BY ANSHIKA SAH AND ABHAVYA SHARAN, FOURTH – YEAR STUDENTS AT RMLNLU, LUCKNOW
INTRODUCTION
Using the term “sustainability” merely as a marketing label, without any supporting regulations or uniform standards, results in purpose-washing and, consequently, loss of credibility in sustainable finance and corporate practices. In recent times, there has been a rapid increase in the ESG finance landscape across the globe, with the market projected to reach approximately $7.02 trillion in 2025. However, a litany of high-profile purpose-washing cases has made this market vulnerable to increased scrutiny over credibility and enforcement.
India’s exploration into this arena has gained momentum with the release of a dedicated Framework for Environment, Social and Governance (‘ESG’) Debt Securities (other than green debt securities) by the Securities and Exchange Board of India (‘SEBI’). This article examines the proposed framework and discusses the strategic incentives involved for Indian corporates in integrating ESG considerations in their core business strategies. By analyzing the challenges involved in the implementation of the same, the article concludes with a few policy recommendations to address these challenges for a more comprehensive and better-suited framework.
OVERVIEW OF THE FRAMEWORK
While India has had an environmental bond program since 2015, the newer instruments lacked the consistent regulation they required. SEBI in June 2025 introduced a comprehensive framework (‘the framework’) , redefining ESG Debt Securities to include social bonds, sustainability bonds, and Sustainability-linked bonds or (‘SLBs’), as the demand for sustainable finance grew. In social bonds, funds are used for projects addressing social issues, such as affordable housing and job creation , whereas in sustainability bonds, funds are raised for a combination of green and social projects. SLBs, on the other hand, are tied to the issuer achieving certain pre-set sustainability goals. These bonds guide private investment towards achieving the United Nations’ Sustainable Development Goals (‘SDGs’). They also provide investors with a practical means to combine financial gains with environmental and social benefits. The significance and momentum of these instruments are highlighted by the expanding global ESG bond market, while India’s own issuance of over USD 13.07 billion on IFSC exchanges by the end of September. Globally accepted and recognised standards, like the Climate Bonds Standard, ASEAN standards, EU Green Bond Standard, and International Capital Market Association (‘ICMA’) Principles, must be followed by these ESG Debt securities to protect against the risks of ‘purpose-washing’ and guarantee comparability.
ENFORCEMENT AND ACCOUNTABILITY MECHANISMS
Disclosure, reporting, and third-party review are significant prerequisites. Transparency needs to be maintained by the issuers, and quantifiable proof of impact has to be provided under the new framework. Significant information, such as how the proceeds are going to be utilised, target population, project selection, and whether the bond will finance new or ongoing projects, needs to be disclosed. For SLBs, issuers must specify the key performance indicators (‘KPIs’) and sustainability performance targets (‘SPTs’). There has to be constant reporting subsequent to the issue of securities of the fund allocation progress, and its impact on the environment and society.
An independent third-party review is a mandatory requirement in order to ensure that, after the issue, the bonds are accurately classified into the four categories which are ‘green bonds’, ‘social bonds’, ‘sustainability bonds’ and ‘sustainability-linked bonds’ and to confirm that disclosures and results align with the commitments made. For this, the issuer must have a review by an independent third-party with relevant expertise, such as SEBI-registered ESG ratings providers. In order to combat non-compliance, SEBI has also included safeguards like early redemption clauses and penalties. Such provisions enable investors to redeem their securities if a try-out is attempted to purpose-wash or if the commitments entered into are not met.
Purpose-washing is defined as making false, misleading, unsubstantiated, or otherwise incomplete claims about a bond’s purpose, often by misrepresenting how the money will be used. SEBI’s rules are explicitly designed to combat this by mandating that social or sustainability bonds must fund only the projects and objectives disclosed at the time of issue, and any deviation must be disclosed immediately. SLBs carry a heightened risk of purpose-washing as compared to green or sustainability bonds, owing to their structure of performance-based incentives, as issuers may set low or easily attainable KPIs simply to label instruments as sustainability-linked, without delivering meaningful impact. SEBI’s earlier February 2023 Green Bond Guidelines mandated ‘dos and don’ts’ to combat greenwashing by prohibiting misleading labels, data cherry-picking, and unverified environmental assertions. However, one of the most glaring issues is the implicit exclusion of SLBs from the applicability of measures to mitigate purpose-washing, given the international standard of penalizing non-compliance.
