, including creating an information management system, a more
concrete definition of “green” bonds to prevent green washing, and incentivizing
green projects, might help further the interest in and scope of these activities.

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