Sebi comes out with operational framework for ESG debt securities

Markets regulator Sebi on Thursday came out with an operational framework for issuance of social bonds, sustainability bonds and sustainability-linked bonds, which together will be known as Environment, Social and Governance (ESG) debt securities.

This will help issuers to raise money for more sustainable projects, assisting in closing the funding gap for the Sustainable Development Goals.

In its circular, Sebi said the debt securities will be labelled as 'social bonds' or 'sustainability bonds' or 'sustainability-linked bonds' only if the funds raised through the issuance of such debt securities are proposed to be utilised for financing or refinancing projects.

The regulator has addressed the initial and continuous disclosures for sustainable securitised debt instruments that would be based on international frameworks.

Initial disclosures would be made in the offer document for the securities, while continuous disclosures would be included in annual reports or other mandated formats.

Sebi said that an issuer desirous of issuing social bonds will have to make additional disclosures in the offer document for public issues or private placements.

These included social objectives of the social project, brief details of the decision-making process followed for determining the eligibility of projects, details of the procedures to be employed for tracking the deployment of the proceeds and details of an indicative estimate of distribution of proceeds between financing and refinancing of projects.

In case of refinancing, details of the existing debt are proposed to be refinanced, including the amount outstanding.

The issuer is required to appoint an independent third-party reviewer/ certifier to ascertain that the ESG-labelled debt securities are in alignment with any of the recognised standards.

An issuer desirous of issuing sustainability bonds will have to comply with the provisions specified for green debt security.

An issuer of social bonds or sustainability bonds will have to ensure that all projects funded by the proceeds of such securities meet the objectives of social bonds or sustainability bonds and utilise the proceeds only for the stated purpose, as disclosed in the offer document.

"Certain social projects may also have environmental co-benefits, and that certain green projects may have social co-benefits. The classification of a debt security as a green debt security, social bond or sustainability bond should be determined by the issuer based on its primary objectives for the underlying projects," Sebi said.

While raising funds for social objects or sustainability objects, an issuer will have to continuously monitor to check whether the form of operations undertaken is resulting in reduction of the adverse social impact or sustainable impact, as envisaged in the offer document.

The framework will come into force for issuances of ESG debt securities with effect from June 5, 2025.