Author: Apeksha Saraf and LLB Hons, University of Leeds; Incoming LLM, University of Law
To the Point
As environmental, social, and governance (ESG) factors become increasingly important in financial decision-making and regulatory supervision, the global banking industry is going through a profound transition. More than merely a trend, this development is a paradigm shift in the way financial institutions evaluate risk, distribute capital, and track success. In creating extensive ESG frameworks for their banking industries, India and the UK have both become important countries, but with distinct strategies that take into account their distinct regulatory systems and economic environments.
In both jurisdictions, regulators have been forced to impose transparency rules and create sustainable finance principles due to the severity of climate change and the growing social conscience of investors. In the UK, the Financial Conduct Authority’s (FCA) regulatory framework and the Reserve Bank of India’s (RBI) approach differ significantly in terms of implementation tactics, enforcement mechanisms, and broadness of applicability. While examining these distinctions, the article also emphasises the difficulties that both regimes have in striking a balance between environmental sustainability and financial stability.
Abstract
A thorough comparison of ESG compliance regimes in the banking industries of India and the UK is given in this article. Despite the fact that both governments have created complex legal frameworks for sustainable finance, their approaches differ in terms of goal and execution. The UK’s system is centred on thorough market regulation with stringent anti-greenwashing measures, whereas India’s emphasises proportionate application and climate risk disclosure. According to the findings, both jurisdictions struggle to strike a balance between environmental preservation and financial innovation, despite their differing strategies. As global standards develop, the research states, convergence across various frameworks might occur, leading to more standardised worldwide approaches to sustainable banking regulation.
Use of Legal Jargon
The regulatory environment around ESG compliance in banking is complicated and includes both new sustainability standards and existing banking regulations. The Banking Regulation Act, 1949, serves as the foundation for the RBI’s Disclosure Framework on Climate-related Financial Risks, 2024, which establishes a sui generis regulatory framework requiring climate-related disclosures from all-India financial institutions, scheduled commercial banks, and non-banking financial companies (NBFCs).
The four thematic pillars of governance, strategy, risk management, and metrics/targets are established by the framework, which follows the methodology of the Task Force on Climate-related Financial Disclosures (TCFD). This strategy preserves regulatory control over domestic financial firms while adhering to international standards. The implementation of these regulations is governed by the proportionality theory, which imposes varying disclosure requirements on companies according to their size and overall significance.
With effect from July 2024, the FCA’s Sustainability Disclosure Requirements (SDR) and Investment Labels Regime in the UK functions under the Financial Services and Markets Act 2000. With different disclosure requirements for each of the three labels: Sustainability Focus, Sustainability Improvers, and Sustainability Impact, the regime establishes a three-part classification system. The anti-greenwashing rule, which is a fundamental component of the UK’s strategy, establishes a higher level of care than conventional misrepresentation theories by imposing severe liability for deceptive sustainability claims.
The Proof
Indian Regulatory Framework
An important shift from the RBI’s historically conservative regulatory position could be seen in its approach to ESG regulation. The RBI released draft guidelines creating a thorough disclosure framework for financial risks associated with climate change on February 28, 2024. Climate risk management governance structures, strategic approaches to climate-related opportunities and dangers, risk management procedures, and quantitative measurements and targets are the four main areas in which this framework requires regulated firms to provide information.
The institutional identification of climate hazards as serious challenges to financial stability is evident in the RBI’s framework. More than 70% of banks surveyed by the central bank acknowledged the possible influence of environmental conditions on their loan portfolios, indicating a growing understanding of climate-related risks among financial institutions. The regulatory approach has been influenced by this empirical data, resulting in mandatory disclosure obligations as opposed to voluntary guidance.
Additionally, banks are required to reveal the ways in which funds obtained through green deposit schemes are used, as per the RBI’s special regulations for green deposits. By preventing greenwashing, this transparency system makes sure that sustainable financing products fulfil their stated environmental goals. By requiring yearly reports on the distribution and effects of green deposits, the rule establishes accountability frameworks for banks that provide these kinds of deposits.
