SEBI has on February 3, 2023 issued a circular on “Dos and Don’ts Relating to Green Debt Securities to avoid occurrences of greenwashing” (“February 2023 Circular”) to all issuers who have listed or propose to list green debt securities.
Green-debt securities are defined under the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”) to mean a debt security issued for raising funds for projects and/or assets relating to renewable energy, clean transport, sustainable waste management, solar energy generation.
The February 2023 Circular defines greenwashing to mean “making false, misleading, unsubstantiated, or otherwise incomplete claims about the sustainability of a product, service, or business operation”.
Avoiding occurrences of greenwashing is important in light of the disclosure requirements for issue and listing of green debt securities (“GDS”) under Chapter IX of the Operational Circular for issue and listing of Non-convertible Securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper, 2021 (“Operational Circular”).
Though there are several disclosure requirements for an issuer of GDS under the Chapter IX of the Operational Circular, the key disclosure requirements are:
Initial disclosures (both in private and public listings) in the offer document: 1. Statement on environmental objectives of the GDS; 2. Details of the system/procedures to be employed for tracking the deployment of the proceeds of the issue; and 3. An appointment of reviewer/certifier (if any) for reviewing/certifying the project categories eligible for financing by green debt securities etc.
For an issuer who has already listed its GDS, the following continuous disclosure requirements need to be followed: 1. The external auditor is required to verify the utilisation of the proceeds of GDS and how funds were allocated from the proceeds of GDS towards the project; 2. A list of projects and/or assets to which the proceeds of GDS have been allocated, amount disbursed among others; and 3. Qualitative performance indicators and quantitative performance measures (if feasible) of the environmental impact of the projects and/or assets.
In furtherance of Chapter IX of the Operational Circular and to address the concerns of market participants, regarding greenwashing, SEBI, for an issuer of GDS, under the February 2023 Circular has listed out the following “don’ts”:
1. Not to utilise funds raised through green bonds for the purposes that will not fall under the definition of GDS under the NCS Regulations;
2. If the above-mentioned requirement is violated for a GDS already issued, then the issuer should disclose the violation to the investors;
3. Not to use misleading labels, cherry-pick data from research to highlight green practices while conveniently ignoring the practices which are unfavourable to itself;
4. Quantify negative externalities associated with utilisation of the funds raised through GDS; and
5. Not to make claims that could be falsely represented as a certification by a third-party entity.
Separately (and not relevant to the February 2023 Circular), the Companies Act, 2013 in any case has certain ESG-related aspects. This is separately attached in Annexure A.
ESG related Measures for Companies
The Companies Act, 2013 (“Companies Act”) governs ESG in the form of corporate social responsibility (“CSR”).
The Act imposes CSR obligations on companies with net worth of Rs 500 crore (Rupees Five Hundred Crore) or more, turnover of Rs 1,000 crore (Rupees One Thousand Crore) or more or a net profit Rs 5 crore (Rupees Five Crore) or more (Section 135(1), Companies Act, 2013).
The obligations include forming a CSR committee, which would in turn make recommendations in the form of a CSR policy for implementing CSR activities. Further, Schedule VII of the Companies Act enlists certain activities that are in the form of ESG and can be included in the CSR policy like activities relating to eradicating hunger, promoting sanitation, gender equality, ensuring environmental sustainability etc. The CSR is governed by the Companies (CSR Policy) Rules, 2014 (“Rules”). The Rules prescribe the criteria and how a CSR committee could be constituted and what the CSR committee should do, ex- formulating an annual action plan and recommend it to the board of the company about how funds were utilised in the CSR activities (Schedule VII, Companies Act, 2013) etc.
Further, Section 166(2) of the Companies Act mandates the director of a company to act in good faith to promote best interests of the community and for protection of environment.
Alongside the Companies Act, Companies (Accounts) Rules, 2014 also governs company’s ESG obligations. The Rule 8, Companies (Account) Rules, 2014 requires the board of director’s report to contain information regarding conservation of energy, steps taken by the company to utilise alternative sources of energy etc.
Additionally, the Ministry of Corporate Affairs (“MCA”) released in 2019 the National Guidelines on Responsible Business Conduct ("NGRBC”). The government expects all businesses/companies irrespective of size, sector etc. would use NGRBC in their business operations.
The Business Responsibility Reporting Framework (“BRRF”) is included in the NGRBC as a tool for the businesses/companies to assess internally where they are in the journey of responsible business. Annexure 3 of the NGRBC details the format of BRRF. It is not a mandatory reporting format. BRRF consists of three sections: (a) Section A- General disclosures like company details, product/services offered. Location of business, number of employees, details of trust/section 8 company to further the CSR agenda etc; (b) Section B- Management and Process Disclosures to help business demonstrate structure, policies etc, in place to meet principles and core elements like governance structure of the company should ensure that it pays taxes on time, does not indulge in bribery etc; (c) Section C- principle-wise performance indicators.
SEBI has introduced new reporting requirements on ESG parameters for top 1,000 (One Thousand) listed entities based on market capitalisation called Business Responsibility and Sustainability Report (“BRSR”) under SEBI (Listing Obligations and Disclosure Requirements), 2015 (“LODR”). The BRSR, which is similar to BRRF, is required to form part of the annual report of the top 1,000 listed entities and is mandatory for these entities. For other listed entities (including entities who have listed securities on SME Exchange) submission of BRSR is voluntary. Further, BRSR is accompanied with a guidance note to enable the companies to interpret the scope of disclosure under BRSR. The format of BRSR and guidance note can be found in Annexure I and II of the SEBI Circular on BRSR reporting by listed entities.