India is considered to be one of the most vulnerable countries to climate change, and is facing impacts on the environment and its people from projects across sectors. This article addresses the role of the country’s financial sector in mitigating these impacts through environmental and social risk management practices in project financing.

India’s accomplishments in recent years have been meteoric. Not only is India a leader among the BRICS nations, it is also projected to be the “fastest-growing large economy” in the world (with some projecting it to be the 5th largest economy in coming years). India has also been designated the number one destination for greenfield foreign investments two years in a row.

Amongst all these achievements, however, the country, particularly its capital, continues to be challenged by the harmful environmental impacts of pollution from industrial and automobile emissions and unsustainable agrarian practices. This pollution, in turn, has contributed  to poor quality of life, environmental degradation, and unprecedented levels of premature deaths per annum.

As India faces the challenge of being the country most vulnerable to climate change, Prime Minister Narenda Modi has publicly deemed climate change “the greatest threat to survival and human civilization,” urging the international community to further global efforts to reduce emissions and move towards green energy.  

The Government of India is developing measures and policies to mitigate climate challenges, but has not yet been able to affectively address the problem. Given the severity of this crisis, one key stakeholder that can assume a leadership position and adopt sustainable industrial practices is the private sector.

Some members of India’s private sector have already committed themselves to cutting emissions and shifting to renewable energy sources. However, the financial sector has a unique role to play in protecting the environment and the people of India as the provider of loans for projects across sectors, particularly since such projects are currently failing to mitigate harmful impacts.

Leading financial institutions around the globe have started adopting the industry-wide private and voluntary framework, the Equator Principles (EPs), which provides the environmental and social risk management (ESRM) standards for projects funded by Equator Principle banks (EPFIs) worldwide. However, of the 97 EPFIs, only one is Indian. Each of the other BRICS nations, except Russia, have more than one EPFI.

The Development of ESRM Frameworks in the Global Financial Sector

With the advent of the UN’s millennium development goals and the subsequent sustainable development goals, the international community at large has demonstrated that sustainable development is a legitimate objective of international law, norms, and standards. In addition, by ratifying treaties that uphold development agenda principles, whether it be conserving biodiversity, combatting climate change, promoting gender equality, implementing high labor standards, or protecting human rights, states are obligated to uphold and enact laws that help them comply with the principles and obligations under such treaties.

While governments enact, implement, and enforce regulations to bring individuals and businesses into compliance with the principles and obligations that states have committed to under these treaties, the private sector, too, is recognizing its role in advancing the development agenda.

A combination of responsible leadership within the private sector and increasing calls for accountability by stakeholders, including civil society and academia, has pushed industries to participate in voluntary codes, principles, or procedures like the Kimberley Principles, the Forestry Stewardship Council, the Voluntary Principles on Security and Human Rights, and the Roundtable on Sustainable Palm Oil.

In terms of ESRM, the International Finance Corporation, the project financing arm of the World Bank, adopted the IFC Performance Standards (IFC PS), to embed sustainable development in its financing of projects across sectors globally, requiring IFC clients to comply with ESRM standards of the IFC PS, with the consequence that non-compliance may result in the IFC divesting or imposing some economic consequence (though not prior to negotiating a resolution).

Increasing pressure from NGOs and advocacy campaigns similarly placed financial institutions in a place of both internal introspection and reputational risk assessment, leading to the 2003 launch of the EPs, using the IFC PS as a benchmark for ESRM in providing project financing or corporate loans in countries where laws are inadequate.

While the EPs and IFC PS in unto themselves are not legally binding, the underlying procedural and substantive principles, provide the standards for EPFIs to conduct due diligence and prepare ESRM safeguard requirements for certain projects and transactions, as part of conditions for project financing.

ESRM in the Indian Financial Sector

Only one Indian bank, IDFC First Bank is currently an EPFI, irrespective of the market projections for project financing needs in India. In the first quarter of 2019, India received $5,265.4 million in project finance, most of which went into the HPCL Rajasthan Refinery. This transaction pushed India’s largest bank, the State Bank of India (SBI), to the number one spot amongst project finance loans mandated arrangers and bookrunners for the quarter, and the bank is now placed fourth as per the mid-year review.

