Market regulator SEBI has implemented a comprehensive new framework for companies issuing ESG bonds, excluding green bonds.
The stringent new rules, effective immediately, aim to curb “purpose-washing” and ensure genuine commitment to stated social and sustainability objectives.
The move follows SEBI’s approval in September 2024 to establish clear guidelines for social bonds, sustainability bonds, and sustainability-linked bonds, which are now collectively categorized as ESG Debt Securities.
Under the new framework, issuers are mandated to ensure that funds raised for social or sustainability initiatives are genuinely used for their intended purposes.
The regulator has explicitly warned against “purpose-washing,” defining it as making “false, misleading, unsubstantiated, or otherwise incomplete claims about the purpose for which bonds are issued.”
Companies must quantify negative externalities and refrain from making false certification claims, SEBI said.
A critical aspect of the new regulations is the requirement for issuers to monitor whether their operations are truly reducing adverse social or sustainable impacts as envisioned. Any deviation from the stated purpose must be disclosed to investors, and if a majority of debenture holders demand it, early redemption of such debt securities may be required.
SEBI has also stressed that issuers must avoid “misleading labels,” “hiding trade-offs,” or “cherry-picking data” to highlight positive social or sustainable practices while obscuring unfavorable ones.
To ensure accountability, issuers are now required to appoint an independent third-party reviewer to verify ESG compliance, ensuring no conflict of interest and adherence to international standards like ICMA principles, Climate Bonds Standard, ASEAN standards, or EU standards.
For sustainability-linked bonds, which have financial characteristics tied to predefined sustainability objectives, issuers must disclose detailed key performance indicators (KPIs), sustainability performance targets (SPTs), and mitigation plans for any risks that could affect target achievement.
This decisive action by SEBI underscores its commitment to fostering transparency and integrity in the rapidly expanding ESG financing market, providing greater assurance to investors and promoting genuine sustainable development.
