SEBI Unveils Stricter Rules For ESG Bond Issuance

In a landmark move aimed at reinforcing transparency and accountability in the ESG (Environment, Social, and Governance) bond market, the Securities and Exchange Board of India (SEBI) has introduced a comprehensive framework for the issuance and listing of ESG debt securities. This new framework, released via circular on June 5, 2025, focuses specifically on social bonds, sustainability bonds, and sustainability-linked bonds (SLBs), while excluding green bonds which already operate under a separate regulatory structure.

The regulatory overhaul is a significant step in India’s ESG journey, seeking to align domestic practices with global standards. Under the new rules, issuers looking to label their bonds as ESG-compliant must now meet rigorous pre- and post-issuance disclosure requirements. These include alignment with widely recognized global frameworks such as the International Capital Market Association (ICMA) Principles or the Climate Bonds Standard. According to SEBI, this alignment is crucial to ensure the credibility of ESG-labeled financial instruments in both domestic and international markets.

The framework introduces detailed norms for the issuance of social bonds, placing strong emphasis on disclosure, accountability, and third-party validation. Issuers must now clearly outline the objectives of the social projects being funded, including the specific target populations and the anticipated social benefits. They are also required to explain the decision-making process that determines the eligibility of these projects and must put in place robust tracking mechanisms for the use of proceeds.

In addition to the initial disclosures, SEBI mandates comprehensive annual reporting post-issuance. This includes a breakdown of how the funds have been utilized, alongside detailed reporting on any unutilized amounts. These steps are aimed at curbing the misuse or misallocation of funds, which has been a growing concern in the global ESG landscape.

Eligible use-of-proceeds categories for social bonds, as defined by SEBI, include a broad range of socially beneficial activities. These include the development of affordable basic infrastructure, provision of access to essential services like education and healthcare, employment generation, food security, and initiatives that drive socioeconomic advancement and empowerment. The clarity in these categories is expected to bring uniformity in project selection and help investors better assess the social impact of their investments.

The framework also places a strong emphasis on independent verification. All issuers are required to appoint a third-party reviewer to ensure their social bonds align with the recognized standards and principles. These reviewers play a critical role in validating the integrity of the bond’s objectives and the legitimacy of its ESG claims.

For sustainability-linked bonds (SLBs), the regulatory requirements are even more granular. Issuers must provide a detailed outline of their sustainability strategy and business roadmap, identifying clearly defined Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs). These targets should not only be ambitious but also reflect the issuer’s broader commitment to sustainability goals.

SEBI’s framework stipulates that third-party reviewers must assess the relevance and ambition of these KPIs and verify whether the proposed targets are aligned with the issuer’s overarching ESG strategy. Furthermore, the framework requires that these targets address critical ESG challenges faced by the issuer or its sector, thereby making the bonds more impactful and aligned with genuine transformation.

In its statement, SEBI noted that the introduction of the framework is aimed at “boosting investor confidence by ensuring that ESG-labeled bonds are credible, transparent, and results-oriented.” By mandating disclosures and independent validations, the regulator seeks to curb greenwashing—a practice where companies exaggerate or falsify claims about the environmental or social impact of their financial instruments.

The market response to this new regulatory framework is expected to be largely positive, particularly among institutional investors who are increasingly prioritizing ESG metrics in their portfolios. By tightening the norms around disclosures and verification, SEBI’s move is seen as a step towards building a more mature, accountable ESG ecosystem in India.

The timing of the framework also coincides with a broader global shift towards sustainable finance, where investors are becoming more discerning and demanding clear, measurable impacts from ESG investments. SEBI’s action not only aligns India with global best practices but also provides a strong foundation for future ESG-related financial instruments.

As the ESG market in India continues to grow, the framework marks a pivotal moment in shaping the future of sustainable finance. By insisting on transparency, credibility, and verifiability, SEBI has made it clear that ESG is not just a label—it’s a responsibility.