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Mint
a day ago
- Business
- Mint
Sebi's stricter ESG debt rules may deter mid-sized firms
The capital market regulator's new rules for continuous monitoring and third-party verification of ESG-labelled bonds could raise compliance burden and deter participation of mid-sized firms, experts said. The Securities and Exchange Board of India's (Sebi's) circular, effective 5 June, aims to combat 'purpose-washing" or the misrepresentation or exaggeration of the social or environmental intent behind ESG bond proceeds. The framework to ensure such debt issuances remain aligned with clearly stated and measurable goals brings India's regulatory stance closer to global standards. 'By incorporating factors like third-party verification, comprehensive disclosures about the issuer decision-making process, project selection and deployment, brings a lot of accountability on the issuer of these securities and acts as a much-needed confidence-building measure for investors," said Swati Agrawal, chief executive officer and president at CareEdge Advisory. 'Mandatory requirement of third-party review/certification is the right step to address growing concerns on green-washing of claims made by issuers." Agrawal, however, warned that the capacity to meet such detailed obligations is uneven across India Inc., with mid-sized firms still finding them difficult. "While large companies are well-positioned to understand these concepts and requirements around them, mid-size companies still find these tasks onerous and less value-accretive." Also Read: Sebi introduces verified UPI handles for market payments from 1 October The compliance requirements, especially for sustainability-linked bonds (SLBs), tied to key performance indicators (KPIs) and sustainability performance targets (SPTs) are perceived as both technically complex and financially burdensome for smaller firms. 'This trade-off needs to be balanced by a regulator," Agrawal said, advocating a consultative process with market participants for continuous review to make the instruments attractive. The State Bank of India (SBI) raised over ₹30,000 crore through social bonds in 2024, placing it among the top global non-sovereign issuers, according to the Climate Bonds Initiative. Continuum Green Energy ( ₹56.8 trillion), REC Ltd ( ₹4,300 crore), DME Development Ltd ( ₹775 crore), and Pimpri Chinchwad Municipal Corporation ( ₹200 crore) also raised funds by issuing green bonds last year, showed data provided by Icra Ltd. Separately, Sebi data as of 30 April showed that L&T Infrastructure Finance raised ₹667 crore via green bonds, while municipal corporations such as Vadodara and Ahmedabad issued green bonds worth ₹100 crore and ₹200 crore, respectively. Shriram Finance ($500 million) and Indiabulls Housing ($350 million) tapped the global markets for social bonds, Icra data showed, reflecting growing private sector participation in ESG-linked funding. Third-party review Legal experts warn that while the new framework elevates the integrity of ESG claims, it may inadvertently lead to a bifurcated market—where only large companies with ESG capacity can participate meaningfully. 'The standards to be followed by entities for investing in green and ecologically sustainable technology are prohibitively expensive," said Radhika M. Dudhat, partner at Shardul Amarchand Mangaldas & Co. 'This financial barrier incentivized companies to claim ESG alignment without making the necessary investments, leading to purpose-washing." Regulatory diligence needs to be matched with rigorous scrutiny, Dudhat said. 'While an entity may be ESG compliant 'on-paper', it is important to ascertain whether or not they are creating a false narrative of complying with the applicable regulatory framework." To mitigate this, she emphasized the role of lending institutions like banks and investment companies in reviewing and verifying compliance with a complete chain of data and documentation. Also Read: Sebi engages with venture capital funds directly to smoothen transition to AIF The new circular also mandates quantification of negative externalities and early redemption provisions in case of deviation from stated ESG objectives. Issuers will have to appoint independent third-party reviewers to verify alignment and monitor progress. While this strengthens governance, experts believe that regulatory guidance must be paired with ecosystem-level support. 'Emphasis can be given on capacity building at the industry associations level, sharing of best practices and guidance at knowledge forums and regular review of these frameworks and their effectiveness," said Agrawal. Sebi's framework could also serve as a guidebook for issuers if supported with targeted assistance, ESG assessment firms said. 'Having clear guidance on which ESG debt instrument suits their fund requirements will help in aligning with their corporate ESG strategies or objectives," said Amishi Kapadia, partner at Deloitte India. 'For a fundraise, issuers may need support for selection of eligible projects or key performance indicators (KPIs) or sustainability performance targets (SPTs) to ensure alignment with the global frameworks," she said. Closer to global standards Experts agree that the framework moves India closer to international ESG standards by enforcing third-party validation and mandating 'true to label" financing. 'In a well-regulated environment, the third-party reviewers acted as independent gatekeepers ensuring that ESG-labelled instruments are genuinely aligned with sustainability objectives and not merely used for reputational gain," said Sheetal Sharad, chief rating officer at ICRA ESG Ratings. Also Read: Bar Council notifies rules allowing foreign law firms limited practice in India However, she also warned that issuers face systemic challenges in building out ESG infrastructure. 'A key gap lies in capacity building and awareness, especially among entities with lower ESG maturity, who may lack the internal expertise to navigate complex sustainability-linked requirements." Without standardized disclosure norms, reporting can become fragmented, Sharad said. 'The role of an independent review becomes especially valuable, as it can enhance credibility, ensure alignment with best practices, and provide assurance to investors and stakeholders regarding the integrity of ESG commitments."
