India Expands ESG Debt Scope After Surpassing 2021 Issuance Record

India is taking significant steps to enhance its environmental, social, and governance (ESG) debt market. The Securities and Exchange Board of India (SEBI) has announced plans to expand the scope of its sustainable finance framework, potentially introducing new ESG-labeled instruments in Asia.

SEBI’s New Proposals

SEBI’s consultation paper outlines the introduction of social bonds, sustainable bonds, and sustainability-linked bonds to the current ESG debt market. This move aims to provide issuers with more opportunities to direct capital towards diverse projects, beyond the traditional focus on green bonds. The paper also proposes the inclusion of eligible asset-backed securities and mandates independent external reviews of all ESG debt to ensure transparency and credibility.

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

Record-Breaking ESG Debt Issuance in 2024

India’s ESG debt issuance in 2024 has already reached $15.6 billion, surpassing the previous annual record set in 2021. Despite this achievement, India’s volume of ESG debt still trails behind other major Asian markets such as China and Japan.

Currently, the existing regulatory framework in India supports products that raise funds specifically for environmental sustainability initiatives, like renewable energy or water management. With the proposed changes, issuers will have the flexibility to seek funding for a broader range of activities, promoting overall sustainable development.

Supporting Green Growth in India

Expanding the ESG debt market aligns with Prime Minister Narendra Modi’s focus on green growth, contributing to India’s broader sustainable development goals. Additionally, this move may help counteract the global slowdown in ESG bond issuances, which has been impacted by a decline in Chinese issuances.

According to Sustainable Fitch, the global volume of ESG-labeled bonds fell by about a third in the second quarter of this year compared to the same period last year. SEBI’s proposals could bolster the global ESG market by increasing India’s contribution to sustainable finance.

The consultation period for SEBI’s proposals will continue until September 6, 2024. If implemented, these changes could position India as a leading player in the global ESG debt market, providing new avenues for sustainable investment and growth.