1. Introduction

Green finance refers to the mobilisation and allocation of financial resources toward activities that produce environmental or climate-related benefits, such as renewable energy, energy efficiency, clean transportation, sustainable agriculture, green buildings, pollution control and climate adaptation. Sustainable investment is broader: it incorporates environmental, social and governance (ESG) considerations into investment decisions alongside conventional financial considerations.

The regulation of green finance has become necessary because investors increasingly rely on environmental claims when purchasing bonds, investment funds and other financial products. Without regulatory standards, issuers and fund managers may describe products as “green” or “sustainable” without sufficiently demonstrating what the money actually finances. This creates risks of greenwashing, misleading disclosure, misallocation of capital and investor protection failures.

Modern sustainable-finance regulation therefore attempts to establish:

definitions of environmentally sustainable economic activities;

disclosure requirements;

green-bond standards;

ESG-related investment-product rules;

verification and reporting mechanisms;

climate-risk disclosures;

fiduciary and governance responsibilities; and

enforcement against misleading sustainability claims.

The EU Taxonomy Regulation, for example, establishes a classification system for determining when an economic activity can qualify as environmentally sustainable and contains six environmental objectives. (Finance)

2. Meaning and Scope of Green Finance

Green finance encompasses several financial instruments and activities:

A. Green bonds

Green bonds are debt instruments whose proceeds are dedicated to eligible environmental projects. Examples include:

solar and wind projects;

electricity-grid modernisation;

energy-efficient buildings;

clean transportation;

waste-management infrastructure;

water conservation;

climate-adaptation projects.

The central regulatory problem is ensuring that proceeds are actually used for the environmental purposes represented to investors.

B. Green loans

Green loans are loans where the proceeds are used for qualifying environmental activities. Loan documentation normally specifies eligible projects, reporting requirements and sometimes performance indicators.

C. Sustainable and ESG investment funds

Investment funds may incorporate environmental or social criteria into portfolio selection. Regulation seeks to prevent sustainability characteristics from being presented more strongly than the underlying investment strategy justifies.

D. Sustainability-linked finance

Unlike a conventional green bond, a sustainability-linked instrument may allow proceeds to be used more generally while linking financial terms to predetermined sustainability-performance targets.

E. Climate-risk finance

Financial regulation increasingly addresses physical and transition risks arising from climate change. These risks can affect asset values, corporate revenues, insurance costs, creditworthiness and investment portfolios.

3. Objectives of Sustainable Investment Regulation

The major objectives are:

3.1 Investor protection

Investors need reliable information about whether a financial product actually possesses the environmental characteristics advertised.

3.2 Prevention of greenwashing

Greenwashing occurs when environmental characteristics are exaggerated, inadequately substantiated or presented in a misleading manner.

3.3 Capital allocation

Regulation can provide a common language through which investors identify activities that contribute to environmental objectives.

3.4 Transparency

Issuers and financial institutions may have to disclose:

use of proceeds;

sustainability objectives;

methodologies;

environmental performance;

ESG risks;

portfolio composition;

impact indicators.

3.5 Financial stability

Climate change can generate material financial risks. Disclosure and risk-management rules therefore seek to integrate climate-related information into financial decision-making.

4. The EU Sustainable Finance Regulatory Framework

The European Union has developed one of the most extensive sustainable-finance regulatory frameworks.

Its principal components include:

EU Taxonomy Regulation 2020/852;

Sustainable Finance Disclosure Regulation (SFDR) 2019/2088;

European Green Bond Standard Regulation 2023/2631;

ESG Ratings Regulation;

climate-transition benchmarks;

corporate sustainability reporting rules.

The European Commission identifies the Taxonomy, SFDR, European Green Bond Standard and ESG Ratings Regulation as key components of its sustainable-finance framework. (Finance)

5. EU Taxonomy Regulation

The EU Taxonomy Regulation, Regulation (EU) 2020/852, creates a classification system for environmentally sustainable economic activities.

An economic activity generally has to satisfy four principal requirements under Article 3:

substantially contribute to one or more environmental objectives;

do no significant harm to the other environmental objectives;

satisfy minimum safeguards; and

comply with technical screening criteria.

The six environmental objectives are:

climate-change mitigation;

climate-change adaptation;

sustainable use and protection of water and marine resources;

transition to a circular economy;

pollution prevention and control; and

protection and restoration of biodiversity and ecosystems. (Finance)

This approach is important because the regulation moves beyond voluntary descriptions of “green” activities toward legally defined sustainability criteria.

Do-No-Significant-Harm principle

A project should not obtain sustainability recognition merely because it benefits one environmental objective while causing substantial damage to another.

For example, a renewable-energy project could contribute to climate mitigation but still require examination of biodiversity, water use or pollution impacts.

6. Sustainable Finance Disclosure Regulation

The SFDR focuses primarily on sustainability-related disclosures by financial-market participants and financial advisers.

