ESG-Linked Fundraising in India: Regulatory Expectations, Investor Demands and Structuring Considerations

Environmental, social, and governance ("ESG") considerations have moved from the margins of the alternative investment landscape to its center. Global institutional investors – pension funds, sovereign wealth funds, endowments, and development finance institutions – are now making ESG alignment a prerequisite for committing capital to new private funds, rather than a secondary consideration. For India-focused fund managers, this shift creates both an opportunity and a compliance challenge: the opportunity to position India's infrastructure and growth story within the global ESG narrative, and the challenge of meeting international ESG reporting standards while operating within a domestic regulatory framework that is still maturing in its ESG architecture.

This article examines the current ESG regulatory framework applicable to AIFs and their portfolio companies in India, the structuring tools available to fund managers seeking to offer ESG-credentialed products, and the international frameworks that sophisticated investors will expect to see reflected in the fund documentation.

The Indian ESG Regulatory Landscape

SEBI's Business Responsibility and Sustainability Reporting Framework

SEBI's Business Responsibility and Sustainability Reporting ("BRSR") framework, introduced in 2021 and made mandatory for the top 1,000 listed companies by market capitalisation from financial year 2022-23, represents the most structurally significant ESG disclosure obligation in the Indian regulatory architecture.¹ The BRSR requires companies to report against the National Guidelines on Responsible Business Conduct, covering nine principles including environmental responsibility, human rights, and stakeholder engagement.

For AIF fund managers, the BRSR framework is directly relevant where the fund holds portfolio companies that are listed or that are subsidiaries of listed entities. More broadly, the framework sets a reporting baseline that sophisticated managers are beginning to apply voluntarily to unlisted portfolio companies, in anticipation of investor expectations and potential future regulatory extension.

SEBI's ESG Rating Framework

SEBI introduced regulations for ESG Rating Providers ("ERPs") – entities providing ESG ratings on securities – through the SEBI (Credit Rating Agencies) (Amendment) Regulations 2023 and associated guidelines.² ERPs are now registered with SEBI and operate within a prescribed framework. This development matters for fund managers who use ESG ratings as part of their investment screening process or who represent to investors that their portfolios are rated against ESG criteria by a recognised provider.

Category I AIFs and Green Infrastructure

Category I AIFs registered as infrastructure funds are particularly well-positioned within India's ESG framework. India's National Infrastructure Pipeline and the National Green Hydrogen Mission – committing USD 2.56 billion to green hydrogen development – sit within a broader government infrastructure push that has been explicitly framed as consistent with India's Nationally Determined Contributions under the Paris Agreement.³ Category I AIFs investing in green infrastructure projects benefit from regulatory treatment that includes concessional pricing on government allocations and an investor base that increasingly equates infrastructure investment with impact credentials.

International ESG Frameworks: What Investors Expect

Fund managers raising capital from international institutional investors in 2026 must be prepared to engage with a range of ESG frameworks that go beyond India's domestic requirements.

The UN Principles for Responsible Investment

Institutional investors who are signatories to the UN Principles for Responsible Investment ("PRI") are required to report annually on their ESG integration practices, including their approach to ESG in manager selection, appointment, and monitoring.⁴ For fund managers, this means that PRI signatory investors will require the fund documentation – the private placement memorandum ("PPM"), the limited partnership agreement or trust deed, and the investment management agreement – to contain express representations about the manager's ESG policy, its approach to ESG integration in investment decisions, and its reporting obligations.

Fund documents drafted without ESG provisions are increasingly being returned by institutional investors with detailed mark-ups requesting the addition of ESG representations, ESG reporting covenants, and – in some cases – ESG-linked carried interest provisions. Fund managers who incorporate these provisions at the outset, rather than negotiating them on a reactive basis, are better positioned to manage fund document negotiation timelines.

The Task Force on Climate-related Financial Disclosures

The Task Force on Climate-related Financial Disclosures ("TCFD") framework – which has now been substantially absorbed into the International Sustainability Standards Board's ("ISSB") IFRS S2 climate disclosure standard – requires entities to disclose their governance, strategy, risk management, and metrics relating to climate-related risks and opportunities.⁵ An increasing number of institutional investors – including the major European public pension funds – now require TCFD-aligned reporting from fund managers as a condition of investment.

For India-focused fund managers, TCFD alignment requires the identification and disclosure of climate-related risks at both the fund and portfolio level. Physical risk (relating to the vulnerability of investee companies' assets to climate events such as flooding, extreme heat, or cyclones) is particularly relevant for India-focused funds given the country's documented exposure to climate-related weather events.

The European Sustainable Finance Disclosure Regulation

The European Union's Sustainable Finance Disclosure Regulation ("SFDR") – Regulation (EU) 2019/2088 – imposes disclosure obligations on financial market participants (including non-EU fund managers marketing to EU investors) regarding the integration of sustainability risks and the adverse sustainability impacts of their investment strategies.⁶ Fund managers marketing an India-focused fund to EU investors must assess whether the fund qualifies as an Article 6 (no sustainability claim), Article 8 (promoting environmental or social characteristics), or Article 9 (sustainable investment objective) product under the SFDR.

