A “High-Stakes Bet”? Revisiting SEBI’s ESG Debt Securities Framework
I. Introduction
The Securities & Exchange Board of India (“SEBI”) introduced the green debt securities framework in 2017. However, the year-on-year issuance of listed green debt securities displays an inconsistent pattern, with issuances of ₹667 crore in 2017 and ₹180 crore in 2018, a sharp surge in 2021 and 2022 with ₹1,387 crore and ₹1,935 crore respectively, followed by a dip to ₹794 crore in 2023 before partially rebounding to ₹1,125 crore in 2024. After recognising some constraints in the earlier green debt securities, SEBI recently unveiled the framework for Environmental, Social and Governance (“ESG”) debt securities (the “Framework”) via a circular dated June 05, 2025. The Framework aims to expand the scope of sustainable finance in the Indian securities market by introducing three new instruments, i.e. Social Bonds, Sustainability Bonds, and Sustainability-Linked Bonds, other than the earlier green bonds.
The introduction of the Framework offers India a chance to better align its financial system with its sustainability goals. But its success will ultimately depend on two key factors: credibility for bondholders and feasibility for issuers. Getting both of them right is essential, not just to channel funds toward genuinely impactful projects, but also to avoid repeating the slow uptake seen under the earlier green debt securities framework.
This post critically examines the new Framework and analyzes whether it manages to deliver both credibility for bondholders and feasibility for issuers. By highlighting pertinent issues like lack of thresholds in definitions, absence of safeguards for sustainability-linked bondholders, and issuer disincentives, it argues that the current design falls short, making ESG debt securities a ‘high-stakes bet’ wrapped in a sustainable label. Further, it proposes targeted reforms that could help transform the Framework from a well-intentioned guideline into a credible and workable model for India’s ESG debt market.
II. Introducing New ESG Securities: A Room for Opportunities
As mentioned, the Framework formally recognises three new and distinct categories of ESG securities, namely social bonds, sustainability bonds and sustainability-linked bonds. Social bonds are meant to raise funds for projects that address specific social issues or deliver positive social outcomes, particularly for identified target populations. The eligible categories include affordable infrastructure, essential services, housing, etc. A sustainability bond is issued to raise funds for financing or refinancing a combination of eligible green and social projects, as defined under green bonds and social bonds respectively, meaning they have integrated environmental and social impact. Further, sustainability-linked bonds are those whose financial or structural features are tied to the issuer’s predefined sustainability objectives, measured using specified sustainability Key Performance Indicators (“KPIs”) and assessed against Sustainability Performance Targets (“SPTs”).
At a global level, the share of social, sustainability, and sustainability-linked bonds in the global sustainable bond issuance has remained relatively low. In 2024, social bonds accounted for approximately 15%, sustainability bonds around 23%, and sustainability-linked bonds just about 4%, whereas green bonds dominated with over 57% of the total sustainable bond issuance. Similar figures could be observed over the past 5 years. This highlights that green securities have remained the most widely utilised instruments over the years. On a brighter side, this presents an opportunity for SEBI to tap into the largely unutilized potential of ESG bonds. Given that India is one of the most socially diverse countries in the world, SEBI can unlock significant value in this space, particularly through social bonds and position them as a far more attractive funding option than they have been globally so far. However, for this to materialize, SEBI must address the following challenges, which may hinder widespread adoption.
III. Cracks Beneath the Surface: Structural Issues
Before delving into the issues, it is important to note that a major portion of the Framework is inspired by the principles issued by the International Capital Market Association (“ICMA”). The definition of all the new categories of bonds, as well as the categories eligible for financing, are directly drawn from the ICMA framework. Disclosure and reporting requirements also closely follow the ICMA guidelines. Another similarity is SEBI’s emphasis that social projects must aim to address specific social issues and achieve positive social outcomes, particularly, but not exclusively, for defined target populations, among others. However, the Framework suffers from drawbacks and loopholes on some fundamental aspects.
A. Threshold Gaps and Purpose-Washing
The Framework adopts verbatim definitions from ICMA principles for social, sustainability, and sustainability-linked bonds, but these definitions are overly broad and vague. For instance, social bonds “are to be utilised for projects that directly aim to address or mitigate a specific social issue or achieve positive social outcomes”, leaves significant room for interpretation, making purpose washing a pertinent concern. This is because there is no clear minimum threshold or quantitative criteria in the definitions for ESG alignment to distinguish genuine impact from superficial initiatives. In other words, there is no clear threshold on what proportion of the bond proceeds must be directed toward social or environmental objectives for a bond to be considered a sustainable, social, or sustainability-linked bond. Without such thresholds, issuers could label the bond as ‘sustainable’ or ‘ESG compliant’ while dedicating only a small portion of proceeds to meaningful impact.
