SEBI's Consultation Paper: Expanding Sustainable Finance with New Bond Instruments

It has taken some major steps concerning broadening the framework of sustainable finance in the securities market, including the introduction of a new category of financial instruments. The proposed move is likely to spread the ambit of sustainable finance,' offering issuers wider options for mobilizing funds for projects that qualify on ESG parameters. New Financial Instruments for Enlarging Sustainable Finance Framework SEBI's proposal provides for a new class of instruments, including social bonds, sustainable bonds, and sustainability-linked bonds, besides existing green debt securities. All these proposed bonds would be collectively referred to as ESG Debt Securities. At this stage, the expansion tries to give more flexibility on the part of the issuer in financing projects that have links with sustainability goals. It will help meet the burgeoning needs of sustainable finance in India and bring its securities market to par with global practices. More importantly, it is expected to help bridge the funding gap toward achieving the SDGs through the introduction of ESG Debt Securities. It is expected to arm issuers with the relevant tools for raising funds for different ESG-related projects. This way, SEBI will foster the adoption of sustainable practices within the corporate sector. Consultation paper insights The regulator has just brought out a consultation paper outlining the proposed changes to the existing regulatory framework. As per the discussion paper, apart from the existing green debt securities, issuers must be allowed to raise funds through social bonds, sustainable bonds, and sustainability-linked bonds. The bonds will enable funding for projects with specific high social impact and environmental impact, as well as those associated with key sustainability objectives. The consultation paper introduced the concept of sustainable securitized debt instruments. These instruments would have allowed originators of underlying credit facilities aligned to international or domestic frameworks for sustainable finance to provide investors with an opportunity to participate in sustainable securitized debt instruments. SEBI's proposal also covered initial and continuous disclosure requirements for such instruments. This may be through an initial disclosure, which could be part of the securities' offer document, followed by continuous disclosure through annual reports or in such other forms as might be necessitated. According to SEBI, there has to be transparency and credibility in the issuance of ESG debt securities and sustainable securitized debt instruments. The market watchdog has said that to ensure the same, issuers should compulsorily appoint an independent external reviewer or certifier. The external review may be in the form of second-party opinion verification, certification, or scoring/rating depending on the nature of the instrument. Stakeholder Involvement and Public Feedback The proposal to expand the framework of green bonds has come after SEBI received representations from market participants, including the Confederation of Indian Industry. The stakeholders represented SEBI to further widen the scope of sustainable finance by including social bonds as one of the modes for raising funds, besides the existing green debt securities. The move is seen to be part of a reaction to changing market needs and growing demand for financial instruments supportive of sustainability. To make proposed changes well-informed and comprehensive, SEBI has called for comments and suggestions from the public on the consultation paper. The stakeholders and interested parties can respond by September 6. This participative approach will help in refining the regulatory framework to ensure that it addresses effectively the needs of the market while promoting sustainable finance. Conclusion: Strengthening India's Commitment to Sustainable Finance It is one of the much-needed initiatives to enlarge the framework of green bonds by SEBI to sustainable finance. With the move towards ESG Debt Securities and Sustainable Securitized Debt Instruments, SEBI is arming the issuers with the required tools to get access to financing for projects that align with ESG objectives. This can help motivate more companies toward embracing sustainable practices and working on the realization of Sustainable Development Goals. It also makes such instruments more credible and transparent, with an independent external review process, which ensures the same in accord with the very best standards of sustainability. Since SEBI has invited public comments on its proposals, the final framework is likely to reflect a broad consensus, balancing the diverse interests of issuers, investors, and other market stakeholders. It will be an integral part of India's efforts toward aligning financial markets with global sustainability trends, thereby driving the country toward a more sustainable and inclusive economy. Source: PTI