The exploration of untapped unconventional reservoirs has increased to fulfill the growing global demand for energy. Traditionally, oil-based mud (OBM) is preferred for drilling such formations; however, it has shortcomings such as environmental concerns, high cost, complex handling and disposal, and logistical challenges. In this regard, vegetable oil derivatives offer a viable alternative, addressing the shortcomings of OBMs while maintaining performance. In this study, mahua oil methyl ester (MME) is synthesized from mahua oil (Madhuca indica) through a transesterification reaction. The synthesized MME is used as a dispersed phase to formulate an oil-in-water (O/W) emulsion mud (MME mud). The rheological, filtration, and shale inhibition capabilities of the formulated MME mud are compared with those of the conventional diesel oil-based mud (diesel mud). The MME mud offered an improved performance with an 18% increase in rheological properties and a 40% reduction in filtration loss volume as compared to diesel mud. The developed MME mud also demonstrated excellent tolerance towards salt contamination and enhanced lubricity compared to diesel-based mud. The viscoelastic studies of the MME mud showed the dominance of elastic modulus over viscous modulus, indicating the structural stability of the O/W emulsion mud. Additionally, the frequency sweep test revealed the mud to behave as a viscoelastic solid under both fast and slow deformation, which is essential for suspending drill cuttings during drilling and periods of low or no flow. The interaction of formulated mud with drill cutting was evaluated by the shale dispersion and slake durability tests. The primary shale recovery of the MME mud was 91.5%, indicating a benign and non-interacting nature of MME mud. Similarly, the slake durability index of MME mud was 86.15%, indicating outstanding inhibitive properties in MME mud. The environmental assessment of MME revealed the absence of aromatic components and a higher LC50, indicating better biodegradability and lower toxicity compared to diesel. The findings of the study indicate that MME mud offers improved drilling performance, environmental compliance, and economic benefits, positioning it as a sustainable alternative to diesel oil-based mud and making it possible for application in drilling unconventional reservoirs.