It seeks to make information available concerning:

sustainability risks;

adverse sustainability impacts;

investment strategies;

environmental or social characteristics;

sustainable-investment objectives.

The broader regulatory objective is to enable investors to understand what sustainability characteristics a financial product actually incorporates.

This complements the Taxonomy Regulation: the Taxonomy helps define environmentally sustainable economic activities, while disclosure rules concern how financial-market participants communicate sustainability information.

7. Green Bonds and Sustainable Investment

Green bonds are particularly significant for energy-law financing because renewable-energy and electricity infrastructure often require substantial upfront capital.

A credible green-bond framework generally requires:

7.1 Use-of-proceeds requirements

The issuer should identify the projects for which proceeds will be used.

7.2 Project-selection criteria

The issuer should explain why the selected projects qualify as green.

7.3 Management of proceeds

Systems should exist to track the proceeds and prevent their diversion to unrelated activities.

7.4 Reporting

Investors should receive information regarding allocation and, where applicable, environmental impact.

7.5 External review

Independent verification or review can provide additional assurance concerning the issuer's green claims.

8. Indian Regulatory Framework

India has developed a substantial sustainable-finance framework through the securities regulator and other financial institutions.

The Securities and Exchange Board of India (SEBI) has regulated green debt securities through its securities framework.

SEBI's framework requires issuers of green debt securities to make additional disclosures concerning, among other matters:

environmental sustainability objectives;

the process for determining project eligibility;

applicable green taxonomies, standards or certifications;

tracking of proceeds;

projects or assets toward which proceeds will be deployed. (Securities and Exchange Board of India)

SEBI has subsequently considered expanding the sustainable-finance framework to include social bonds, sustainability bonds and sustainability-linked bonds, in addition to green debt securities. (Securities and Exchange Board of India)

This represents a transition from a relatively narrow green-bond framework toward a broader ESG-finance architecture.

9. Role of Disclosure in Green Finance

Disclosure is the foundation of sustainable investment regulation.

Traditional securities law is primarily concerned with financially material information. Sustainable-finance regulation increasingly addresses information concerning environmental performance and climate risks where such information is relevant to investors or required by the applicable regulatory regime.

Important disclosure categories include:

10. Climate-Related Financial Disclosure

Climate change can affect corporations through:

physical risks;

regulatory changes;

carbon pricing;

technological transition;

changing consumer demand;

stranded assets;

supply-chain disruption.

Consequently, securities regulators increasingly require companies to disclose material climate-related information.

For example, the U.S. Securities and Exchange Commission adopted climate-related disclosure rules in 2024 requiring certain climate-related information in registration statements and annual reports, including information concerning material climate-related risks and certain financial-statement effects. (SEC)

This illustrates an important legal development: climate information is increasingly treated as a financial-market transparency issue rather than merely an environmental-policy issue.

11. Greenwashing as a Regulatory Problem

Greenwashing is one of the central problems of sustainable-investment regulation.

It may occur where:

a fund is marketed as sustainable but holds substantial investments inconsistent with its stated strategy;

a green bond finances projects with weak environmental credentials;

a company makes unsupported carbon-neutrality claims;

environmental performance indicators are selectively disclosed;

sustainability terminology is used without objective criteria.

Regulation therefore attempts to connect marketing claims with verifiable evidence.

A useful legal principle is:

The stronger the environmental claim, the stronger the justification and disclosure necessary to substantiate it.

12. Case Law

Case 1: ClientEarth v European Commission, Case T-579/22 (2025)

This is particularly important because it directly concerns the EU Taxonomy Regulation.

ClientEarth challenged aspects of the European Commission's Taxonomy Delegated Regulation concerning activities including certain bioenergy activities, manufacture of organic base chemicals and plastics.

The General Court examined issues including:

technical screening criteria;

scientific evidence;

precautionary principle;

life-cycle assessment;

the “do no significant harm” principle;

balancing the various requirements under the Taxonomy Regulation. (curia)

The General Court dismissed the action on 10 September 2025. The case is now subject to an appeal before the Court of Justice in Case C-746/25 P. (curia)

Legal significance

The case demonstrates that sustainable-finance regulation is not simply about financial disclosure. Courts can scrutinise the scientific and regulatory foundations used to determine whether an economic activity qualifies as sustainable.

It also shows the difficulty of constructing taxonomy criteria where environmental, scientific, economic and financial considerations overlap.

Case 2: Hanuman Laxman Aroskar v Union of India, (2019) 15 SCC 401

This Indian Supreme Court case concerned environmental decision-making and the environmental clearance process for the Mopa airport project in Goa.

The Court connected environmental decision-making with the rule of law and sustainable development. It emphasised principles including:

accountability of decision-makers;

access to information;

public participation;

institutional integrity;

coordinated institutional responsibilities;

access to justice.

The Supreme Court has subsequently described Hanuman Laxman Aroskar as an important application of environmental rule-of-law principles in India. (Sci API)

Relevance to green finance

Although it was not a green-finance case, its principles have relevance for sustainable investment because investors financing environmentally sensitive infrastructure depend upon:

lawful environmental approvals;

credible environmental assessments;

transparent governmental decision-making;

institutional accountability.

