ESG is increasingly moving into areas of the organisation that were traditionally managed separately from the sustainability function.
For years, sustainability teams primarily focused on disclosures, environmental performance, social initiatives, governance practices and stakeholder expectations. Finance teams, meanwhile, focused on financial statements, accounting policies, treasury, financing arrangements and capital allocation.
That separation is becoming increasingly difficult to maintain.
The connection between sustainability performance and financial reporting is becoming more visible through ESG-linked financing, renewable power purchase agreements and other financial arrangements whose terms are influenced by environmental or sustainability-related factors.
This development has received further attention in India following the Ministry of Corporate Affairs’ notification of the Companies (Indian Accounting Standards) Amendment Rules, 2026 on 12 August 2026. The amendments bring changes to several Ind AS standards and include provisions relating to financial instruments with contingent features and contracts referencing nature-dependent electricity. The amendments apply to annual reporting periods beginning on or after 1 April 2026.
For companies, this is important because sustainability-linked contractual terms can have consequences beyond the ESG report.
They can affect how financial instruments are assessed, how certain contracts are accounted for and what information needs to be disclosed in financial statements.
The broader message is significant:
ESG is increasingly becoming part of financial information rather than remaining only a sustainability disclosure topic.
Why the Finance and ESG Functions Are Converging
The connection between ESG and finance is not new.
Companies have been issuing green bonds, entering into sustainability-linked loans, signing renewable energy agreements and making investments in energy efficiency for several years.
What is changing is the level of integration.
Consider a sustainability-linked loan.
The financing arrangement may contain terms linked to sustainability performance indicators. The interest rate or another contractual feature may change depending on whether specified sustainability targets are achieved.
From an ESG perspective, the organisation needs to measure the relevant sustainability indicator accurately.
From a finance perspective, the organisation needs to understand the contractual and accounting consequences of the arrangement.
From a governance perspective, management needs to ensure that the sustainability data used to determine the financial consequence is reliable.
This creates a direct connection:
ESG target → ESG data → Performance assessment → Contractual consequence → Financial reporting
A weakness at any stage can affect the next.
If the ESG metric is poorly defined, the target may be difficult to assess.
If the underlying data is unreliable, determining whether the target was achieved can become contentious.
If the contractual terms are not properly understood, the financial implications may not be appropriately reflected.
This is why ESG-linked financial arrangements require collaboration between sustainability, finance, treasury, legal, risk and internal control functions.
What Has Changed Under the 2026 Ind AS Amendments?
The MCA’s 2026 amendments cover several areas of Ind AS, including financial instruments with contingent features, electronic settlement, nature-dependent electricity contracts and annual improvements to various standards.
The ESG relevance is particularly visible in two areas.
The first concerns financial instruments with contractual cash flows that may include contingent features, including features linked to environmental, social or governance performance.
The second concerns contracts referencing nature-dependent electricity, such as certain renewable power purchase agreements.
These amendments should not be interpreted as creating a general accounting standard for ESG.
Rather, they address specific accounting questions that arise when financial instruments or contracts contain characteristics connected with sustainability-related factors or renewable electricity.
That distinction is important.
ESG does not automatically determine the accounting treatment of a transaction.
The accounting treatment continues to depend on the specific terms and conditions of the arrangement and the applicable Ind AS requirements.
ESG-Linked Financing Brings Sustainability Data into Financial Processes
ESG-linked financing is an important example of this convergence.
A sustainability-linked loan can include contractual terms where the financing economics are connected to the borrower’s performance against specified sustainability-related targets.
The target could relate to an environmental or social performance indicator, depending on the structure of the financing arrangement.
The organisation therefore needs a reliable mechanism for determining whether the target has been achieved.
This is where the sustainability team’s data becomes financially relevant.
Suppose a company has a financing arrangement linked to a reduction in greenhouse gas emissions intensity.
The organisation needs to establish:
What exactly is the emissions metric?
What is the baseline?
What is the target?
Which facilities are included?
Which emission sources are included?
What methodology is used?
Which emission factors apply?
How frequently is the metric measured?
Who reviews the calculation?
What evidence supports the reported performance?
The answers to these questions are no longer relevant only to a sustainability report.
They can potentially influence the financial terms of the company’s financing arrangement.
This creates a much stronger business case for ESG data governance.
Why ESG Data Quality Matters to the CFO
A sustainability metric may appear relatively simple when viewed in a presentation.
For example:
“Reduce Scope 1 and Scope 2 emissions intensity by 20%.”
But the actual calculation can involve multiple layers of data.
The company may have several plants.
Different plants may use different fuels.
Electricity may be purchased under different arrangements.
Production volumes may come from different systems.
Emission factors may need to be applied consistently.
Historical data may have been calculated using different methodologies.
If the sustainability target is linked to financing, these details can become financially significant.
The CFO therefore has an interest in questions that traditionally sat within the sustainability function.
