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Indian capital market regulator's updated green debt guidelines: Unlocking the potential of sustainable finance

March 29, 2023
Shantanu Srivastava and Saurabh Trivedi

Key Findings

The Securities and Exchange Board of India's (SEBI) revised green debt securities circular aligns with global green finance issuance guidelines. It will improve the confidence of foreign environmental, social and governance (ESG) investors in domestic green debt issuances.

The most significant enhancement in SEBI’s green debt circular is the requirement to appoint an independent third-party reviewer/certifier for both pre and post green bond issuance.

On the use of proceeds, while the SEBI circular’s disclosure guidelines are improved, there is still a lack of clarity on disclosure and tracking of the use of proceeds from multiple green bond issuances by the same issuer.

To further strengthen domestic issuances, a robust science-based green taxonomy is required to provide proper definition and eligibility criterion for green and transitionary assets.

The Securities and Exchange Board of India (SEBI) published a key milestone regulation that further signals its seriousness in developing the Indian green finance market. This follows a successful sovereign green bond issue in January 2023 and comes amid a growing focus on low-carbon energy and increased scrutiny of greenwashing.

SEBI’s revised green debt securities circular aligns with global green finance guidelines. This will improve the confidence of foreign environmental, social and governance (ESG) investors in Indian corporate green bonds and, in turn, advance India's energy transition efforts.

Updated guidelines move the requirements up a notch to better align with global practices

The most significant enhancement is the requirement to appoint an independent third-party reviewer/certifier for both pre and post-green bond issuance. Pre-issuance, a third-party entity should review/certify the green bond framework that includes the definition of a green project and the process for project evaluation and selection. Earlier, such an appointment was at the option of the issuer. Similarly, post-issuance, the issuer must appoint a third-party entity to audit its management of proceeds and impact reporting in accordance with its framework. These requirements are a higher standard and go further than the International Capital Market Association (ICMA) recommendations. Therefore, ESG-focussed investors will highly value these requirements.

Past instances of greenwashing in green bond issuances – for example Brazil’s Petrobras in 2014, where bond proceeds funded unrelated projects, and Repsol in 2017, where the bond was for improving the efficiency of its fossil-burning activities – have raised investor concerns around the lack of high-quality green bond standards.

Global investors have started to rely on pre- and post-assurances from accredited third parties to determine the robustness of a green debt framework and post-issuance tracking and reporting processes.

Other major revisions that align with the ICMA include the alignment of the framework with international green taxonomies, which help global ESG investors compare the frameworks referred by them. Distribution of the green debt raised between financing and refinancing of projects is another one. ESG investors prefer financing new projects to create incremental impact from their capital contributions. The circular also requires details related to the perceived social and environmental risks and the proposed mitigation plan associated with the project. This helps identify and address any negative externalities of financing a green project.

Alignment with other areas of domestic sustainable finance ecosystem

The circular also requires disclosures that align with the major elements of Business Responsibility and Sustainability Reporting (BRSR), India’s mandatory sustainability reporting regime. This helps integrate the framework with the overall green debt ecosystem under development in the country.

Transition bonds require alignment with India’s Intended Nationally Determined Contributions (NDCs), which the country submitted to the United Nations Framework Convention on Climate Change (UNFCCC) as part of the Paris Agreement.

Lastly, SEBI has also released a circular detailing “dos and don’ts” relating to green debt securities to avoid occurrences of greenwashing, which all green debt issuers must follow. In the absence of any official taxonomies on greenwashing globally, this is a noteworthy step.

Areas requiring further work

The Institute for Energy Economics and Financial Analysis (IEEFA) provided a series of comments and recommendations in response to SEBI's consultation paper in August 2022 that led to the publication of the revised circular. While SEBI adopted many of the suggestions, it left out a few key recommendations.

IEEFA recommended developing an in-depth science-based taxonomy to classify eligible projects as part of any green debt issuance, including eligibility criteria for green hydrogen and associated value chains. We noted that ICMA guidelines provided a very broad-level classification of eligible projects, without any specific thresholds, and recommended that SEBI goes beyond them. In the absence of India’s official green taxonomy, which is in development, such classification would be quite helpful for investors in identifying green projects.

On the use of proceeds, while the revised disclosure guidelines are improved, there is still a lack of clarity when it comes to disclosure and tracking of the use of proceeds of multiple green bond issuances by the same issuer. IEEFA has gone further than the ICMA's recommendations by proposing that utilisation of issue proceeds should be disclosed and tracked separately for enhanced transparency. Additionally, a bond-by-bond reporting system can help investors track and report on the exact economic activity funded by their capital.

Overall the enhanced requirements will give an impetus to the domestic framework for green issuances. Considering India’s need for capital to fund its NDCs and overall energy transition efforts, dedicated green capital from global ESG investors will be necessary. A robust ESG ecosystem involving disclosure regimes, taxonomies, and a guiding framework for debt issuance will go a long way in building the credibility of domestic issuances to attract the global pool of ESG capital.

This article was first published by Financial Express.

Shantanu Srivastava

Shantanu Srivastava is responsible for leading the sustainable finance and climate risk initiatives at IEEFA South Asia. He specializes in the financing, policy, and technology aspects of the Indian electricity market.

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Saurabh Trivedi

Saurabh Trivedi is a Sustainable Finance Specialist at IEEFA. His focus is on analysing global investment flows into clean energy and fossil fuel sectors with a specific attention to debt investment.

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