ESG Debt Securities: Broadening the Framework for Sustainable Debt in India
- CCL NLUO
- 3 hours ago
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Authors: Ira Tiwari and Khushi Kalyani Gautam
Fourth year students at Hidayatullah National Law University, Raipur
I. Introduction
SEBI formalized Green Debt Securities (GDS) through its circular in 2017, which marked a major milestone in the Indian green finance market. The circular was issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 which were later repealed by SEBI (Issue and Listing of Non-Convertible Securities) (NCS Regulations) in 2021. Listed Issuers can label bonds as “green” if the proceeds will be utilized to finance specified environmental projects. Earlier these GDS were the only formally recognized sustainable financing instruments in India, however companies raised funds through other related debt securities as well. However, global and domestic demand for broader sustainable financing has expanded the focus beyond purely environmental projects. In 2024, the NCS regulations were amended to formally recognize Environment, Social, and Governance (ESG) Debt Securities. However, it was on June 05, 2025 that SEBI released its circular laying out a comprehensive framework for the issuance, disclosure requirements, etc. of such securities. The central question that this article deals with is whether the new framework genuinely strikes at the issues of greenwashing, where the issuers mislead investors about the true sustainability of the projects undertaken, or whether it merely adds another layer of cumbersome regulatory compliance. By conducting a critical examination of the scope, enforcement mechanism and disclosure requirements, we try to assess the implications and challenges posed to the debt market and various stakeholders by this regulatory intervention.
II. Regulatory Scope and Background
ESG Debt Securities have been defined under Regulation 2(1)(oa) of the NCS regulations to include not only GDS, but also social bonds, sustainability bonds, and sustainability-linked bonds. Any other bonds that are aligned with SEBI-specified international frameworks are also included in the definition. However, due to a lack of comprehensive disclosure requirements and sustained reporting, the ESG claims were plagued by purpose washing and opacity. Indian issuers could voluntarily label bonds using global ESG principles like the Social Bond Principles published by the ICMA, but these bonds relied on external guidelines and were not recognized by SEBI. To address this regulatory lacuna, SEBI issued its circular in June 2025, which requires issuers to meet the prescribed conditions for issuing ESG bonds. Notably, the framework is for ESG debt securities, except GDS, which continue to be regulated by the provisions of the NCS regulations. The circular marks a shift from broad declarations by issuers to verifiable commitments. It imposes obligations at issuance and post-issuance stages, with distinct guidelines applicable to each type of bond, prescribed by the established international standards. Issuers have to make sure that the bonds comply with at least one among the ICMA principles, Climate Bonds Standard, ASEAN standards, or the EU Green Bond Standards. This approach makes it easier for Indian ESG bonds to be readily accepted and utilized by international investors, thereby avoiding fragmentation across borders.
III. Operational Framework and Issuer Obligations
The circular offers definitions for Social bonds, Sustainability Bonds, and Sustainability-linked bonds (SLB). Social bonds mean a debt security that is used to raise funds for social projects and deliver positive social outcomes, which must fall under the seven specified categories. Sustainability bonds are instruments that combine features of both green and social bonds. The environmental component is governed by the existing framework for GDS, and the new framework applies to the social component. Issuers have to justify why the projects would qualify under each component. SLBs have a broader definition as they are not tied to a particular project or use. The financial terms of the bond are tied to the fulfilment of the issuer’s pre-determined sustainability and ESG objectives.
A. Pre-Issuance Disclosure Mandates
SEBI has specified a set of mandated disclosures that issuers must make before issuing ESG bonds. It secures transparency for the sake of investors and builds better trust and understanding of the impact and structure of the bonds. Issuers have to expand upon their process of project selection and ensure that the funds raised by social and sustainability bonds are used exclusively for the stated project and purpose. They must also specify the tools and systems that will be used to monitor the use of the funds raised. The target population has to be specified, along with the social value that is expected from the investment. For SLBs, the disclosures are more performance-centric. Issuers have to disclose their business strategy, details of the Key Performance Indicators, and the rationale behind choosing the indicators. Third-party review mandate introduces an objective filter that ensures that investors are helped by verifiable and unbiased metrics. The reviewer/certifier must ensure that the debt securities fulfil the prescribed standards and verify the process of project evaluation and selection. Issuers must specify these reviewers at the pre-issuance stage, which will be later appointed by them.
