Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities)

ESG Debt Securities:

On 5^th June 2025 SEBI issued a circular for “Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities)” in consultation with Industry Standard Forum (ISF).

This circular shall come into force for issuances of ESG debt securities with effect from June 05, 2025.

The requirements under this chapter shall be in addition to the requirements specified in SEBI NCS Regulations and SEBI LODR Regulations, 2015.

Constituents of ESG Debt Instruments

1. Social bonds:

Social Bonds” means a debt security issued for raising funds, subject to the conditions as may be specified by the Board from time to time, to be utilised for social project(s) that directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes especially but not exclusively for a target population, falling under any of the following categories:

• Affordable basic infrastructure (e.g. clean drinking water, sewers, sanitation, transport, energy)
• Access to essential services (e.g. health, education and vocational training, healthcare,)
• Affordable housing
• Employment generation and programmes designed to prevent and/or alleviate unemployment stemming from socioeconomic crises, climate transition projects and/or other considerations for a “just transition” (such provision and/or promotion could include SME financing and microfinance)
• Food security and sustainable food systems (e.g. physical, social, and economic access to safe, nutritious, and sufficient food that meets dietary needs and requirements; resilient agricultural practices; reduction of food loss and waste; and improved productivity of small-scale producers)
• Socioeconomic advancement and empowerment (e.g. equitable access to and control over assets, services, resources, and opportunities; equitable participation and integration into the market and society, including reduction of income inequality)
• Any other category, as may be specified by the Board from time to time.

Disclosure requirements:

1. An issuer desirous of issuing social bonds shall make the disclosures specified in part I of Annexure-A in the offer document for public issues/ private placements
2. An issuer who has listed social bonds shall provide continuous disclosures as specified in part II of Annexure-A in its annual report and financial results
3. The issuer of social bonds shall appoint an independent third-party reviewer/ certifier to undertake the activities and responsibilities specified in part III of Annexure A.

These are in addition to adhering to the obligations in accordance with the relevant international standards that the securities are aligned/ issued with.

2. Sustainability bonds:

Sustainability bonds’ means a debt security issued for raising funds, subject to the conditions as may be specified by the Board from time to time, to be utilised for finance or re-finance of a combination of eligible green project(s) and social project(s) as specified under the definition of green bonds and social bonds respectively.

Disclosure requirements:

An issuer desirous of issuing sustainability bonds shall comply with the provisions specified for green debt security as specified in chapter IX of the NCS Master Circular4 and for social bonds as specified in Annexure-A of this circular.

3. Sustainability-linked bonds:

Sustainability-linked bonds’ means a debt security which has its financial and/or structural characteristics linked to predefined sustainability objectives of the Issuer, subject to the condition that such objectives are measured through predefined Sustainability Key Performance Indicators (KPIs) and assessed against predefined Sustainability Performance Targets (SPTs)

Disclosure requirements:

1. An issuer desirous of issuing sustainability-linked bonds shall make the disclosures as specified in Part I of Annexure B in the offer document for public issues/ private placements.
2. An issuer who has listed sustainability-linked bonds shall provide disclosures as specified in Part II of Annexure-B along with its annual report and financial results.
3. The issuer of sustainability-linked bonds shall appoint an independent third party reviewer/ certifier to undertake the activities and responsibilities specified in part III of Annexure-B. 

Certain social projects may also have environmental co-benefits, and that certain green projects may have social co-benefits. The classification of a debt security as a green debt security, social bond or sustainability bond should be determined by the issuer based on its primary objectives for the underlying projects. 

Raising funds and naming as above will be only allowed when it is in line with the following recognized standards or fall under the definitions given in the following paras:

1. International Capital Market Association (ICMA) Principles / Guidelines;
2. Climate Bonds Standard;
3. ASEAN Standards;
4. European Union Standards; and
5. Any framework or methodology specified by any financial sector regulator in India

 

Responsibilities of the issuer:

An issuer of social bonds/ sustainability bonds shall:

1. Maintain a decision-making process which it uses to determine the continuing eligibility of the project and/or asset.; and
2. Ensure that all project(s) and/or asset(s) funded by the proceeds of these bonds meet the documented objectives of these bonds and utilise the proceeds only for the stated purpose, as disclosed in the offer document;

 

Measures to mitigate the risk of purpose- washing and not being “True to Label:

An issuer desirous of issuing these bonds shall ensure the following to avoid occurrence of purpose-washing:

• It shall continuously monitor to check whether the form of operations undertaken is resulting in reduction of the adverse social impact/ sustainable impact, as envisaged in the offer document.
• It shall not utilise funds raised through these bonds for purposes that would not fall under the category of social bonds/ sustainability bonds as specified in paragraph V.3 and/ or paragraph V.4/ V.5 above.
• In case any such instances above come to light regarding these bonds already issued, it shall disclose the same to the investors and, if required, by majority of debenture holders, undertake early redemption of such debt securities.
• It shall not use misleading labels, hide trade-offs or cherry pick data from research to highlight social practices/ sustainable practices while obscuring others that are unfavourable in this behalf.
• It shall maintain highest standards associated with issue of social bonds/ sustainability bonds while adhering to the rating assigned to it.
• It shall quantify the negative externalities associated with utilisation of the funds raised through social bonds/ sustainability bonds.
• It shall not make untrue claims giving false impression of certification by a third-party entity.

India is seriously moving towards sustainable development with sustainable financing.