VIDUSHI AND AADARSH GAUTAM, FIFTH -YEAR STUDENTS AT NLUD, NEW DELHI
INTRODUCTION
On June 5, 2025, the Securities and Exchange Board of India (‘SEBI’), in its Circular titled “Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities)” (‘Circular’) has come out with an operational framework Circular for issuance of social bonds, sustainability bonds and sustainability-linked bonds, which together will be known as Environment, Social and Governance (“ESG”) debt securities. Before this amendment and the introduction of the ESG Framework, SEBI had formally recognised only green bonds. While the regulatory landscape in India was initially focused solely on green bonds, market practices had already begun embracing broader ESG categories. This Circular is significant as it will help issuers to raise money for more sustainable projects, assisting in closing the funding gap for the Sustainable Development Goals.
The Circular is part of a larger regulatory trajectory that began with SEBI’s consultation paper released on August 16, 2024. The consultation paper had proposed to expand the scope of the sustainable finance framework in the Indian securities market, recognising the growing global demand for capital mobilization to achieve the 2030 Sustainable Development Goals (“SDGs”). It had set the stage for subsequent amendments to the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 through the SEBI (Issue and Listing of Non-Convertible Securities) (Third Amendment) Regulations, 2024, which formally introduced the definition of ESG Debt Securities under Regulation 2(1)(oa). This blog analyses how the Circular operationalises these regulatory intentions to create a structured ecosystem for the issuance and listing of a broader class of ESG debt instruments in India.
UNDERSTANDING ESG DEBT SECURITIES
ESG Debt Securities in their definition include green debt securities (“GDS”), social bonds, sustainability bonds, and sustainability-linked bonds. While GDS have already been defined under Regulation 2(1)(q) of NCS Regulations, with effect from date of release, SEBI’s new Circular governs the issuance and definition of ESG Debt Securities, excluding GDS. The definition is deliberately wide to encompass advancements in international standards encompassing the International Capital Market Association (ICMA) Principles, the Climate Bonds Standard, and the ASEAN Standards among others. This permit the incorporation of additional categories of ESG Debt Securities as designated internationally and by SEBI periodically. Thus, if any activity qualifies internationally to ESG Standards, it will be able to secure the tag in India, too. These international standards are also relevant for issuers for adherence to initial and continuous disclosures for issuance of ESG Debt Securities as will be discussed later in this blog.
This Circular provides the definition of social bonds as a way for firms to gain finances for initiatives that positively benefit society. For example, governments may involve projects aimed at improving water supply, supplying necessities like medical care and education, ensuring food security, and improving fundamental infrastructure. Similarly, sustainability bonds are defined as made for the purpose of financing green and social projects. They acknowledge the convergence of environmental and social goals. For instance, in 2020, Alphabet Inc., Google’s parent organisation, made the prominent move of offering a USD 5.75 billion bond in support of sustainability. Part of these bonds went to finance green buildings and electric transport, demonstrating how sustainability bonds can be multipurpose.
Besides, under this framework, sustainability-linked bonds (“SLBs”) are very different from bonds tied to the use of funds. They do not depend on a single project but are based on the issuer’s continuous ESG achievements. The issuers make forward-looking commitments to enhance their sustainability by using Key Performance Indicators (“KPIs”) and comparing their outcomes with their agreed-upon Sustainability Performance Targets (“SPTs”). Even though the proceeds from these bonds are flexible, the issuance process is only credible if the issuer is able to accomplish the set goals.
As ESG bonds are distinct in their manner of use of investment obtained, separate obligations and requirements are laid down by the Circular for these bonds as will be explored next.
THE PROPOSED REGULATORY FRAMEWORK
At the outset, an issuer desirous of issuing these social bonds, sustainable bonds or SLBs have to comply with initial disclosure requirements, continuous disclosure obligations and appoint independent third-party certifiers as per the Circular. The issuance of social and sustainable bonds requires adherence to requirements as per Annexure A and for SLBs as per Annexure B. The primary aim behind the requirements remains transparency and investor protection. For instance, as per Annexure A, the initial disclosure regarding how the project benefits the public put an end to the raising of money for projects without adequate information and instil trust in investors. Significantly, the Circular provides for the qualification of a third-party reviewer by mandating independence, expertise and lack of any conflict of interest. It is to be highlighted that while the presence of third-party reviewers remains essential and a step forward in right direction, the regulations governing ESG credit rating agencies are still evolving to enhance clarity and transparency and are at a comparatively nascent stage. The ability of reviewers to provide accurate and tailored reviews rather than template ones remains untested and the Circular does not provide guidelines that could ensure it.
In addition to the above requirements, as per Annexure B, SLBs need to comply to certain unique requirements due to the forward-looking, performance-oriented characteristics of these instruments. During the issuance phase, issuers must furnish exhaustive information on chosen KPIs, encompassing definitions, calculation benchmarks, while elucidating the justification for picking such KPIs. Similar to the framework for social and sustainable bonds, an independent third-party need to be appointed to verify the credibility of the selected KPIs and SPTs. If there is any change in the method by which the company sets or measures KPIs or SPTs, this information has to be examined and notified. This strict structure guarantees that SLBs are both ambitious and transparent, providing investors with a reliable means to evaluate issuers’ ESG performance over the course of time.
ACTION MEETS AMBITION: ELIMINATING PURPOSE-WASHING
One of the significant change brought by the framework is to ensure that the instruments are “true to their labels”. The issuer is not allowed to use any misleading labels, hide any negative effects or choose to only highlight positive outcomes without informing negative aspects. Herein, to prevent purpose washing, that is misleadingly portraying of funds as impact investments, the regulator mandates that the funds and their utilisation to meet the agreed ESG objectives are continuously monitored. Any misuse of the allocated funds has to be immediately reported and the debenture holders’ have the right to early redemption.
The mandatory nature of impact reporting by the issuer ensures to provide clear and transparent assessments of the outcomes of their ESG labelled initiatives. Such report shall include both qualitative (explaining narratives, approaches, case studies and contexts of social impact) and quantitative indicators (specific metrics and measurable data, such as carbon emissions reduced, of the social impact) and should be supplemented by third party verification. As a result, SEBI ensures to create a culture of responsibility that extends beyond initial issuance and to the complete lifecycle of the management. These mechanisms ensures a comprehensive framework of safeguards aimed at protecting investors and maintaining the integrity of India’s sustainable finance ecosystem.
THE WAY FORWARD
SEBI’s ESG Debt Securities Framework is a relevant and progressive regulatory advancement that broadens India’s sustainable finance repertoire beyond green bonds to encompass social, sustainability, and sustainability-linked bonds. The Circular enhances market integrity and connects India’s ESG debt landscape with global best practices by incorporating stringent disclosure standards, and protections against purpose-washing. The industry has welcomed Larsen & Toubro’s announcement of a Rs 500 crore ESG Bond issue, marking it as the first Indian corporation to undertake such an initiative under the newly established SEBI ESG and sustainability-linked bond framework. With the need to strengthen certain aspects including third-party reviews, as implementation progresses, strong enforcement, market awareness, and alignment with international standards will be essential to realising the framework’s full potential.
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