B. Continuous Disclosure Requirements
The framework puts in robust provisions to ensure that the initial commitments to the investors are kept. After having listed the ESG bonds, issuers continue to be bound by disclosure requirements, extending the transparency beyond just the point of issuance to ensure long-term accountability. Issuers of social and sustainability bonds must provide annual updates on the use of proceeds, impact of the projects, current status of projects, etc. For SLBs, the issuer must release reports on the KPI performance and disclose whether Sustainability Performance Targets were adequately met. If the project deviates from the proposed plan of action, issuers must explain such slippage and detail their efforts in resolving the same. SEBI even envisages early redemption clauses for these ESG debt securities so that investors may demand that the issuers repay the bonds early if the ESG conditions are breached. This mechanism seeks to enforce accountability; however, its effect would depend on the bond indentures and the consent processes between the issuer and the investor.
C. Tackling Purpose-Washing
SEBI circular strikes at the problem of purpose-washing by issuers, where they make unsubstantiated and fabricated claims about the purpose of raising funds through ESG debt securities and end up misusing the proceeds for some other end. Alignment of projects with international standards and the mandate of independent reviewers helps in mitigating the possibility of such misfeasance. Issuers must continuously monitor operations to ensure that they are in line with the envisaged purpose of the investment. They may also not use misleading labels and hide information as per their convenience, only to lure investors. Furthermore, in case targets are missed for SLBs, financial penalties can be levied on issuers by SEBI.
IV. Implications and Challenges
ESG has a direct effect on business performance. Companies that were a part of the S&P 500 ESG Index managed to perform better, suffer losses, and stay afloat during the pandemic, in contrast to the other companies. Therefore, the creation of a mechanism that ensures credibility and certainty in ESG funding is bound to positively affect the issuers, investors, and the market. Rather than vague greenwashed claims, companies are now bound by a pre-determined standard if they seek to boost their ESG investment and gain investors’ trust. As these standards are aligned with global standards, any investor looking for ICMA/ASEAN/CBS-compliant bonds can now find eligible issues in India as well. Financial penalties in case of breach of certain provisions by issuers lead to the benefit of those who excel in sustainability compliance, creating a positive feedback loop for ESG investments. For investors, ESG bonds can offer competitive yields in comparison to conventional debt instruments and with a measurable social and economic impact. The framework provides transparency to investors and prevents fraud by mitigating purpose-washing risks.
However, despite being ambitious, it might suffer from potential gaps and challenges. It assumes the existence of a pool of qualified third-party reviewers. However, the ESG market is still relatively in its nascent stage. Therefore, if review work grows rapidly, SEBI would need to accredit more reviewers and ensure a substantial presence of review agencies. Currently, many small and mid-sized firms lack expertise in structuring and reporting of ESG debt securities and may find the increased compliance cumbersome. These firms must be provided with scaled support and templates for reporting; otherwise, only larger firms might be able to participate substantially in the market. Recently, SEBI notified revised norms for the appointment of an independent third-party reviewer for GDS as well. Fragmentation between the regimes for GDS and the new ESG bonds might create confusion for issuers and investors, and split the ESG capital flows. Additionally, credit rating agencies in India do not factor ESG bonds into their rating methodologies and primarily rely on traditional financial metrics without adjusting for the underlying ESG vulnerabilities.
V. Conclusion
By the end of 2024, the issuance of ESG debt in India had reached USD 55.9 billion, marking a substantial increase from the previous year. In light of the promising growth of the market, the framework arrives at an opportune time. Now, we have moved beyond the restricted focus on GDS, and the new regulatory framework promises a diverse and impactful ecosystem for sustainable finance. However, the success of the new framework depends on how well the stakeholders rise to the demands of the new ecosystem. While the new provisions establish clear standards and are aligned with international requirements, the real test lies in the implementation of the rules. Robust redressal mechanisms in case of defaults by issuers and capacity-building among third-party reviewers will be crucial for the framework’s success. Without enough safeguards, the label of ‘ESG’ will be reduced to a marketing gimmick rather than a commitment to sustainable environmental and social impact. India still needs to work towards integrating the ESG debt rules with broader corporate sustainability reporting and credit rating practices.
Note: This article has been reviewed by Mr. Vinod Kothari (Managing Partner, Vinod Kothari and Company), at the Tier II Stage.