Ever since the net zero and reduced emission commitments in 2021, the Government of India has taken various steps to mobilise finances to achieve these goals. In fact, post publication of our last article on sustainable financing in November 2022, this significant mobilisation of funds has also been complemented by regulatory development. For instance, India debuted with its INR 16,000 crore sovereign green bond issuance (tailored to fund India’s ‘green’ needs i.e. grid scale solar and wind, green hydrogen, afforestation etc.), and this was closely followed by RBI’s framework for acceptance of green deposits. SEBI too amended the ‘green debt securities’ framework under its regulations for non-convertible securities and has enhanced the BRSR sustainability disclosures by listed companies.

India’s Department of Economic Affairs has set up a Task Force on Sustainable Finance, to develop an official Indian green taxonomy. Meanwhile, India’s sovereign green bonds and SEBI’s amendments for ‘green debt securities’ have been aligned with ICMA’s Green Bond Principles.

Impact financiers across the world have been adopting the global voluntary standards like ICMA’s social, green, sustainability and sustainability-linked bonds principles. ICMA reported that until June 2023, 97% bonds had referenced these principles. ICMA also updated its sustainability-linked principles and Key Performance Indicators (“KPI”) to include specific provisions and metrics for sovereign issuers and social metrics for corporates. Additionally ICMA also updated its social principles requiring issuers to identify the target population and its harmonised framework for impact reporting for social bonds.

Similarly, the sustainability loan principles discussed in our earlier article (issued by APLMA, LMA, and LSTA) have also been revised with updated guidance. Sustainable loans which adopt these principles, and are originated post March 9, 2023, need to align with the revised principles to qualify as ‘sustainable’. The key revisions are:

(a)   Use of proceeds – social and green loan principles

• Widened end use – Now enables (a) temporary placement of unallocated proceeds, (b) financing intangible expenses (such as training, monitoring, research and development) in support of eligible projects, and (c) financing of long dated social assets (including maintenance) by multiple consecutive social loans, subject to disclosures. While refinancing is permitted, parties are cautioned against double counting of funds for the same ‘social’/ ‘green’ project in an overlapping period.
• Project evaluation – Borrowers to have processes to identify mitigants to any material risks of negative social/ environmental impact from the eligible project being financed (such as trade off analysis and monitoring).
• Labelling loans – Where an eligible project has both social and environment benefits (e.g. green affordable housing), one can label loans as ‘green’ or ‘social’, depending on the primacy of intended objectives. Where the loan aligns with both social and green principles, this may be labelled as a sustainability loan.
  
  (b) Sustainability-linked loan principles
• Guidance on Material KPIs –KPIs for such loans need to be material to the borrower’s core sustainable and business strategy we now have clarity on what qualifies as material from:
  • an economic standpoint–KPIs with the highest impact on borrower’s operational /financial performance, which can be influenced by management decisions;
  • a sustainability standpoint – KPIs having the highest impact on the environment / external stakeholders.
• Sustainability Performance Targets – These are now required to be annual for each KPI (unless these is strong rationale for longer periods). Targets must be beyond the minimum regulatory requirement.
• Neutral Margin Adjustment – As a general practice, margin/ interest is increased when performance targets are achieved and reduced with a shortfall in target achievement. Now, parties may mutually agree to a neutral bracket where no margin adjustment applies for a slight deviation from the set performance targets.

In light of these changes, where loans are originated on or after March 9, 2023, parties will need to amend existing documentation, frameworks and policies to ensure compliance with the revised principles which aims at longevity of the ‘green’ impact.  There is now scope to negotiate constructs such as end uses, labelling of loans, material KPIs, the neutral bracket of performance targets, temporary placement of proceeds, wider end use (e.g. towards intangible expenses).

More often than not, ESG funds borrowed from outside India by Indian financial institutions such as banks and NBFCs are aligned with these principles issued by ICMA/ APLMA, which are consequently adopted into their on-lending sustainable financing frameworks. We have seen that such on-lending frameworks often provide guidance on inter alia:

(a) eligible project lists (which would provide an illustrative list of ‘sustainable’ projects and exclusionary activities such as those set out under the exclusion list published by the International Finance Corporation (IFC));

(b) project evaluation, where lenders provide for setting up a sustainability committee to determine eligibility, monitor projects and also declassify as ‘green’/ ‘social’ upon review. Care must be taken to ensure that funding to declassified projects, once cancelled, are re-allocated to other eligible projects;

(c) reporting indicators, to ensure accurate reporting.

Interestingly, with the growth of impact financing globally, in addition to the ever-looming concern of ‘green-washing’ with inflated claims of ‘green compliance’, the flip side is now also seen – with under-reporting i.e. ‘greenhushing’. Corporates have been seen to choose deliberate radio silence about their ‘green’ goals/initiatives to avoid global glare / backlash for perceived failures to meet their green targets despite achieving substantial progress. While some may view this as a company’s prerogative, (the right to remain below the radar), at a macro level, this may significantly reduce progress towards sustainability goals. SEBI’s BRSR framework helps address this to some extent by mandating declaration of ESG initiatives and their progress by the top 1000 listed companies and encouraging other listed companies to volunteer this information. As a start, impact financiers could also maintain a sustainability focussed MIS at an institutional level to track and record aggregate mobilisation of funds on a real time basis for this purpose.

Indian regulators have evidently been pushing to develop the ecosystem around sustainability and impact financing. There has simultaneously been a systemic mindset change with corporates increasingly appreciating the value of the sustainable / green ecosystem. ESG is no longer viewed as an unnecessary expense and is even perceived as a revenue generating alternative, adding ‘long term business value’ to their growth story.  For impact financiers and corporates alike, the ‘principles’ have played a crucial role in setting market standards.