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Circular No.: F. No. IFSCA-DSF/6/2024-Capital Markets
Circular date: November 21, 2024
To address these issues, the Indian Finance Minister’s Budget 2024-25 announced the development of a taxonomy for climate finance, aimed at enhancing capital availability for climate adaptation and mitigation and addressing greenwashing concerns in India.
Under the IFSCA Listing Regulations, 2024, issuers must follow established international standards (such as ICMA Principles/Guidelines, Climate Bonds Standards, European Union Standards, ASEAN Standards and any framework or methodology specified by a competent authority or a financial sector regulator in India ) to label debt securities as “green,” “social,” or “sustainability-linked.” Issuers must also provide annual disclosures and appoint an independent external reviewer to confirm compliance with these standards.
Principles issued by IFSCA that issuers of ESG-labelled debt securities in IFSC must follow:
1. Being True to Label – Avoid misleading labels and terminology : An issuer of debt security in IFSC shall not use the name “Green”, “Social”, “Sustainability”, “Sustainability-linked” or similar terms or a combination of these terms in the issuance of ESG labelled debt securities or its marketing, unless the securities are aligned with any of the frameworks recognised by IFSCA. Additionally, the offer document and marketing materials, if any, must clearly explain how the issue including use of proceeds aligns with the chosen framework and the specific environmental or social objectives it aims to achieve.
2. Screen the Green – Transparency in methodology for project selection and evaluation: The issuer shall disclose in the offer document a statement on ESG objectives, details of process followed for evaluating and selecting the project(s) and/or asset(s), proposed use of the proceeds and details of the systems and procedures for tracking the deployment of the proceeds as per the regulation 77 (1) of the Listing Regulations, for the issue of securities. The issuer shall avoid the use of broad or generic statements to describe investment screening criteria. Further, disclosures should enable investors to fully understand the product’s sustainability-related investment screening criteria.
3. Walk the talk – Managing and tracking use of proceeds: The issuer shall outline procedures for ensuring funds are directed solely towards projects or activities as defined in the offer document and also disclose the internal control for managing and tracking the use of proceeds. Details of the systems and procedures to be employed for tracking the deployment of the proceeds of the issue must be disclosed by the issuer in the offer document.
4. Overall Impact – Quantification of Negative Externalities: The issuer shall quantify the negative externalities associated with ESG debt utilization. This could include metrics for residual environmental impacts or potential environmental risks associated with the financed projects.
5. Be alert – Monitoring and Disclose: Issuers of green debt securities shall continuously monitor and disclose the environmental impact of their projects financed by the issuance. This includes metrics demonstrating a reduction in adverse environmental impacts (e.g., carbon emissions, pollution levels) and progress towards a sustainable economy, as outlined in the offer document.
Further guidance and explanation along with examples to the aforesaid Principles have been provided by IFSCA in the circular attached. While the above principles may not be exhaustive, the issuer may choose to adopt such other methods, disclosures and processes that would assure investors as measures against greenwashing. Stock exchanges in IFSC where the ESG labelled debt securities are listed / intended to be listed shall monitor the initial and ongoing disclosures and where warranted, seek necessary clarifications from issuers. Any case of potential or actual greenwashing shall be analysed and shall be brought to the attention of IFSCA with comments. In case of any incidence of Greenwashing in the IFSC, the Authority shall undertake suitable action under the provisions of the IFSCA Act, 2019 and the Listing Regulations
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