SEBI’s consultation paper on expanding the scope of Sustainable Finance: The regulator plans another enabler. Will the market respond?

What is SEBI’s consultation paper on sustainable finance about?

Through its recent consultation paper, SEBI has laid out its aim to expand the scope of the country's sustainable finance framework. SEBI’s present regulations on ‘green debt securities’ relate to a limited set of Use of Proceeds (UoP) bonds, i.e., securities wherein the issue proceeds are meant to be deployed in projects or end uses specified by the regulator. However, globally, a wider bouquet of debt issuances, such as ‘Social Bonds’, ‘Sustainable Bonds’, and ‘Sustainability-Linked Bonds’, have emerged. In recent times, even India has seen issuances of Social Bonds (for instance, NABARD, Shriram Finance) and Sustainability-Liked Bonds (JSW Steel, Ultra tech Cement, and Tata Cleantech Capital). However, these have been under voluntary guidelines/principles developed by bodies such as the International Capital Markets Association (ICMA) and Climate Bonds Initiative (CBI).

SEBI proposes establishing a regulatory framework for such bonds. The consultation paper says that SEBI’s guidelines/definition will consider the ICMA / CBI principles. This means the ‘principles’ being followed as ‘voluntary’ for issuing thematic debt securities should be transformed into a ‘guideline.’ The other key proposal is to introduce a ‘sustainable securitized debt instrument category.’ As is the case with green debt presently, external review in the form of second-party opinion, verification, certification, and rating is envisaged for the proposed new categories of sustainable debt as well.

Will the proposed framework help the market?

Suppose the essence of the principles is retained while framing the final guidelines (except for some tweaking to suit the Indian context), as can be reasonably expected. In that case, it should lead to a wider acceptance of such thematic securities amongst investors without significantly altering the existing compliance burden for the issuers. Secondly, green/sustainable securitization can also enable long-term debt capital to be matched with green assets.

Will the widening of the scope of sustainable debt securities provide a boost to the issuance of such thematic debt in India?

To answer this question, one would need to probe into the reasons for the tepid response to green debt issuances in India so far. The primary reason for this is a weak economic rationale for issuing green or sustainable or social debt security. For the issuer, a thematic debt issuance comes with higher compliance/issuance cost (greater regulatory compliance and disclosures) without any compensatory  ‘greenium’, leaving the Issuer with little incentive to go down this path. On the other hand, from the investors’ perspective, the demand for such thematic debt is low because there is no mandate or a compulsion to deploy capital in green/sustainable assets, nor does India have any meaningfully large dedicated pools of capital meant for such causes, that would need to seek out thematic debt issuances to invest in actively.

In sum, while the proposed framework is a step ahead and a critical enabler, what will meaningfully move the needle on the mobilization of sustainable debt is the creation of demand for sustainable debt securities.