IFSCA circular · 21 Nov 2024
Page 1 of 7 CIRCULAR F. No. IFSCA-DSF/6/2024-Capital Markets November 21, 2024 To, Recognised stock exchanges in the International Financial Services Centres (IFSCs) Issuers who have listed/propose to list ESG labelled debt securities in the IFSCs Dear Sir/Madam, Subject: Principles to mitigate the Risk of Greenwashing…
[Image omitted. See the official document.]
CIRCULAR
F. No. IFSCA-DSF/6/2024-Capital Markets
November 21, 2024
To,
Recognised stock exchanges in the International Financial Services Centres (IFSCs)
Issuers who have listed/propose to list ESG labelled debt securities in the IFSCs
Dear Sir/Madam,
Subject: Principles to mitigate the Risk of Greenwashing in ESG labelled debt securities in the IFSC
International Financial Services Centres Authority (IFSCA) recognizes the pivotal role of ESG labelled debt securities (Green Bonds, Social Bonds, Sustainability Bonds, Sustainability-linked Bonds and other labelled bonds as may be specified) in financing sustainable development and transition to a low-carbon economy. However, there is a growing concern globally among stakeholders, including investors, regarding the accuracy and reliability of claims made by issuers about the sustainability benefits of the projects or assets they invest in. While there is no universally accepted definition/taxonomy of greenwashing, the term “Greenwashing” generally refers to the deceptive practice of making unsubstantiated, false, vague, exaggerated or misleading claims regarding the sustainability benefits of a product, service, or business operation. It also includes practices such as concealing, omitting, or hiding relevant information in sustainability claims and use of words, labels, symbols, and imagery placing emphasis on positive environmental aspects while downplaying or concealing harmful attributes.
In the context of ESG labelled debt securities such claims may exaggerate, misrepresent, or omit information about the projects or assets where the proceeds of issuance are utilised to create a false impression of sustainability, thereby misleading investors. Greenwashing undermines investor confidence and market integrity. This can also result in an uneven playing field between issuers engaging in greenwashing and those who have genuinely “greened” operations.
The announcement of the Hon’ble Finance Minister in the Budget speech of 2024-25 towards developing a taxonomy for climate finance for enhancing the availability of capital for climate adaptation and mitigation will support in addressing issues related to greenwashing across various sectors in India.
The International Financial Services Centres Authority (Listing) Regulations, 2024 (“Listing Regulations”) requires one of the following international standards/principles to be adhered to in order to label the debt securities as “green”, “social”, “sustainability” and “sustainability-linked” bond:
Further, the Listing Regulations, in addition to mandating certain initial and annual post issuance disclosures, mandate the appointment of an independent external reviewer to ascertain that the ESG labelled debt securities are in alignment with any of the recognised standards mentioned above.
International Organization of Securities Commissions (IOSCO) in November 2022 published the paper1 on “IOSCO Good Sustainable Finance Practices”. The good practices identified by IOSCO focus on product-level disclosures concerning naming, labelling and classification of sustainability-related products, investment objectives and strategies disclosure, monitoring of compliance and sustainability-related performance of products.
ICMA2 also published a report on “Market integrity and greenwashing risks in sustainable finance” in October 2023 and identified four areas of concern of greenwashing with respect to sustainable bonds viz. lack of ambition, strategic inconsistency, mismanagement of wider sustainability risks and actual deception.
In line with the above, practices prevalent in other jurisdictions and in order to further promote transparency, accountability and adequacy of disclosures to investors, the IFSCA hereby issues the following principles which issuers of ESG labelled debt securities in IFSC should adhere to:
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.
Further Guidance: An issuer should refrain from labelling or representing projects/activities as environment friendly with vague green claims when the projects/activities are only partially green, or when the green attributes are not a significant part of its overall environmental impact. Further, there should not be any strategic inconsistencies, to illustrate, where there is a lack of a broader sustainability/environmental strategy accompanying a green bond especially where there is a clear inconsistency between the green label and what the issuer does beyond the label. In case of sustainability linked bonds, issuer on a voluntary basis may consider taking an external review on adequacy of ambition.
A bond is being marketed as a Green Bond; however, the issuance is not aligned with any of the recognised frameworks as referred in sub-regulation (1) or (2) of regulation 76 of the Listing Regulations.
A bond is issued as a sustainability-linked bond; however, the sustainability performance targets (SPTs) are too low or their tracking/reporting is misrepresented, or data is being selectively picked from research while ignoring other data which is unfavourable to issuer.
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.
Further Guidance:
I. The issuer of the security should clearly communicate:
II. If the issuer has set a certain sustainability target as in the case of sustainability-linked bonds, the issuer should clearly explain:
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.
Guidance: A detailed allocation plan outlining how the proceeds will be used to finance or refinance projects or activities shall be stated in the offer document. The issuer shall disclose to investors the details of investment and instruments towards temporary placement for unallocated net proceeds along with the environmental impact of such investments. In case of any inadvertent misallocation of green bond proceeds, issuers must promptly disclose this to investors. In extreme cases, it is advisable to consult the investors for early exit opportunity.