UK Regulatory Framework
The FCA is leading the UK’s strategy, which places a strong emphasis on market-driven solutions backed by stringent transparency laws. Asset managers and investment businesses are required to make comprehensive disclosures regarding their sustainability policies and the environmental consequences of the investments they make under the FCA’s SDR framework, which went into effect in 2024.
The regime’s extensive reach and thorough implementation guidelines are its main advantages. The UK system combines requirements for disclosure with strict labelling regulations and anti-greenwashing legislation, in contrast to India’s purely disclosure-focused approach. By establishing precise standards for sustainability labelling, the FCA has stopped the improper use of terminology like “sustainable,” “ESG,” or “green” in the promotion of financial products.
With large UK banks investing massive amounts of money on ESG reporting infrastructure, recent data shows high compliance costs. But as evidence of the usefulness of thorough ESG frameworks, these investments have produced noticeable gains in stakeholder confidence and risk management.
Case Laws
Milieudefensie et al. v. Royal Dutch Shell plc (2021) – Netherlands
This historic decision has important ramifications for banking ESG compliance in both India and the UK, despite being determined in the Netherlands. The notion that businesses have special responsibility regarding climate change mitigation is established by the Hague District Court’s finding that Shell must decrease its carbon emissions by 45% by 2030. The way banks in both jurisdictions evaluate the climate risks connected to their loan portfolios, especially in carbon-intensive industries, has been impacted by this ruling.
The case shows that judges are ready to place particular environmental requirements on big businesses, suggesting that banks that do not sufficiently evaluate and control climate risks in their lending choices may be held liable. When creating their methods for assessing climate risk, banks in the UK and India have both cited this instance.
ClientEarth v. European Investment Bank (2019) – European Court of Justice
This caselaw set significant precedents for sustainable finance transparency. According to the ECJ, the European Investment Bank is required to provide its lending practices and evaluation standards pertaining to climate change. Although this ruling is not legally binding in India or the UK, it has impacted regulatory strategies in both countries, especially with relation to disclosure standards for sustainable financial products.
The RBI’s disclosure framework and the FCA’s SDR regime both reflect the case’s reaffirmation of the fundamental requirement that financial firms make meaningful disclosures regarding their sustainability and environmental effect.
R (on the application of People & Planet) v. HM Treasury (2009) – UK High Court
The UK Treasury’s approach to climate change issues in financial regulation was the subject of an early case that established the obligation of public authorities to take environmental factors into account when formulating policies. Although the case predates current ESG requirements, it established the legal requirement that financial regulators take climate risks into account when performing their supervision duties.
The FCA’s approach to sustainable finance regulation, especially in creating the anti-greenwashing rule and disclosure requirements, has been impacted by the ruling’s emphasis on the precautionary principle in environmental protection.
Greenpeace India v. Ministry of Environment and Forests (2012) – Supreme Court of India
Important guidelines for corporate responsibility and environmental disclosure were established in India as a result of this case. Environmental impact evaluations must fully disclose potential dangers and mitigation strategies, according to the Supreme Court ruling. The RBI has integrated these principles into its framework for disclosing climate risk, specifically with relation to banks’ responsibilities to evaluate and report on the environmental effect of their loan portfolios.
The case highlights Article 21 of the Indian Constitution’s guarantee of a healthy environment, which establishes the legal basis for mandatory environmental considerations in bank operations.
Conclusion
There are similarities and differences between the regulatory measures taken by the banking industries in India and the UK when comparing their ESG compliance frameworks. Although the systemic significance of incorporating social and environmental factors into financial regulation is acknowledged by both countries, their approaches to implementation differ in terms of institutional contexts and objectives.
The strategy used by India, which is based on the RBI’s disclosure framework, stresses proportionality and gradual adoption, which reflects the need for the developing economy to strike a balance between environmental goals, financial inclusion, and economic progress. The framework’s adherence to international norms while preserving regulatory independence is an example of complex policymaking that takes into account both national and international obligations.
