Context: Capital markets regulator SEBI (Securities and Exchange Board of India) has issued the operation guidelines for the issuers of green debt securities (green bonds).
Major Highlights of the Framework for Green Bonds
- The need for the framework: It has been issued in the backdrop of growing interest in sustainable finance globally and to align with the updated Green Bond Principles (GBP) recognized by IOSCO.
- IOSCO (International Organization of Securities Commissions) represents securities regulators from around the world and sets standards for the regulation of securities markets.
- Effective Date: The guidelines will be effective from April 1, 2023.
- Definition of green bonds: The framework defines Green bonds as debt securities issued for raising funds that are to be utilized for projects classified as environmentally sustainable.
- Categories of green bonds: For assigning the status of the bonds as Green, the broad categories of areas of projects include the following:
- Renewable and sustainable energy (wind, solar etc.)
- Clean transportation (mass transportation)
- Sustainable water management (clean and/or drinking water, water recycling etc.)
- Climate change adaptation
- Energy efficiency (efficient and green buildings)
- Sustainable waste management (recycling, waste to energy etc.)
- Sustainable land use (including sustainable forestry and agriculture, afforestation etc.)
- Biodiversity conservation
- Guidelines to the issuers of green bonds on disclosure:
- Additional Disclosure Requirements: Issuers of green bonds are required to make additional disclosures regarding environmental sustainability objectives in the offer document.
- Continuous Disclosure Requirements: Issuers are required to inform about the utilization of the proceeds of the issue and details of unutilized proceeds.
- Third-Party Reviewer: Issuers are required to appoint a third-party reviewer for post-issue management of use of proceeds from green debt securities.
- Unutilized proceeds: Also, the issuers will have to make a disclosure about details of unutilized proceeds from the issuance of green bonds.
- Guidelines on greenwashing:
- Definition of greenwashing: It is the act of making false, misleading, unsubstantiated, or otherwise incomplete claims about sustainability of a product, service, or business operation.
- Issuer’s Responsibility: An issuer of green debt securities must ensure that they do not use misleading labels or hide trade-offs in their sustainability practices.
- Use of Funds: Funds raised through green bonds must not be used for purposes that do not fall under the definition of green debt securities. In case of any such instances, the issuer must disclose it to investors and, if necessary, redeem the debt securities early.
- Blue and Yellow bonds: SEBI has further strengthened the framework for green bonds by introducing the concept of ‘blue’ and ‘yellow’ bonds (sub-categories of green debt securities) as new modes of sustainable finance.
- Blue bonds: They comprise of funds raised for sustainable water management including clean water and water recycling, and sustainable maritime sector including sustainable shipping, sustainable fishing, fully traceable sustainable seafood, ocean energy and ocean mapping.
- Yellow bonds: They comprise of funds raised for solar energy generation and the upstream industries and downstream industries associated with it.
Green Bond Principles (GBP)
- These are a set of voluntary guidelines developed by the International Capital Market Association (ICMA) to promote transparency and integrity in the green bond market.
- The GBP provide a common definition of what constitutes a green bond and a framework for the issuance and reporting of such bonds.
- The GBP are recognized by the International Organization of Securities Commissions (IOSCO) as a benchmark for good practices in the green bond market.
About Green Bonds
- Green bonds are debt securities issued by corporations, governments or other entities to finance environmentally-friendly projects.
- Working of green bonds:
- Significance of green bonds for India:
- Tackle climate change: Green Bonds have emerged as an important financial instrument to tackle the threats of climate change and related challenges.
- Capital for sustainable development: Green bonds provide a way to connect environmental projects with capital markets and investors and channel capital towards sustainable development.
- Market growth: Indian companies raised nearly $7 billion through ESG (Environmental, Social and Governance) and green bonds in 2021 compared to $1.4 billion in 2020 and $4 billion in 2019.
- Global compliance: Issuance of green bonds is in line with India’s Nationally Determined Contributions (NDCs) to the Paris Agreement on Climate Change.