This paper examines the role of environmental sustainability policies in shaping financial risk exposure at two systemically important Indian banks: State Bank of India (SBI) and HDFC Bank. Using secondary data from bank sustainability reports, annual reports, and regulatory guidance, and by reviewing empirical studies on ESG and banking in India (2016–2024), the study evaluates changes in key risk indicators—credit (GNPA), asset quality provisions, and market/reputation metrics—alongside the banks’ green financing activity and sustainable debt issuance. Results indicate that formal sustainability frameworks, green bond issuance, and structured sustainable finance frameworks coincide with improvements in asset quality metrics and strengthen investor perceptions, though causality is complex and mediated by macroeconomic and regulatory factors. Policy implications and recommendations are presented for banks and regulators to institutionalize climate risk disclosure and integrate environmental risk into credit underwriting.