The majority of India-focused private equity and infrastructure funds seeking EU institutional capital will need to engage carefully with Article 8 qualification, which requires the fund to promote environmental or social characteristics and to disclose the investment strategy through which those characteristics are achieved. The "do no significant harm" test and the mandatory consideration of principal adverse impacts of investment decisions are key hurdles that fund documents must address expressly.

Structuring ESG-Linked Products

ESG-Linked Carried Interest

A small but growing number of private fund managers globally have introduced carried interest structures that are linked, in part, to the fund's ESG performance. The mechanism typically operates by conditioning a portion of the carry (commonly referred to as the "ESG carry") on the fund achieving predefined ESG key performance indicators ("ESG KPIs") at the portfolio level – such as a specified reduction in portfolio-weighted carbon intensity, achievement of gender diversity targets at the portfolio company board level, or maintenance of an above-threshold ESG rating by an external provider.

For India-focused AIFs, ESG-linked carry structures are structurally permissible under the AIF Regulations, which do not prescribe the form of manager economics beyond requiring that they be disclosed in the PPM. The commercial challenge is the agreement of measurable, verifiable, and attributable ESG KPIs with a diverse investor base – particularly where investors have differing priorities across the E, S, and G dimensions.

Green Bonds and Sustainable Infrastructure Debt Funds

Category II AIFs structured as debt funds may participate in India's growing green bond market. SEBI's Green Debt Securities framework (introduced by amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations 2021) permits the issuance of green bonds – debt instruments whose proceeds are applied exclusively to eligible green projects – through a defined disclosure and certification process.⁷ Debt AIFs that originate or acquire green bonds can position their products as sustainable fixed-income vehicles, providing institutional investors with a measurable deployment of capital into green-categorised assets.

Impact Measurement and the IFC Operating Principles for Impact Management

For fund managers positioning their India-focused AIF as an impact fund – a product whose investment thesis is explicitly organised around generating measurable social or environmental outcomes alongside financial returns – the International Finance Corporation's Operating Principles for Impact Management provide a recognised framework for structuring the impact measurement and management ("IMM") system.⁸ These principles require signatories to: define strategic intent to contribute to measurable social or environmental benefits; originate deals in alignment with the investment strategy; manage ESG and impact risks of investees; promote gross positive impact and avoid harm; monitor the progress of each investee; and exit in a way that considers the effect on the sustainability of the investment.

Fund managers adopting the IFC Principles and publicly disclosing their alignment signal to institutional investors that their impact claims can be independently verified, a credential that has become increasingly important as regulatory scrutiny of "impact washing" has intensified in the EU and UK.

Practical Recommendations for Fund Managers

Fund managers preparing an India-focused ESG-credentialed fund raise in 2026 should address the following at the fund design stage:

1. Policy documentation: Prepare a standalone ESG policy document that governs the investment process from screening through to exit. This should be referenced in the PPM and made available to investors as a disclosure document.
2. Data infrastructure: ESG reporting cannot be delivered without portfolio-level data collection. Managers should build ESG data collection requirements into the investment monitoring framework from the point of initial investment, including through the negotiation of ESG-specific information rights in the shareholders' agreement with each investee company.
3. Third-party verification: Institutional investors are increasingly sceptical of manager-reported ESG data that has not been independently verified. Managers should consider engaging an external ESG data provider or assurance firm to verify portfolio-level ESG reporting.
4. SFDR classification: Where the fund will be marketed to EU institutional investors, the manager should obtain legal advice on SFDR classification at the outset, rather than treating this as a post-documentation exercise. SFDR Article 8 classification requires specific provisions in the fund documents that are not easily retrofitted after close.
5. ESG in LPA/trust deed: The ESG framework – including any ESG KPIs, reporting obligations, and ESG-linked carry provisions – should be fully documented in the constitutional documents of the fund. Relying on side letter arrangements for ESG terms creates governance complexity and limits enforceability.

Conclusion

ESG-linked fundraising is no longer a niche strategy for a specialist subset of the market – it is a structural feature of institutional capital allocation globally. India-focused fund managers who approach ESG as a compliance exercise, rather than as a genuine investment framework, will find themselves increasingly disadvantaged in the competition for institutional capital. Those who invest in the infrastructure, documentation, and data systems required to deliver credible ESG credentials will be better positioned to access the deepening pool of ESG-mandated capital from Europe, North America, and the multilateral development bank ecosystem.

Endnotes

¹ SEBI, 'Business Responsibility and Sustainability Reporting by Listed Entities' (Circular No SEBI/HO/CFD/CMD-2/P/CIR/2021/562, 10 May 2021).

² SEBI (Credit Rating Agencies) (Amendment) Regulations 2023; SEBI, 'ESG Rating Providers – Regulatory Framework' (Circular, July 2023).

³ Ministry of New and Renewable Energy, Government of India, National Green Hydrogen Mission (January 2023).

⁴ United Nations, Principles for Responsible Investment (2006) <www.unpri.org>.

⁵ International Sustainability Standards Board, IFRS S2 Climate-related Disclosures (June 2023).

⁶ Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on Sustainability-related Disclosures in the Financial Services Sector [2019] OJ L 317/1 (SFDR).

⁷ SEBI (Issue and Listing of Non-Convertible Securities) (Amendment) Regulations 2023.

⁸ International Finance Corporation, Operating Principles for Impact Management (April 2019) <www.impactprinciples.org>.