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The Securities and Exchange Board of India (SEBI) has introduced a comprehensive operational framework for the issuance of Environmental, Social, and Governance (ESG) debt securities. This includes instruments such as social bonds, sustainability bonds, and sustainability-linked bonds, aiming to boost responsible financing in India.

Understanding ESG Debt Securities

Definition:
ESG debt securities are financial tools designed to raise capital specifically for projects that yield positive environmental, social, or governance (ESG) outcomes. These instruments are a key part of sustainable finance, with categories including:

• Social Bonds: Focused on projects with direct social impact (e.g., affordable housing, education).
• Sustainability Bonds: Target projects with both environmental and social objectives.
• Sustainability-Linked Bonds: Tied to specific ESG performance indicators or targets.

Salient Features:

• Funds raised must be used exclusively for eligible ESG-aligned projects.
• Bonds must be clearly labelled in line with the project's primary focus.
• Compliance with global ESG norms and standards is mandatory.
• Verification or certification by an independent third-party is required.
• The framework applies to both public and private debt offerings.

Highlights of SEBI’s Framework

1. Classification Guidelines: Issuers are required to categorize their bonds—green, social, or sustainability—based on the core objective of the projects being financed. This ensures transparent communication of the bond's intended impact.

2. Disclosure Norms:

• At the Issuance Stage: Offer documents must detail project eligibility, selection methodology, and a tentative allocation between financing new initiatives and refinancing existing ones.
• Post-Issuance: Issuers must provide annual updates on fund deployment and report impact metrics to demonstrate accountability and transparency.

3. Independent Assurance: Issuers must engage accredited third-party entities to validate the alignment of bonds with ESG principles, thereby enhancing investor confidence and market integrity.

4. Monitoring and Evaluation: There is an obligation for ongoing impact assessment. Issuers must ensure the projects funded effectively contribute to reducing environmental degradation or addressing social challenges.

5. Scope and Enforcement: The framework will come into effect from June 5, 2025, and is aligned with international ESG standards to facilitate greater inflow of sustainable and ethical investments.

Significance for India: This move marks a significant step in mainstreaming ESG finance in India. It aims to improve transparency, attract climate-conscious capital, and reinforce India’s commitment to sustainable development.