Universities may lose out on grant allocations if they fail to adopt sustainable development as a guiding principle.
Education secretary Charles Clarke this week announced an action plan for sustainable development within education as part of a wider government initiative following on from last year's world summit in Johannesburg.
Universities will be expected to embrace greener principles, while students will be encouraged to become involved in decision-making on sustainable development policies within their institutions.
The action plan specifically places an obligation on the Higher Education Funding Council for England to "signal to the university sector that education for sustainable development requires development".
"This will feature in the grant settlement process," the plan adds. A strategy to encourage universities to operate "to the highest environmental standards" will be developed in discussions with Hefce and specifically raised in the grant settlement letter.
Hefce is to develop a strategy in close association with universities and colleges, Universities UK and the Environmental Association of Universities and Colleges.
Hefce director Steve Egan said: "As an organisation, we will be looking to improve our own performance in this area, but the really big issue is our work with universities and colleges.
"There are already excellent examples of sustainable development in higher education, and institutions have a strong role to play in terms of research, teaching and the community."
Existing projects, such as Higher Education Partnership for Sustainability (Heps) and Higher Education Environmental Performance Improvement (Heepi), will form the basis for the initiative.
Hefce accepted that it would need to take into account the complexity of higher education institutions and their operations and to "consider the resources needed to achieve a step change".
Andy Johnston, head of the education programme at the sustainable development pressure group Forum for the Future, said: "There are some vice-chancellors who recognise this is an important strategic issue. Higher education does not have the option of opting out. National and regional government, local authorities and business are all engaged in theI debate, and they are asking questions about higher education."
Heps was set up in 2000 to help 18 universities and higher education colleges engage in the sustainable development agenda and to share their experiences across the sector.