INCENTIVE FOR ESG INTEGRATION
The new framework by SEBI incentivizes Indian companies to integrate ESG considerations into their core strategies. With the global ESG asset pool sizing up to more than $35 trillion, the framework positions India to tap into this pool, to attract global capital and long-term finance. This is evident from Larson & Toubro’s debut ESG bond, which demonstrated huge investor demand and received a AAA CRISIL rating, and was priced at a lower interest rate of 6.35%, compared to 6.45–6.50% for similar non-ESG instruments in the secondary market, indicating clear financial advantages for compliant issuers.
Further, SEBI’s requirement of standard ESG disclosure through the Business Responsibility and Sustainability Reporting (‘BRSR’) core and the proposed India-specific ESG parameters improve the scope of sectoral comparison while aligning ESG reporting with domestic priorities. A higher ESG rating encourages businesses to improve corporate governance and performance because it signals increased market credibility and a lower cost of capital. Leading examples are Infosys and L&T, which have incorporated ESG principles in their core business strategies to gain a competitive edge by leveraging innovation and sustainability.
Furthermore, businesses can use their credible ESG governance and disclosure practices to gain access to global markets and secure preferred vendor status with multinational buyers, particularly in export-driven industries like automobiles, electronics, textiles, etc. Moreover, Developmental Financial Institutions (‘DFIs’) like NABARD and SIDBI also provide facilities like concessional finance and targeted incentive schemes for companies that demonstrate ESG performance and compliance with SEBI’s framework.
COUNTER ARGUMENTS AND CHALLENGES IN THE INDIAN MARKET
Despite the benefits, as the ESG finance market expands, it presents significant challenges for issuers. One primary challenge is that there is no universally accepted definition for ‘Social’ or ‘Sustainable’, leading to a lack of clarity in application and also inhibiting standardization. Issuers run the risk of being falsely accused of purpose-washing in the absence of any uniform standards. Huge compliance costs for third-party verification and detailed disclosure requirements are compounded by this, which may discourage small and first-time issuers from participating because they often lack the infrastructure and budget to meet these requirements. Additionally, the ESG-rating market is highly fragmented and opaque, which makes it difficult for investors to evaluate and contrast the issuances across sectors. Investor confidence is further undermined by a lack of standard evaluation tools and unclear information on impact metrics.
Although some critics have expressed concerns that the introduction of rigid taxonomies and standard KPIs may hinder innovation, and possibly put small and regional issuers at a disadvantage. Though valid, these concerns do not negate the broader need for uniformity in general. The same could be addressed through a phased implementation of the framework, starting with voluntary compliance and then gradually moving towards mandatory requirements. Similarly, inference can be drawn from the EU’s experience with the Green Taxonomy, which demonstrated that proportionality and standardization can go hand-in-hand.
PROPOSED REFORMS TO STRENGTHEN THE FRAMEWORK
However, this is only the beginning, and there is scope to counter these obstacles and to turn them into an opportunity to strengthen the ESG Finance landscape in India by learning from global best practices and tailoring them to suit India’s development needs. SEBI should move beyond international standards and introduce an India-specific ESG taxonomy tailored to national priorities and SDG commitments. This could draw inspiration from the EU Green Taxonomy but be adapted for India’s socio-economic development. For this, SEBI should promote the use of sector-specific templates and model KPIs to enable comparison without compromising local relevance. Though the disclosure burden is high and compliance requirements are complex, it must be noted that these are essential to eliminate the misuse of ESG labelling or purpose washing and ensure genuine impact is made. Leveraging public infrastructure and targeted support from DFIs like NABARD, SIDBI, etc., should be sought to alleviate this burden. Moreover, coalitions of the private sector, like the Confederation of Indian Industries (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI), can assist in ESG-related capacity building and provide technical and financial support.
A central ESG oversight body under SEBI should be created to monitor disclosure, enforce accountability, ensure market discipline, and serve as an institutional safeguard for all the different stakeholders. Penalties for non-compliance should be clearly articulated to deter purpose-washing. Credit rating agencies must be mandated to follow a uniform ESG-scoring criterion. Additionally, integrating the ESG Bond market with blockchain technology and the smart contract system can enhance transparency and automate compliance by tracking the use of proceeds in real-time.
CONCLUSION
The framework is a timely step in aligning the Indian financial market with the UN SDGs and introduces baseline standards, opening a pathway for credible ESG capital mobilization. While it is built on good intent, this will all be meaningful when it is backed by strong enforcement and accountability mechanisms that go beyond mere disclosure formalities. The current framework leaves several gaps that require further attention. For India to become a global hub for sustainable financing, its ESG regulatory infrastructure must be built on pillars of credible enforcement, integrity, real impact, and alignment with sustainable principles.
The HNLU CCLS Blog 