A striking example of this can be seen in the green bonds issuance by DMEDL, a subsidiary of the National Highways Authority of India (NHAI). The declared use of proceeds included installing street lights powered by renewable energy, constructing animal underpasses and overpasses, and setting up rainwater harvesting systems, etc. along the Delhi–Mumbai Expressway. This project is a 1,350 km-long, 8-lane-wide expressway project, one that inherently causes large-scale environmental and social disruption. This raises a critical question, should projects that cause significant and irreversible environmental loss, yet include a few ‘green’ components, be allowed to raise funds through sustainable bonds? Such examples highlight the urgent need for clear definitions and thresholds in the classification of sustainable securities. Without them, the label risks being diluted, and the market risks losing credibility.
B. Lack of Safeguards in Sustainability-Linked Bonds
The Framework currently includes safeguards to mitigate purpose-washing, such as continuous monitoring, mandatory disclosures, and third-party verification. Particularly from a bondholder perspective, it provides protection by including the possibility of early redemption, based on the majority of bondholders, if funds are diverted from their stated purpose. However, a major issue remains that the purpose washing protections do not extend to sustainability-linked bonds, leaving bondholders of sustainability-linked bonds without similar enforceable safeguards.
This issue is particularly relevant because, unlike traditional project-specific bonds like social or sustainable bonds, the funds raised for sustainability-linked bonds are not earmarked for particular projects and can be used for general corporate purposes. While they link financial or structural terms to predefined sustainability objectives measured through KPIs and assessed against SPTs, this flexibility creates a heightened risk of purpose-washing.
In such a situation, bondholders are left with two possible recourses. First, they may choose to exit through secondary markets, often at a financial loss, due to exiting earlier than their intended investment period. Alternatively, they might continue holding the bond, reassured by regular coupon payments, without realizing that the issuer has deviated from the stated purpose. This ultimately leads to a breakdown in trust. In both cases, bondholders either suffer financially or lose confidence in the market. These risks, combined with vague definitions turn such investments into a ‘high-stakes’ bet wrapped in a sustainable label for sustainability-linked bondholders. It poses a serious threat to the long-term growth of India’s ESG debt market, as distrust and purpose-washing risks amongst bondholders can reduce participation and ultimately prevent the sector from achieving the scale needed to support India’s broader sustainable goals.
C. Issuer Disincentives
Having analyzed the bondholders’ perspective, the issuer perspective is equally critical to the Framework’s success. Without addressing issuer-side frictions, even the most bondholder-friendly measures risk failing, as potential issuers may simply opt out of the sustainable bond route. The following issues illustrate how the current design creates avoidable hurdles for issuers and, in turn, could limit the overall growth and credibility of the market. T.
One of the primary deterrents to participate in ESG bond market is the absence of tangible financial incentives. The pricing of ESG debt securities currently offers no clear premium or tax benefit to issuers. The premium or greenium (for green securities) refers to the pricing advantage that issuers of sustainable bonds may enjoy because bondholders are ready to settle for lower returns in exchange for supporting socially or environmentally responsible projects. But since there is substantive premium/greenium, issuers gain little economic advantage compared to conventional debt, making them naturally inclined towards plain vanilla bonds, that offer predictable returns with fewer procedural hurdles. The lack of sufficient financial incentives has also been empirically identified as a major barrier to the development of sustainable markets.
Compounding this problem is the complex and overlapping compliance landscape. As per the Framework[1], issuers are not only required to follow the Framework but also have to align with multiple international standards such as the ICMA Principles, Climate Bonds Standard, ASEAN Standards, or EU frameworks. As a result, issuers face duplication in disclosures and verification requirements, creating issuance fatigue and deterring new entrants to the sustainable bond market. This problem amplifies the financial disincentives, making ESG bond issuance both costly and cumbersome for potential issuers. Therefore, there is a need to introduce effective incentives for issuers, both financial and procedural.
IV. Strengthening the ESG Debt Securities Framework: Proposed Reforms
After highlighting the above issues, the following suggestions can serve as a starting point for meaningful reform.
Firstly, SEBI should issue more granular definitions of ESG debt instruments under the Framework. These definitions should go beyond broad categories and shall include objective thresholds that issuers must meet to qualify for ESG labelling. For instance, SEBI could require that at least 80% of the total project cost (not just the bond proceeds) be directed toward activities that fall within its defined social or sustainable categories, for them to be considered as completely ESG compliant.
This benchmark draws on international regulatory practice. For example, the European Securities and Markets Authority (“ESMA”), under its 2024 guidance on fund naming rules, requires that at least 80% of a fund’s investments must align with its stated ESG or sustainability characteristics in order to retain those labels. Furthermore, the ESMA guidance provides that funds using the term “sustainable” must allocate a minimum of 50% to sustainable investments as defined under the EU’s Sustainable Finance Disclosure Regulation. Taking inspiration from these practices, a similar tiered framework could be adopted in India. If a project falls below the 80% mark but exceeds 50%, it should not qualify for the ESG label but could instead be disclosed as having “partial ESG alignment” in the offer document. This would allow issuers to still highlight the sustainable component without misleading bondholders into believing the bond is fully ESG-compliant.
