SEBI proposes expansion of sustainable financial framework in securities market: Key points explained

The Securities and Exchange Board of India (SEBI) on Friday, August 16, suggested expanding the securities market’s sustainable finance framework via the introduction of a new category of financial instruments.

The new category of financial instruments, as proposed by SEBI, will include social bonds, sustainable bonds and sustainability-linked bonds on top of the current green debt securities. The goal is to furnish users with the flexibility in raising funds for projects that are in line with environmental, social and governance (ESG) objectives.

ESG Debt Securities

In the consultation paper, the capital market regulator suggested that issuers, other than the existing green debt securities, should be allowed to raise funds through issuance of social, sustainable and sustainability-linked bonds. These bonds will collectively fall under the umbrella of ESG Debt Securities, the new category of financial instruments.

The aim of creating a new category of financial instruments is to provide the users of the bonds falling under the umbrella, the flexibility in raising funds for projects whose goals align with ESG objectives.

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

Calls to expand scope

SEBI said it received representations from market participants including the Confederation of Indian Industry to expand the scope of the regulatory framework pertaining to sustainable finance to include social bonds, in addition to existing green debt securities as a mode of raising sustainable finance, in line with global practices.

As per the consultation paper, SEBI said, it "proposed to introduce the concept of Sustainable Securitised Debt Instruments for the purpose of providing originators of the underlying credit facilities which are within such international or domestic frameworks for sustainable finance, and thereby provide investors as well an opportunity to participate in the sustainable securitised debt instruments".

Disclosure requirements

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

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

The markets watchdog also suggested that issuers of ESG debt securities and sustainable securitised debt instruments appoint an independent external reviewer or certifier, to facilitate transparency and credibility.

The review could take various forms including, second-party opinions, verification, certification, or scoring/ rating.

The SEBI has invited comments and suggestions from the public on the consultation paper by September 6.