Observer
21-05-2025
- Business
- Observer
What Islamic finance brings to climate resilience
As ministers representing the 57 member countries of the Islamic Development Bank Group gather in Algiers for the IsDB's 51st annual meeting, the devastating effects of climate change are impossible to ignore. Wildfires consuming entire communities, floods displacing millions of people, and heat waves claiming hundreds of thousands of lives. Such extreme weather events are no longer anomalies; they are the new normal, threatening lives and livelihoods in the world's most climate-vulnerable regions – especially in the Global South. With traditional responses proving inadequate to this escalating threat, innovative finance must take centre stage. According to the Intergovernmental Panel on Climate Change, as many as 3.6 billion people currently live in regions that are highly vulnerable to climate change. Between 2010 and 2020, deaths caused by floods, droughts, and storms in those areas were 15 times more frequent than in low-vulnerability regions, underscoring the severe and unequal toll of the climate crisis. Conventional wisdom holds that for resource-dependent economies, climate action is a matter of economic survival, while for developing economies, it offers a pathway to sustainable growth and development. But many economies fall into both categories – developing and resource-dependent – compounding the challenge of designing and implementing effective climate strategies. Climate action is a matter of economic survival, while for developing economies. While a comprehensive strategy for building climate resilience is essential to strengthening developing economies' ability to withstand shocks, resilience and adaptation must go hand in hand. For vulnerable countries, this may involve reinforcing infrastructure to protect against flooding, investing in drought-resistant crops, and diversifying income sources to reduce dependence on climate-sensitive sectors. But conventional modes of resilience financing remain constrained, both in terms of sources and delivery mechanisms. As a result, vital social safeguards and support systems are often underfunded or insufficient. The problem is made worse by growing uncertainty over the availability of concessional financing from developed countries. Given this reality, financial innovation must become a central pillar of climate resilience. To that end, financial institutions, governments, and other stakeholders must work together to develop new financing mechanisms aimed at protecting climate-vulnerable regions. Encouragingly, several innovative financing funds and mechanisms have emerged to support resilience and adaptation efforts. These include the Green Climate Fund, which provides financial assistance to developing countries; the Climate Bonds Initiative, which promotes the growth of the climate bond market; climate insurance, which helps manage and reduce climate-related risks; community-based adaptation, which enables local communities to design and implement their own adaptation strategies; and nature-based solutions, which focus on restoring and protecting natural ecosystems. Even so, such financing falls far short of demand. Multilateral development banks play a pivotal role in delivering the financing necessary for vulnerable countries to reduce emissions and invest in adaptation projects. According to the most recent Joint Report on Multilateral Development Banks' Climate Finance, MDBs provided a record $125 billion in public climate finance in 2023. Notably, 60 per cent of that total – $74.7 billion – was directed to low- and middle-income countries, highlighting MDBs' commitment to supporting those most exposed to climate risks. The IsDB is a notable example. In November 2024, the IsDB approved $1.15 billion in financing to bolster food and water security in Kazakhstan by sustainably irrigating 350,000 hectares of land. The project aims to boost average crop yields by 30 per cent, thereby strengthening community resilience to climate-related disasters and improving the economic well-being of 1.3 million vulnerable people. Like other MDBs, the IsDB is grappling with the challenge of strengthening climate resilience across its 57 member countries, more than half of which are more vulnerable to climate change than the global average. Addressing such vulnerabilities requires an estimated $75-90 billion annually through 2030 for sustainable agriculture, water, and infrastructure projects. Adaptation-related financial flows to these countries average $23.9 billion per year, leaving a 68 per cent funding gap that the IsDB is actively working to close. The growing supply of adaptation financing illustrates MDBs' indispensable contribution to global climate efforts. But success should not be measured only by the amount of money disbursed; instead, it must be judged by tangible, real-world outcomes. While climate finance is growing, its effectiveness hinges on rigorous monitoring and impact assessment. Establishing robust reporting frameworks is therefore critical to building stakeholders' confidence and channelling more financing toward adaptation projects. To enhance their impact, MDBs should also adopt targeted results-based and policy-based financing models. Beyond bolstering borrowers' institutional capacity and expanding targeted financing, MDBs also have an opportunity to boost resource mobilisation by attracting capital from non-conventional sources. The IsDB's sustainability framework is a prime example. Under this scheme, the IsDB has mobilised more than $6 billion by issuing Islamic bonds (Sukuk), attracting both Muslim and non-Muslim investors. Rooted in asset-backing and risk-sharing, Islamic finance is inherently aligned with sustainability principles. In recent years, instruments like cooperative insurance (takaful), charitable endowments (waqf), and faith-based crowdfunding platforms have emerged as alternative sources of climate financing across the Muslim world. Recognising the need for targeted climate-funding solutions, the IsDB has actively promoted and supported these mechanisms. By tapping into the $4.5 trillion Islamic finance industry and adopting its asset-backed, risk-sharing model, other MDBs could expand and diversify their funding sources, enabling them to support adaptation and mitigation initiatives in the world's most vulnerable regions. But the time for pilot projects and piecemeal interventions is over. To build a sustainable, climate-resilient future, MDBs must urgently scale high-impact solutions, embrace financial innovation, and foster global cooperation. Drawing on more than a half-century of experience, the IsDB is ready to do its part. @Project Syndicate, 2025
