The global financial system is steadily shifting toward sustainability-aligned capital. Investors today are no longer looking only at returns, they are equally attentive to whether their capital enables positive environmental, social and governance (ESG) outcomes. In this context, ESG debt securities have emerged as powerful financing instruments.
Under SEBI’s updated regulatory structure, ESG debt securities are categorised in three categories (excluding green bonds):
• Social Bonds — The proceeds of social bonds are earmarked strictly for projects that deliver measurable social outcomes. The issuance of these bonds should be in-line with Social Bond Principle (SBP) from ICMA, which aims towards improving disclosures and transparency in social bond markets.
• Sustainability Bonds — The proceeds of Sustainability bonds are utilized to support a mix of environmental and social initiatives. The issuance should follow the Sustainability Bond Guidelines from ICMA, which are aligned with both the Green Bond Principle (GBP) and SBP.
• Sustainability-Linked Bonds (SLBs) — Sustainability-linked bond’s financial or reputational reward/penalty is tied to the issuer achieving pre-defined ESG performance targets (SPTs) measured through credible KPIs.
With SEBI’s introduction of a new framework through Circular SEBI/HO/DDHS/DDHS-POD-1/P/CIR/2025/84 (June 2025)2, India now has a more structured, globally aligned system governing the issuance, reporting and assurance of ESG debt securities excluding green bonds, which already have a separate regulatory framework.
By aligning with global standards and frameworks (e.g., International Capital Market Association (ICMA) Principles, Climate Bonds Initiative (CBI) standards, ASEAN or EU norms), Indian issuers can make their debt instruments globally comparable and attractive to international investors.
Understanding SEBI’s 2025 Framework for ESG Debt Securities
SEBI’s new framework establishes detailed requirements for issuance, reporting, monitoring and verification of social bonds, sustainability bonds and sustainability-linked bonds.
- Clear Eligibility & Use-of-Proceeds Requirements For Social Bonds, proceeds must be allocated to clearly defined categories such as: • Basic infrastructure • Essential services (healthcare, education, sanitation) • Affordable housing • Employment generation • Food security • Poverty alleviation • Socio-economic empowerment
For Sustainability Bonds, proceeds must target a balanced portfolio of environmental and social outcomes.
For SLBs, proceeds are for general corporate purposes, but the bond’s performance is tied to achieving KPIs such as:
• GHG emissions reduction
• Renewable energy consumption
• Water efficiency
• Waste diversion
• Workforce diversity
SEBI requires issuers to justify KPI relevance, materiality and ambition aligning with global SLB principles and discouraging superficial target-setting.
Pre-Issuance Disclosures and Governance
Before issuing a Social Bond, Sustainability Bond or Sustainability-Linked Bond (SLB), SEBI requires issuers to make a detailed set of disclosures. These disclosures help investors clearly understand what the bond will finance, how impact will be measured, and how the issuer will be held accountable.
For Social and Sustainability bonds, issuers must disclose:
• Issuers must explain why the bond is being issued and what positive change it intends to create. This helps investors understand the purpose and long-term impact of the bond.
• Issuers must describe how they choose eligible projects, including the screening criteria, policies, and decision-making processes. This ensures that only genuinely sustainable or socially beneficial activities are funded.
• For social projects, issuers must define who will benefit from the outcome such as low-income communities, women entrepreneurs, or rural households. This improves transparency and avoids vague or misleading project descriptions.
• Issuers must outline the internal governance structure for managing the bond proceeds. This includes:
- committees responsible for project selection
- controls to ensure funds are used correctly
- monitoring processes for tracking project implementation
This gives investor’s confidence that the money will be used responsibly.
• Issuers must disclose potential risks (e.g., project delays, regulatory challenges, implementation issues) and explain how they will address them. This helps investors assess the reliability and credibility of the project.
For SLBs, issuers must also disclose:
• Issuers must clearly describe the Key Performance Indicators (KPIs) chosen such as GHG emissions, renewable energy use, or waste reduction. They must also explain why these KPIs are relevant, material and aligned with their sustainability strategy.
• Issuers must disclose:
- the baseline year
- current performance levels
- the Sustainability Performance Targets (SPTs) to be achieved
This transparency allows investors to judge whether the targets are ambitious and realistic.
• Issuers must explain how they arrived at the target including benchmarking against peers, national commitments, sector pathways or science-based targets.
This ensures there is no “target manipulation” or greenwashing.
• SEBI requires clear disclosure of financial penalties if the issuer fails to meet the SPT.
For example:
- an increase in coupon rate (step-up)
- other monetary adjustments
This protects investor interests and ensures accountability.
- Post-Issuance Reporting and Ongoing Monitoring Once the bond has been issued and funds have been raised, SEBI requires ongoing reporting to ensure transparency and integrity throughout the bond’s lifecycle. This is where issuers must demonstrate that the money is actually being used as promised.
SEBI mandates stringent post-issuance obligations:
• Issuers must disclose how much money was allocated, which projects received funds, and how unallocated proceeds (if any) were managed. This helps investors track whether the proceeds are being used as committed.
• For Social and Sustainability Bonds, issuers are expected to provide quantifiable impact metrics. Examples include:
- number of households receiving clean energy
- GHG emissions avoided
- students or beneficiaries impacted
- litres of water saved or recycled This allows investors to track real-world outcomes.