Further, given that India claimed the top destination globally for greenfield foreign direct investments in 2015 and 2016 and the number two spot in 2017, the country has seen its fair share of project financing.  Indian banks, such as Axis and Yes Bank, IDFC and ICICI are also active as bookrunners in India. Nonetheless, Indian banks have not joined industry recognized ESRM frameworks such as the EP.

The Government of India has tried to promote corporate social responsibility. Indian companies above a certain size, are required to spend at least 2% of their average net profits over the preceding three years, on activities that provide social benefits. The top 500 Bombay Stock Exchange listed companies are required to report their ESG initiatives. Neither of these measures address the unique ESRM role of banks in project financing, and the ESG reporting requirement does not refer to the IFC PS or the EPs.  

On the other hand, the Reserve Bank of India has recognized the need for “sustainable developmental efforts” in one of its notifications and the Indian Bank Association provides voluntary guidelines for responsible financing. Both documents cite the IFC PS and EPs as sources for guidance, though not explicitly advising banks to join the EPs.

Investment in renewable energy and sustainable businesses is essential and crucial. India aims to have 40% of its energy needs met through renewable energy sources by 2030. It is also essential that India address the E&S impacts of its major infrastructure, agricultural, energy and extractives, textiles and apparels, ICT and service sector projects.

The EPs do not include India in its list of designated countries with robust ESRM regulations, which suggests that domestic regulation of non-designated countries are not considered to be ESRM-adequate. Such countries would thus benefit from greater responsible financing leadership. The ESRM measures guided by the comprehensive integration of the IFC PS and their guidance notes could help achieve the country’s development goals.

With growing awareness of industrial and corporate activities’ adverse E&S impacts, Indian financial institutions are beginning to assume a leadership role by strengthening their ESRM practices. In fact, some Indian banks active in project financing, such as Axis and Yes Bank, cite the UN Guiding Principles, EPs and IFC PS guiding their ESRM policy. Axis even provides case studies on how these policies have guided its ESRM.

However, mandated arrangers in India still need to develop their ESRM and improve reporting practices. For instance, SBI’s annual report focuses more on its corporate responsibility initiatives than its ESRM. Furthermore, its sustainability report does not articulate a clear ESRM policy or due diligence process. It remains unclear whether the bank has been guided by the IFC PS, EPs, or international human rights standards and norms, besides the UN sustainable development goals, GRI and Indian voluntary ESG reporting guidelines or domestic regulations.

Going forward, financial institutions in India would benefit from fully integrating each of the seven IFC PS and the UN Guiding Principles into their ESRM for project financing, including reporting on how the full range implementation of IFC PS, their guidance notes, the UN Guiding Principles and monitoring of ESRM measures through the project life cycle, are managing E&S impacts.

Joining the EPs can help Indian banks demonstrate commitment to responsible financing and to craft implementable ESRM policies. Indian banks can both lead and benefit from EPs knowledge transfer and working groups. Additionally, the EPs community of practice on “broader policy application, interpretation and methodologies,” can help banks with innovative and actionable ESRM or remedial measures, the complex integration of IFC PS and their guidance notes, or understanding specific thematic issues. The EPs also provide a minimal level of transparency through reporting requirements on ESRM aspects of project financing, though not as robust as identified by stakeholders.

It is recognized that the EPs need to evolve and develop themselves to incorporate more human rights related due diligence and reporting frameworks. Increased membership from India, can help the EPs benefit from greater South Asian representation, contribution and leadership. With India’s growing appetite for projects based on market projections, it is imperative that Indian banks take on a leadership position not only nationally, but amongst their global financial industry peers as well to help create and set the ESRM goals, standards, and practices for project financing in India.    


Mahima Achuthan advises capstone workshops at Columbia University’s School of International and Public Affairs. She is also an oil, gas and mining transactional, regulatory, and policy advisory professional, working on international energy projects.