The finance function may need confidence that the reported sustainability performance is accurate, consistent and supported by appropriate evidence.
This does not mean the CFO should become responsible for calculating emissions.
It means financial governance increasingly needs to recognise the importance of the ESG information feeding into financial arrangements.
The Importance of Defining ESG Targets in Contracts
One of the lessons from ESG-linked financing is that the wording of the target matters.
A sustainability target should not be treated as a broad ambition.
If a contractual outcome depends on the target, the relevant metric needs to be clearly defined.
Consider two statements:
“Reduce carbon emissions significantly.”
and
“Reduce Scope 1 and Scope 2 greenhouse gas emissions intensity by a specified percentage against a defined baseline by a specified date.”
The second statement is much more measurable.
But even the second statement may require further clarification.
Which organisational entities are included?
How is emissions intensity calculated?
What happens if there is an acquisition or divestment?
How are changes in methodology treated?
How are structural changes in production handled?
What evidence is required?
Who determines whether the target has been achieved?
These questions become particularly important when sustainability performance has contractual or financial consequences.
Nature-Dependent Electricity Contracts Are Another Important Area
The 2026 Ind AS amendments also address contracts referencing nature-dependent electricity.
These arrangements are particularly relevant as companies increase their use of renewable electricity.
Wind and solar generation depend on natural conditions. Electricity generation can therefore vary depending on factors such as weather conditions.
This creates accounting questions that are not necessarily present in a conventional fixed-volume electricity purchase arrangement.
The IASB’s corresponding amendments to IFRS 9 and IFRS 7 were developed to address accounting challenges associated with contracts referencing nature-dependent electricity, including certain renewable power purchase agreements. The amendments address the application of the own-use requirements, hedge accounting and additional disclosure requirements.
India’s 2026 Ind AS amendments incorporate corresponding changes into the Indian accounting framework.
This is relevant because renewable energy procurement is becoming an increasingly important part of corporate decarbonisation strategies.
Companies may enter into long-term power purchase agreements to secure renewable electricity or manage electricity costs and sustainability objectives.
The accounting treatment of these contracts therefore needs to be considered alongside their sustainability objectives.
Why Renewable PPAs Can Create Accounting Complexity
A conventional electricity purchase arrangement may appear straightforward.
The company consumes electricity and pays the supplier according to the contractual terms.
A renewable PPA can have additional characteristics.
The quantity of electricity generated by the renewable facility may vary.
The contract may contain pricing arrangements linked to market conditions.
There may be periods when the renewable facility generates more electricity than the buyer can consume.
The buyer may have to sell excess electricity back into the market.
These features can create questions around whether the contract qualifies for the applicable own-use treatment or whether other financial instrument accounting requirements become relevant.
The amended requirements provide specific guidance for qualifying nature-dependent electricity contracts and introduce additional disclosures intended to help users of financial statements understand relevant financial effects and risks.
The important ESG lesson is that a renewable energy contract cannot be evaluated only from the perspective of emissions reduction.
It also needs to be evaluated as a financial and contractual arrangement.
The ESG Team Cannot Evaluate Renewable PPAs Alone
A renewable power purchase agreement can simultaneously be:
- A decarbonisation instrument
- An electricity procurement arrangement
- A long-term commercial contract
- A financial reporting consideration
- A source of market and volume risk
- A component of the organisation’s renewable energy strategy
Different teams therefore see different aspects of the same contract.
The sustainability team may focus on renewable electricity consumption and emissions reductions.
The procurement team may focus on price, supplier terms and reliability.
The finance team may focus on accounting treatment and financial exposure.
The treasury team may assess financial risk.
The legal team may review contractual obligations.
The ESG reporting team may consider how the arrangement affects environmental disclosures.
These perspectives need to be connected before the contract is finalised.
ESG Targets Need Strong Internal Controls
As ESG information becomes connected to financing and financial reporting, internal controls around sustainability data become more important.
A company should know who owns each material ESG metric and who has authority to approve it.
For an ESG-linked financing arrangement, a control framework could include:
Data collection → Calculation → Review → Independent validation where applicable → Management approval → External reporting
The exact control structure will depend on the organisation and the financing arrangement.
But the underlying principle is straightforward.
The sustainability figure used to determine a financial consequence should not be treated as an informal management estimate.
It should have a documented methodology, defined ownership and appropriate review.
This is similar to the approach companies already use for important financial information.
The growing integration of ESG and finance means that some sustainability metrics may increasingly need comparable levels of discipline.
The Role of Documentation Is Becoming More Important
One of the most practical implications of this convergence is the need for stronger documentation.
Suppose a company reports that it achieved a sustainability-linked financing target.
It should be possible to demonstrate how the result was calculated.
