SEBI Introduces Framework for ESG Debt Securities

On June 5, 2025, the Securities and Exchange Board of India (SEBI) introduced a regulatory framework for the issuance and listing of Environmental, Social, and Governance (ESG) -labelled debt securities, excluding green bonds. This framework marks a significant expansion of SEBI’s sustainable finance regime, formally bringing within its fold social bonds, sustainability bonds, and sustainability-linked bonds. The objective is to instil consistency and credibility in ESG-labelled issuances by standardising disclosure norms, mandating third-party verification, and reducing the risk of mislabelling, also referred to as “purpose-washing.”

Scope and Categorisation

Notified under Regulation 12A of the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (NCS Regulations), the framework complements the existing regime for green debt securities and seeks to regulate all ESG-labelled instruments other than green bonds proposed to be listed on recognised stock exchanges in India.

To qualify under this framework, such instruments must align with one or more internationally recognised ESG standards, such as the International Capital Market Association Principles, the Climate Bonds Standard, the ASEAN Green/Social/Sustainability Bond Standards, or frameworks notified by Indian financial sector regulators.

The framework applies to three distinct categories of instruments: (i) social bonds, (ii) sustainability bonds, and (iii) sustainability-linked bonds (SLBs). Each category carries specific obligations depending on the nature of the instrument and its stated objectives:

• Social bonds are defined as debt securities where the proceeds are used exclusively to finance or refinance eligible social projects. These may include infrastructure for clean drinking water, access to essential services like healthcare and education, employment generation in crisis or transition scenarios and socioeconomic empowerment initiatives. Issuers are required to clearly articulate the social objective, define the target population, and establish a transparent linkage between project design and intended outcomes.
• Sustainability bonds finance a combination of green and social projects. While classification depends on the issuer’s primary intent, the regulatory requirements are cumulative and issuers must fully comply with both the green bond requirements set out in SEBI’s NCS Master Circular dated May 22, 2024, and the social bond requirements set out in the present circular. This includes dual project selection criteria, integrated use-of-proceeds tracking, and combined impact reporting, all verified through independent review.
• SLBs diverge from the traditional use-of-proceeds model because their financial terms, like interest rates or repayment schedules, change based on whether the issuer meets specific sustainability targets tied to clear and verifiable performance indicators. SLPs typically include instruments that finance exclusively social projects, a mix of social and green projects, or embed sustainability-linked performance targets into the terms of the security. To qualify under this framework, such instruments must align with one or more internationally recognised ESG standards.

Disclosure and Verification Framework

SEBI has prescribed a robust compliance regime that balances pre-issuance clarity with post-issuance accountability across all three categories of instruments:

• For social bonds, issuers are required to provide comprehensive pre-issuance disclosures in the offer document, including project eligibility criteria, social objectives, mechanisms for fund tracking, allocation methodology for unutilised proceeds, risk mitigation plans, and details of the intended impact on target populations. These disclosures must be certified by an independent third-party reviewer. Post-issuance, issuers are obligated to submit annual updates on fund deployment, project-level utilisation, and impact metrics—both quantitative and qualitative—all of which must again be independently verified.
• Sustainability bond issuers must adhere to the combined requirements applicable to both green and social bonds. In addition to dual disclosures, they are expected to implement integrated fund tracking mechanisms and produce composite impact reports covering both environmental and social dimensions. Independent reviewers must validate the ESG alignment of the entire pool of financed projects and confirm that proceeds have been utilised in accordance with stated objectives.
• In the case of SLBs, SEBI has underscored that issuers must go beyond aspirational statements and establish rigorous performance measurement frameworks. The offer document must outline the rationale for each selected key performance indicator, the associated sustainability targets, their alignment with broader ESG strategy, and any structural consequences of non-compliance—such as coupon step-ups or redemption premiums. Issuers must also disclose contingency arrangements and data reliability mechanisms. After issuance, they are expected to submit annual, independently certified progress reports confirming whether the KPIs have been met and what financial adjustments, if any, have been triggered.

Governance Standards and Market Safeguards

SEBI has further mandated a continuing duty upon issuers to ensure that ESG-labelled instruments maintain their alignment with the disclosed objectives throughout their tenure. Issuers must implement auditable internal systems to monitor project eligibility, track fund allocation, and assess impact in real time. Any deviation, misrepresentation, or breach of ESG commitments is expected to be disclosed promptly to investors and to stock exchanges.

To reinforce accountability, SEBI has mandated that issuers quantify potential negative externalities and align their ESG disclosures with any ESG ratings assigned to the instrument. Further, the framework introduces an investor protection mechanism allowing early redemption of the instrument if a majority of debenture holders determine that ESG commitments have been materially breached or misrepresented. This provision acts as both a governance safeguard and a deterrent against superficial ESG labelling.

Issuers have also been cautioned against the use of unverified ESG claims, promotional marketing language, or selective data disclosure practices. The regulatory intent is to ensure that ESG labels reflect measurable and externally validated sustainability performance, not reputational branding.