Context:
India’s capital market regulator, the Securities and Exchange Board of India (Sebi), has introduced a comprehensive framework for the continuous monitoring and third-party verification of environmental, social, and governance (ESG)-labelled bonds, effective from 5 June 2025. While aimed at curbing “purpose-washing,” the move may increase compliance burdens, especially for mid-sized firms, according to market experts.
Environmental, social, and governance (ESG)-Labelled Bonds
Environment, Social and Governance Debt Securities or “ESG Debt Securities” means green debt securities, social bonds, sustainability bonds, sustainability-linked bonds, or any other type of bonds
Key Objectives of Sebi’s New Framework
- Combat Misrepresentation: Targets purpose-washing, where issuers misstate the environmental or social impact of bond proceeds.
- Mandatory Third-Party Verification: Issuers must appoint independent reviewers to verify alignment of ESG claims.
- Enhanced Disclosures: Requirements include detailed reporting on decision-making, project selection, fund deployment, and impact assessment.
- Early Redemption Clause: Allows redemption of bonds in cases where issuers deviate from stated ESG objectives.
- Quantification of Negative Externalities: Issuers must disclose potential negative outcomes from funded projects.
Risk of Market Bifurcation
- Larger companies can afford ESG investment and verification.
- Smaller issuers may resort to green-washing or abstain altogether due to high costs.
- Dudhat emphasized strict scrutiny and due diligence, not just on-paper compliance.