• SLB issuers must publish performance updates every year to show progress against their Sustainability Performance Targets. This ensures continuous accountability until the bond matures.
• SEBI requires an accredited third-party verifier (like a sustainability assurance provider) to validate KPI progress. This removes subjectivity and strengthens investor confidence that reported achievements are genuine.
•If the issuer is unable to allocate funds as intended, or if KPI progress falls behind expectations, they must clearly report these deviations. Transparency in challenges is as important as success.
- Third-Party Review and Independent Assessment A core requirement of SEBI’s ESG debt securities framework is independent external evaluation. This ensures that the issuer’s sustainability claims are credible, measurable, and aligned with global norms reducing the risk of greenwashing or social-washing. Under SEBI’s circular, issuers of Social Bonds, Sustainability Bonds, and Sustainability-Linked Bonds must obtain a third-party review before issuance. This may take the form of: • A Second-Party Opinion (SPO) • An independent Assurance / Verification Report • A Rating or Framework Assessment
These assessments must be conducted by a credible, independent organisation with the technical capability to evaluate ESG claims. As an accredited independent assessor, this is where organisations like ours play a central role.
What does the independent review cover? What is the role of independent assurance provider in ensuring integrity, trust and transparency?
The reviewer evaluates several key aspects to ensure transparency and integrity:
Alignment with Global Standards
The expert checks whether the issuer’s bond framework aligns with internationally accepted principles such as:
• ICMA’s Social Bond Principles (SBP)
• ICMA’s Sustainability-Linked Bond Principles (SLBP)
• Climate Bonds Initiative (CBI) standards
This helps ensure the bond meets global investor expectations.Integrity of Project Selection (for Social & Sustainability Bonds)
The reviewer examines whether:
• The chosen projects genuinely deliver environmental or social benefits
• The eligibility criteria are clearly defined and robust
• The expected outcomes are realistic and evidence-based.
This protects investors from overstated or misleading impact claims.Governance and Monitoring Mechanisms
This includes evaluating how the issuer plans to:
• Allocate funds
• Track expenditure
• Monitor project implementation
• Manage risks and corrective actions
Strong governance is essential to ensure funds are used responsibly.Quality and Reliability of Data (for SLBs)
For Sustainability-Linked Bonds, the review assesses whether:
• Selected KPIs are material, relevant, and measurable
• Baseline values are accurate
• Targets (SPTs) are ambitious yet achievable
• The issuer has reliable systems for data collection and reporting
This ensures that SLB targets are meaningful and not “soft” or easy to achieve.
- Risk of Misuse or Misallocation of Proceeds The review evaluates controls and internal processes to minimise: • Diversion of funds • Double counting • Non-compliance with the stated use-of-proceeds
The objective is to maintain full financial and impact integrity.
Why is Third-Party Review Important?
• Builds investor confidence by ensuring transparency and authenticity
• Protects issuers by preventing compliance lapses and reputational risks
• Improves credibility of ESG bonds in Indian and global markets
• Helps avoid regulatory and market risks, including greenwashing allegations
A strong example of the importance of independent review is DNV’s Second-Party Opinion on L&T’s ESG Finance Framework, which validated alignment with SEBI’s new ESG bond norms and supported India’s first listed ESG bond issuance under the updated framework. This demonstrated how external validation strengthens investor trust and elevates market acceptance.
Case Study
India’s First Listed ESG Bond Under SEBI’s New Framework
In a landmark development, Larsen & Toubro (L&T) issued India’s first listed ESG bond, raising ₹500 crore under the new SEBI framework1.
Key highlights:
• DNV, a global assurance and risk management provider, issued the Second-Party Opinion (SPO).
• The SPO confirmed the alignment of L&T’s ESG Finance Framework with SEBI’s 2025 regulatory guidance as well as international sustainable finance standards.
• The issuance demonstrated strong investor interest, reflecting rising demand for credible ESG-labelled debt instruments in India.
• The transaction strengthened India’s positioning in the global sustainable finance ecosystem.
This issuance sets an early benchmark and exemplifies the importance of robust governance, transparent disclosures and credible assurance.
Challenges and Considerations Ahead
While the framework is comprehensive, implementation may face challenges:
• Issuer capacity to implement robust data and reporting systems
• Inconsistent ESG data across sectors
• Need for scaling third-party expertise
• Risk of treating ESG bonds as compliance exercises instead of strategic tools
• Limited awareness among mid-cap issuers
Building capacity, strengthening assurance standards and enhancing issuer readiness will be critical for long-term success.
Conclusion
SEBI’s 2025 framework marks a transformative moment for India’s sustainable finance landscape. By enforcing robust governance, transparent disclosures, and mandatory independent assurance, the regulator has elevated ESG debt securities to global standards.
For issuers, it offers access to responsible capital.
For investors, it brings credibility, comparability and measurable impact.
For assurance providers like us, it positions independent verification as a central pillar in India’s ESG debt market.
As India continues its journey toward a more sustainable and inclusive financial ecosystem, ESG bonds underpinned by strong regulations and independent assurance will play an increasingly strategic role in mobilizing capital for long-term, impactful growth.
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References
1.https://www.dnv.com/news/2025/dnv-supports-indias-first-esg-bond-issuance-by-lt-under-new-framework-for-sustainable-finance/
2.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
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