The world of finance is transforming. More than ever, investors and companies are not just chasing profits, they are also focusing on purpose. The new SEBI framework for Environment, Social, and Governance (ESG) debt securities reflects this very shift in India’s growing financial ecosystem. On September 30, 2024, the Securities and Exchange Board of India (SEBI) took a landmark step to broaden the scope of ESG debt instruments, going beyond just “green debt securities” to include social bonds, sustainability bonds, and sustainability-linked bonds. Together, these instruments create a robust framework that promotes sustainable development while safeguarding investors.
ESG debt securities are financial instruments where the money raised must be used for projects with environmental, social, or governance benefits. These could be for building renewable energy projects (green bonds), funding affordable housing or healthcare (social bonds), or a mix of both (sustainability bonds). There are also sustainability-linked bonds, where the financial terms (like interest rates) depend on whether the company meets pre-agreed sustainability targets. SEBI’s expanded definition aims to ensure that issuers of these bonds clearly spell out what they are promising and that they are held accountable for delivering on these promises.
Corporate Governance and the Prevention of Purpose-Washing
One of the risks globally in the ESG space has been “purpose-washing”, where companies claim to be sustainable but misuse the funds or make misleading claims. SEBI’s new framework introduces rigorous safeguards against this.
Issuers must:
- Clearly define project eligibility and social objectives.
- Ensure continuous monitoring of outcomes against the stated purpose.
- Appoint independent third-party reviewers to validate their ESG claims.
- Avoid misleading claims, cherry-picking data, or overstating benefits.
- Disclose deviations or misuse, and initiate early redemption if necessary.
- Quantify any negative externalities and maintain transparency around any third- party certifications.
ESG Compliance Risks for Emerging Businesses
Compliance obligations such as mandatory third-party certifications, continuous disclosures, and sustainability-linked targets introduce new operational and legal risks:
🔸 Compliance Burden: Startups, often strapped for resources, may find ESG disclosures and third-party verifications costly and complex.
🔸 Data Risks: To set and report on ESG goals, issuers need reliable data, this could give rise to synthetic data risks if assumptions are used without real-world validation, potentially leading to compliance breaches.
🔸 Data Breach & Confidentiality Risks: ESG-linked projects especially in health, education, or SME financing require handling sensitive personal or community data. A data breach here could not only damage trust but also attract regulatory action under India’s data protection laws.
🔸 Purpose Misalignment Risk: The risk of “chasing the ESG trend” without aligning real business models to ESG goals, resulting in the risk of failing post-issuance targets or misleading disclosures.
🔸 Investor Scrutiny: ESG bondholders (especially global investors) are cautious, non-compliance could mean reputational damage or litigation.
Compliance Roadmap for Issuers and Startups
To safely participate in this new ESG debt ecosystem:
- Integrate ESG into business models, not just marketing.
- Invest early in credible data systems to track ESG outcomes honestly.
- Engage experienced ESG consultants to navigate SEBI’s disclosure and certification demands.
- Understand the risks of synthetic data creation and ensure all projections and impact assessments are grounded in reality.
- Transparency to be maintained with investors
Conclusion
SEBI’s ESG debt framework shows the regulator’s clear intention to align India’s capital markets with global sustainability standards while safeguarding market integrity. For investors, this promises more credible ESG opportunities. For issuers including startups, it opens a gateway to sustainable financing but also demands responsibility, transparency, and readiness to handle compliance risks. India’s ESG bond market is becoming a mainstream, regulated, and trusted source of purpose-driven capital.
Disclaimer: The information published in the above newsletter is collected from various sources in electronic medium and analyzed by the firm. The reader is advised to consult the attorney qualified in their jurisdiction, before acting on any information contained in this newsletter. India Juris excepts no liability what so ever in this regard.