A sustainable-investment framework cannot function effectively if the underlying environmental governance system lacks transparency and accountability.

Case 3: Lafarge Umiam Mining Pvt. Ltd. v Union of India

The Indian Supreme Court's environmental jurisprudence surrounding large infrastructure and natural-resource projects illustrates the relationship between economic development and environmental protection.

The legal significance for sustainable investment is that environmental considerations cannot necessarily be treated as an external issue after capital has been committed. Environmental legality and sustainable development can affect the viability, approval and long-term risk profile of infrastructure investments.

Thus, environmental due diligence becomes an important component of responsible investment.

13. Relationship Between Environmental Law and Investment Law

Green-finance regulation creates an important bridge between two historically separate fields:

Environmental law

→ environmental standards
→ pollution controls
→ climate objectives
→ environmental impact assessment
→ biodiversity protection

Financial law

→ securities regulation
→ investor protection
→ disclosure
→ fiduciary responsibilities
→ financial risk management

Green finance connects these two systems.

For example, a renewable-energy company may comply with securities disclosure requirements while simultaneously being subject to environmental approvals. Investors therefore need information from both legal domains.

14. Sustainable Investment and Fiduciary Duties

One difficult question is whether institutional investors are legally required to consider ESG factors.

The answer varies by jurisdiction and depends upon:

applicable fiduciary-duty rules;

investment mandates;

materiality;

pension legislation;

securities regulation;

contractual obligations.

ESG factors may be financially relevant because environmental risks can influence:

asset valuations;

operating costs;

insurance;

financing costs;

regulatory compliance;

market access.

However, ESG regulation does not necessarily mean that every investment decision must maximise an environmental objective. The legal requirement depends on the particular regulatory framework and investment mandate.

15. Sustainable Finance and Energy Law

Green finance has particular significance in energy law.

Energy-transition projects require enormous amounts of capital for:

solar generation;

wind generation;

battery storage;

transmission networks;

smart grids;

green hydrogen;

electric mobility;

energy efficiency;

carbon-reduction technologies.

Financial regulation can therefore become an indirect instrument of energy policy.

For example:

Taxonomy rules

→ identify sustainable energy activities

Green bonds

→ provide project finance

Disclosure rules

→ provide investor information

Climate-risk regulation

→ identify financial risks associated with high-carbon assets

Sustainability-linked finance

→ connect financing conditions with performance targets

This creates a legal-financial infrastructure for the energy transition.

16. Problems and Challenges

16.1 Lack of uniform global definitions

Different jurisdictions may classify the same economic activity differently.

16.2 Greenwashing

Weak verification can undermine investor confidence.

16.3 Data quality

Many companies lack reliable historical environmental data.

16.4 Cost of compliance

Small and medium-sized enterprises may face disproportionate reporting costs.

16.5 Taxonomy complexity

Highly technical sustainability criteria can be difficult for investors and companies to apply.

16.6 Transition finance

An important question is whether financing should support only activities that are already green or also activities that are credibly transitioning toward lower emissions.

16.7 Scientific uncertainty

Environmental classification sometimes requires regulators to make decisions using evolving scientific evidence. The ClientEarth litigation illustrates how such scientific and legal questions can reach courts. (curia)

17. Future Development

The future of green-finance regulation is likely to focus increasingly on:

transition finance;

mandatory sustainability disclosures;

taxonomy interoperability;

ESG-rating regulation;

greenwashing enforcement;

climate-risk stress testing;

biodiversity-related financial risks;

sustainable infrastructure finance;

digital verification of green assets;

international harmonisation of sustainability standards.

The EU framework itself continues to evolve, with amendments and technical criteria being developed and revised. (Finance)

18. Conclusion

Green finance and sustainable investment regulation represent the convergence of environmental law, securities regulation, corporate governance and financial-market supervision.

The principal legal challenge is not simply encouraging investors to invest in environmentally beneficial projects. It is creating a system in which sustainability claims are defined, measurable, disclosed, verifiable and legally accountable.

The EU Taxonomy provides an important example by establishing legally defined criteria for environmentally sustainable activities. India's SEBI framework demonstrates how green-debt regulation can require disclosure concerning environmental objectives, project eligibility and tracking of proceeds. (Finance)

The developing case law is equally significant. ClientEarth v Commission demonstrates judicial scrutiny of the scientific and legal foundations of sustainable-finance classifications, while Hanuman Laxman Aroskar demonstrates the Indian Supreme Court's emphasis on environmental rule of law, transparency and institutional accountability.

Ultimately, effective sustainable-investment regulation depends upon three connected principles:

credible standards + transparent disclosure + enforceable accountability.

Without these three elements, green finance risks becoming primarily a marketing category rather than a reliable mechanism for directing capital toward sustainable economic development.