The organisation may need to retain:
- The contractual definition of the sustainability target
- The baseline methodology
- Data sources
- Calculation methodology
- Emission factors where relevant
- Production or operational data
- Supporting records
- Review documentation
- Changes in methodology
- Management approvals
- Relevant assurance or verification reports where applicable
The objective is not to create documentation for the sake of documentation.
It is to establish a defensible information trail.
If the sustainability metric has financial consequences, the company should be able to explain the basis of the conclusion to internal stakeholders, lenders, auditors, assurance providers and other relevant stakeholders.
This Is Also a Governance Issue
The integration of ESG and finance raises an important governance question:
Who is responsible when a sustainability metric affects a financial outcome?
There may be no single answer.
The sustainability team may own the methodology.
Operations may own the underlying data.
Finance may own the financing arrangement.
Legal may own contractual interpretation.
The board or relevant committee may have oversight responsibility.
This makes role clarity important.
Companies should avoid situations where sustainability targets are negotiated by one function, measured by another and financially interpreted by a third without a common understanding of the metric.
A cross-functional governance process can help ensure that the target is understood consistently from the time the financing is negotiated through the time the performance is assessed.
ESG and Financial Reporting Are Becoming More Connected
The significance of the 2026 Ind AS amendments extends beyond the specific accounting changes.
They illustrate a broader development in corporate reporting.
Environmental considerations are increasingly entering contracts that have financial consequences.
Renewable electricity arrangements can have accounting implications.
Sustainability-linked financing can connect ESG performance with borrowing terms.
Climate-related risks can influence assumptions used in business planning.
Carbon prices can influence project economics.
Environmental regulations can affect asset values and capital expenditure decisions.
These developments do not mean that every ESG initiative belongs in the financial statements.
They do mean that finance teams can no longer assume that sustainability information is separate from financial decision-making.
What Companies Should Do Now
Companies should begin by identifying where ESG performance is already connected to financial arrangements.
This could include sustainability-linked loans, green financing, renewable power purchase agreements, carbon-related contractual arrangements or other financing instruments containing environmental or sustainability-related features.
The next step is to review the underlying contractual terms.
What sustainability indicators are included?
What happens if the target is achieved?
What happens if it is not achieved?
Who determines performance?
What data is required?
What methodology is specified?
What verification or assurance is required?
The organisation should then assess whether its ESG data systems are capable of producing the required information consistently.
For renewable electricity contracts, companies should also involve accounting and finance teams early in the contract review process.
Finally, organisations should establish clear ownership and controls over the ESG metrics that have financial implications.
The Need for ESG and Finance Teams to Work Together
The traditional organisational structure often places ESG and finance in different parts of the company.
That structure may have been sufficient when sustainability was primarily a disclosure and stakeholder engagement issue.
It becomes less effective when sustainability performance affects financing arrangements, contractual obligations and financial reporting.
The answer is not necessarily to merge the two functions.
Instead, companies need stronger interfaces between them.
The sustainability team brings expertise in environmental metrics, reporting methodologies and sustainability performance.
Finance brings expertise in financial instruments, accounting, controls and financial consequences.
Legal brings contractual interpretation.
Operations brings knowledge of the underlying activity.
Together, these functions can create a much stronger system for managing ESG-linked financial arrangements.
From ESG Reporting to Financial Accountability
The evolution of ESG is increasingly moving from disclosure towards accountability.
Earlier, the primary question may have been whether a company disclosed its emissions.
Now, organisations increasingly need to consider whether their emissions data can support targets, financing arrangements, customer requirements and external verification.
The same principle applies to renewable energy.
It is no longer enough to state that renewable electricity is part of the company’s decarbonisation strategy. The company also needs to understand the commercial, contractual and accounting characteristics of the arrangements through which renewable power is procured.
The 2026 Ind AS amendments provide another reminder that sustainability and financial reporting are becoming increasingly interconnected. The amendments apply to annual reporting periods beginning on or after 1 April 2026 in India.
For organisations, the practical implication is clear.
ESG teams need to understand the financial relevance of the information they produce.
Finance teams need to understand the sustainability information entering financial arrangements.
And both need reliable systems that connect contractual commitments with measurable, documented performance.
How ESG360 Supports Organisations
ESG360 supports organisations in strengthening ESG data systems, sustainability reporting, materiality assessment, ESG policies, carbon footprint assessment and broader ESG governance processes.
As ESG becomes increasingly connected with financing and financial reporting, organisations need to ensure that sustainability metrics are clearly defined, consistently measured and supported by appropriate documentation.
For companies entering into ESG-linked financing or renewable energy arrangements, this means bringing sustainability considerations into the process early rather than treating ESG measurement as an activity that begins after the contract has been signed.
Strong ESG data governance can help organisations establish clear ownership, consistent methodologies and reliable evidence for the sustainability information that increasingly influences business and financial decisions.
The direction of travel is clear.
ESG is no longer sitting outside finance.
It is increasingly becoming part of the information that finance needs to understand, evaluate and govern.