For projects where less than 50% of costs align with ESG categories, the sustainable element is too small to be meaningful and risks being used as a marketing tool rather than a genuine funding driver. Such issuers should not be allowed to raise funds under the Framework, as this would dilute the credibility of the label and undermine bondholder trust. This tiered approach ensures that the overwhelming bulk of proceeds go toward activities with genuine environmental or social value, while leaving a narrow margin for ancillary works that are necessary for project completion but do not directly contribute to ESG goals.
The implication of adopting such precision is twofold. On one hand, it would limit issuer discretion, making it harder to label bonds as ESG-compliant, and on the other hand, it would build greater transparency and comparability, allowing investors to evaluate bonds based on consistent and credible criteria. This would not only strengthen trust in ESG-labelled instruments but also attract more serious, impact-focused capital to the market.
Secondly, SEBI should address the ‘high-stakes bet’ problem by mandating concrete, enforceable rights for bondholders in sustainability-linked bonds. A possible suggestion could be including put option or event-linked redemption rights in the offer document, similar to those provided for social and sustainable bonds, allowing bondholders to demand early redemption or compensation if the issuer diverts proceeds from their stated ESG purpose.
In addition, coupon step-up clauses could also be mandated if the issuer fails to achieve the SPTs by the specified target date, increasing the interest rate until compliance is restored. According to the World Bank, a review of all sustainability-linked bonds issued globally up to the end of 2021 shows that the vast majority of sustainability-linked bonds issuance include such a coupon step-up mechanism. The targets are externally verified and set at issuance. If the targets are not met by the target date, the issuer pays the increased coupon for the remainder of the bond’s life. This observation also aligns with the ICMA sustainability linked bonds guidelines, which recommends disclosing the maximum cumulative step-up (at maturity) at the time of issuance.
The outcome of including step-up clauses for bondholders will be that they shall receive a higher interest rate if the issuer fails to meet SPTs, providing a financial safeguard and partially mitigating the risk of purpose-washing. Overall, mandating enforceable rights and well-structured step-up clauses can strengthen accountability and protect bondholders to enhance the credibility of sustainability-linked bonds.
Thirdly, tax incentives should be introduced for ESG bonds. The United States offers a useful example through its tax-exempt municipal green bonds. Interest on these bonds is exempt from federal income tax and, in some cases, state and local taxes as well. This allows issuers to offer lower interest rates than comparable taxable debt, often with longer maturities, while still attracting strong investor demand. While these benefits apply only to sovereign issuers in the US, India could go further by extending similar incentives to privately issued ESG bonds.
Lastly, a single, unified compliance guideline with clearly prioritised requirements would help eliminate redundancy and reduce confusion amongst issuers. Importantly, SEBI could incorporate the same eligibility thresholds used for ESG labelling into the compliance regime, linking requirements to the share of total project costs allocated to eligible green or social activities. Projects meeting the highest threshold (80%) should be subjected to lower compliance requirements, while those with lower shall be subject to higher compliances. This would align compliance burdens with a project’s actual sustainability focus, rewarding genuinely green or social projects with lighter requirements.
These incentives are important because, unlike in the U.S. and Europe, sustainable bonds in emerging markets like India have not consistently shown strong performance to draw investors on their own. Adopting these suggestions can fill this gap by easing financing and compliance costs for issuers. Such measures would help build early market depth and make ESG bonds a credible alternative to conventional debt options.
V. Conclusion
The Framework marks a significant shift in India’s sustainable finance landscape by broadening the scope beyond green bonds and aligning with global standards. Despite laying a strong foundation to attract impact-driven capital, there remain certain drawbacks as highlighted. To deal with such drawbacks, India’s diverse socio-economic landscape and pressing developmental needs offer a unique opportunity to lead in the global ESG space. By implementing the proposed reforms, particularly clearer definitions, enforceable rights for sustainability-linked bondholders, targeted tax incentives, and streamlined compliance, the Framework can evolve from an initial step into a powerful catalyst for impact-driven funding. Building trust in the market and aligning with India’s broader sustainable goals will be key to unlocking the full potential of ESG bonds in a country that stands at the intersection of growth and sustainability.
[1] Securities & Exchange Board of India, Framework for Environment, Social and Governance (ESG) Debt Securities (other than green debt securities) (Circular, SEBI/HO/DDHS/DDHS-POD-1/P/CIR/2025/84) <https://www.sebi.gov.in/legal/circulars/jun-2025/framework-for-environment-social-and-governance-esg-debt-securities-other-than-green-debt-securities-_94424.html> para V.3.
Abhishek Kajal is a final year law student at the Indian Institute of Management (IIM), Rohtak.