The Securities and Exchange Board of India (Sebi) came out with a circular on February 3, 2023, outlining the criteria that issuers of green debt securities should follow to avoid greenwashing.
Sebi broadly defines a green debt security as one that is issued for the purpose of raising capital to be used for the cause of sustainable development or furthering energy efficiency.
What Is Greenwashing?
The term ‘greenwashing’ refers to falsely claiming that a company’s products, services, or business operations are more environmentally friendly than they actually are.
Companies which engage in ‘greenwashing’, mislead the market participants who buy these securities.
Sebi said in the circular that an issuer of green bonds shall not use misleading labels, hide trade-offs, or, cherry pick data from research to highlight green practices, while obscuring others that are unfavourable. It also asked issuers to ensure that they continuously monitor the transition to a more sustainable form of operation.
The circular further said that issuers of green debt securities must ensure that funds raised through green bonds are not used for purposes that would not fall under the definition of ‘green debt security’ under the non-convertible securities (NCS) regulations.
Purposes Listed In NCS
Categories of assets have been listed under the NCS regulations, where capital raised through green bonds can be invested. These include investment in renewable and sustainable energy, such as wind, solar, and bioenergy. Investing in public transportation, energy efficient buildings, biodiversity conservation, sustainable waste management, and climate change adaptation also fit the description.
Other areas where green bonds can be invested include sustainable land use, sustainable forest and agriculture, afforestation, and sustainable water management. Sebi has also listed other new categories from time to time on its website.
Sebi has told issuers that if they notice capital raised from green bonds is being invested outside of the above-mentioned asset classes, they should inform investors and allow for early redemptions if majority of investors demand it.
“Issuer shall maintain highest standards associated with the issue of green debt security while adhering to the rating assigned to it. It shall quantify the negative externalities associated with utilisation of the funds raised through green debt security. It shall not make untrue claims giving false impression of certification by a third-party entity,” Sebi said.