The extensive approach in the UK, which includes transparency, labelling, and anti-greenwashing measures, demonstrates the ability of an established financial sector to handle intricate regulatory requirements. The strategy used by the FCA shows how advanced financial systems may take the lead in setting strict guidelines for sustainable financing while preserving their ability to compete in the market.
This analysis yields a number of recommendations for the future. To guarantee consistent policy execution, both countries should first improve the coordination mechanisms between environmental agencies and financial regulators. Second, improved cross-jurisdictional assessment and risk management would be made possible by the creation of standardised ESG measurements and assessment techniques. Third, in order to guarantee that ESG regulations are implemented inclusively, smaller financial institutions must participate in capacity building programs.
A significant move towards sustainable finance is represented by the development of ESG regulations in the banking industry. Opportunities for regulatory collaboration and knowledge exchange will probably grow as India and the UK keep developing their strategies, which might help create internationally standardised guidelines for sustainable banking.
FAQs
Which ESG banking regulations in the UK and India differ most significantly?
Under the RBI’s 2024 guidelines, India’s framework mainly focusses on financial risk disclosure related to climate change, with a focus on proportionate implementation based on organisation scale and overall significance. Under the FCA’s SDR framework, the UK takes a more thorough approach that includes stringent anti-greenwashing regulations, investment labelling, and disclosure requirements. The UK has set up standards for quick compliance with severe consequences for non-compliance, but India takes a more phased approach to implementation.
What effects do these rules have on foreign banks doing business in both countries?
Both regulatory systems must be followed by international banks, which could be costly and complicated. Nonetheless, banks can take use of a shared reporting infrastructure because many obligations overlap, especially with regard to TCFD-aligned climate disclosures. Navigating the disparate deadlines, declaration formats, and enforcement procedures between the two regions is the main obstacle.
What sanctions exist in these nations for violating ESG regulations?
The Banking Regulation Act, 1949, gives the RBI the authority to enforce fines and operational limitations in India. Significant financial penalties, licence limitations, and criminal punishments for major violations of anti-greenwashing regulations are only a few of the larger enforcement tools available to the UK’s FCA. Because of its better established enforcement system, the UK typically levies harsher financial penalties.
What impact do these rules have on banks that are small and medium-sized?
With less stringent regulations for smaller institutions, both countries have embraced proportionate measures. Although the UK has scaled disclosure requirements, India’s approach gives graded compliance based on the size of assets and overall impact. Smaller banks, however, continue to incur high compliance costs and can need assistance with capacity building and regulatory guidance.
What changes in ESG banking regulations are anticipated in the future?
Beyond environmental issues, both jurisdictions are probably going to broaden their frameworks to incorporate social and governance factors. While the UK is thinking about expanding SDR requirements to other financial sectors, India may impose mandatory green lending targets. Global standards may become more uniform as a result of international cooperation through institutions such as the Bank for International Settlements.
Sources
Reserve Bank of India, “Disclosure Framework on Climate-related Financial Risks, 2024” (Draft Guidelines, February 28, 2024)
Financial Conduct Authority, “Sustainability Disclosure Requirements and Investment Labels Regime” (2024)
Nishith Desai Associates, “India’s New Disclosure Frameworks by RBI and SEBI” (2024)
Bank of England, “Climate-related Financial Disclosure 2024” (July 2024)
Securities and Exchange Board of India, “Business Responsibility and Sustainability Report Guidelines” (2023)
Morgan Lewis, “UK Sustainability Disclosure Requirements and Investment Labels Regime” (March 2024)
Tech Mahindra, “Navigating RBI’s Climate-Related Disclosure Framework” (February 2025)
Chambers and Partners, “Banking & Finance 2024 – India” (2024)
S&R Associates, “Regulatory Initiatives on ESG Disclosure Requirements in India” (May 2025)
FCA Handbook, Environmental, Social and Governance Sourcebook (2024)
