India Proposes Expansion of Sustainable Finance Framework in Securities Market

India’s Securities and Exchange Board (SEBI) is set to broaden the sustainable finance landscape in its securities market, aiming to incorporate new ESG-labeled instruments. The proposed framework, which includes the introduction of sustainable securitized debt instruments or “green securitization,” would significantly diversify the range of investment products available for raising sustainable finance.

SEBI’s consultation paper suggests that, alongside existing green debt securities, issuers may soon have the ability to raise funds through social bonds, sustainable bonds, and sustainability-linked bonds. This expansion is designed to channel more capital into projects that address environmental, social, and governance (ESG) concerns.

Xuan Sheng Ou Yong, sustainable fixed income lead for Asia Pacific at BNP Paribas Asset Management in Singapore, stated, “The proposal is a positive move for the market. It means we may have different opportunities to direct fixed income capital towards new issuers and their projects, beyond green bonds.”

India has already seen its ESG debt issuance soar to $15.6 billion this year, surpassing its previous annual record in 2021. This growth highlights a strong momentum in sustainable finance, although the volume still lags behind other major Asian markets like China and Japan.

The proposed changes will allow issuers to seek debt for a broader range of sustainable activities beyond just environmental sustainability, such as renewable energy or water management. SEBI will continue its consultation until September 6, potentially leading to significant regulatory shifts.

These developments come at a critical time for India, as a stronger ESG debt market could not only support Prime Minister Narendra Modi’s green growth ambitions but also help counter the global slowdown in ESG bond issuances, especially given the decline in Chinese market activity. Sustainable Fitch recently reported a roughly one-third drop in the overall volume of ESG-labeled bonds in the second quarter compared to the same period last year.

Should SEBI’s consultation lead to regulatory changes, it would enable the regulation of onshore bonds, further strengthening India’s position in the global ESG market. Some of India’s major corporations, including units of the Adani Group, have already begun issuing sustainability-linked and social bonds in foreign currency through private placements or listings abroad, signaling the potential for further growth and diversification in this sector.