India Wants Securities Market to Widen Sustainable Funds Framework
India’s securities and exchange regulator, the SEBI, is in the final stages of liberalizing the securities market for sustainable financing. This might make India an ESG powerhouse globally. The proposed new framework, left open for consultation, provides for new ESG-labeled instruments in the form of sustainable securitised debt instruments, social bonds, and sustainability-linked bonds to diversify investment products available for raising sustainable finance.
Expanding the ESG Toolkit
The consultation paper foresees the expansion of the ESG toolkit and, in doing so, leaps beyond what is already available with green debt securities. It will propose a “green securitization” in which an issuer can have various types of sustainable assets ring-fenced and transformed into debt instruments that allow wide capital mobilization. The framework also provides for issuers to sell social bonds to finance projects with social benefits and sustainability-linked bonds tied to an issuer’s achievement of certain ESG goals.
“The proposal is a step in the right direction for the market,” said Xuan Sheng Ou Yong, the sustainable fixed income lead for Asia Pacific at BNP Paribas Asset Management in Singapore. “It means potentially we can have other opportunities to allocate fixed income capital to new issuers and their projects beyond green bonds.” This sentiment has been growing in the marketplace, as issues have gotten more complex and ESG investors seek greater ways of appealing to a wider group of investors to support a wider array of sustainable activities.
Surging ESG Debt Issuance
Indian ESG debt issuance has this year reached $15.6 billion, outstripping the former all-time calendar-year record, set last year. That certainly implies something of a head of steam behind the country’s pivot to address ESG matters, though it still lags the absolute volumes of majors like China and Japan in Asia.
Those suggested regulatory changes by SEBI could further accelerate this growth by the way: issuers will then be able to seek debt against a wider set of sustainable activities, going beyond environmental sustainability to renewable energy or water management. Since the project scope is enlarged, the framework could channel more money to initiatives required for addressing a wider set of pressing social and governance challenges, not just environmental ones.
Inching Close to Modi’s Idea of Green Growth
All these developments also come at an excellent time, given that they accompany Prime Minister Narendra Modi’s larger green growth agenda. The evolution of a new ESG framework for India could support the ambitions of the country to lead in driving sustainable development in the region at this important point, since observations are showing a general slowdown in the issuance of ESG bonds across the region. Sustainable Fitch has just reported a roughly one-third pullback in the overall volume of ESG-labeled bonds issued in the second quarter of 2024 compared to the same period last year, with attention focused on the lowered activity across the Chinese market.
A deeper domestic ESG debt market can help in so many ways to the green growth of India, but at the same time save it from the volatility in foreign markets. The new proposed framework will place India to attract more global ESG capital at a time when it is becoming more mainstream among the international investors and moving beyond the traditional green bonds.
Future Outlook
Running through September 6, the SEBI public consultation can result in strong regulatory shifts that improve the governance of onshore ESG bonds and, as a result, improve the credibility and attractiveness of ESG debt in the Indian onshore and offshore markets for both foreign and domestic investors.
Already, large Indian firms like units of the Adani Group have started issuing such sustainability-linked and social bonds in foreign currency through private placements or listings abroad. This activity underlines the potential for further expansion and diversification within the ESG sector in India, especially if SEBI’s proposed framework is put into place.
In conclucation, the proposed expansion of the sustainable finance framework would be a strategic move that possibly enhances India in the global ESG market. It opens up avenues for enhanced and new financial products in ESG and enlarges the portfolio of activities eligible for financing, thus laying the foundation for a stronger and more diversified sustainable finance ecosystem in India. As the consultation progressed, the prospect of regulatory changes might point towards a new age of growth and opportunity within India’s sustainable finance landscape.