The International Financial Services Centres Authority ( IFSCA ) has released detailed guidelines to address concerns of “greenwashing” in the issuance of Environment, Social, and Governance ( ESG ) labelled debt securities, including Green Bonds, Social Bonds, Sustainability Bonds, and Sustainability-linked Bonds.
Greenwashing, broadly defined, involves deceptive practices such as making unsubstantiated, exaggerated, or misleading claims about the sustainability benefits of a product, service, or operation. It also includes omitting or concealing relevant information. In the context of ESG-labelled securities, such practices can mislead investors and create an uneven playing field between genuine and non-compliant issuers.
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The IFSCA (Listing) Regulations, 2024, require ESG-labelled debt securities to comply with one of the following recognized international standards:
The guidelines stated that the issuers must appoint independent external reviewers to ensure compliance with these standards and provide initial and annual post-issuance disclosures.
Being True to Label – Avoid misleading labels and terminology
Issuers must ensure that ESG-labelled securities align with recognised regulations or any frameworks. Offer documents and marketing materials must clearly explain the alignment and specify environmental or social objectives. Misleading labels, vague claims, or inconsistent strategies are prohibited.
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Screen the Green – Transparency in methodology for project selection and evaluation
As per the principles, issuers of ESG-labelled securities must disclose details in their offer documents, including ESG objectives, project evaluation processes, proposed use of proceeds, and tracking mechanisms for fund deployment, as per Regulation 77(1) of the Listing Regulations. Broad or generic investment criteria are discouraged to ensure clarity for investors.
Issuers must clearly communicate project sustainability goals, methodologies for measuring these objectives, risk management processes, and tools used for decision-making. For sustainability-linked bonds, issuers must detail targets, timelines for achievement, and assumptions, providing investors with a complete understanding of the product’s sustainability alignment.
Walk the Talk – Managing and tracking use of proceeds
Issuers of ESG-labelled securities must establish and disclose procedures for ensuring that funds are used exclusively for projects outlined in the offer document. Internal controls for tracking and managing the deployment of proceeds must be transparently communicated.
A detailed allocation plan should specify how funds will be utilised to finance or refinance eligible projects, including disclosures about temporary placements of unallocated proceeds and their environmental impact.
Issuers are required to disclose any misallocation of funds to investors and, in significant cases, consult with them on early exit opportunities.
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Overall Impact – Quantifying Negative Externalities
The issuers of ESG debt securities must quantify the negative externalities associated with the utilisation of proceeds, including residual environmental impacts or potential risks linked to financed projects. The offer document should clearly acknowledge any limitations or trade-offs in the environmental benefits of the financed initiatives.
Environmental data must be comprehensive, verifiable, and presented in a way that avoids selectively highlighting favourable metrics while ignoring unfavourable ones. Issuers should ensure that they provide a full, transparent picture of the overall environmental impact, including life cycle assessments, rather than focusing only on isolated benefits.
For instance, a company claiming a 50% reduction in carbon emissions through its “EcoSmart” packaging line should disclose detailed calculation methods, including the full lifecycle impacts (production, transportation, disposal) to avoid misleading representations of the project’s environmental effectiveness.
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Be Alert – Monitoring and Disclose
Issuers of green debt securities are required to continuously monitor and disclose the environmental impact of their financed projects, highlighting reductions in adverse impacts such as carbon emissions or pollution levels, as well as progress towards a sustainable economy. These details must be aligned with the objectives outlined in the offer document.
Issuers should provide a list of projects funded by the debt proceeds, including a brief description, the amounts allocated, and the expected environmental impacts. Disclosures should include both qualitative and, where possible, quantitative performance indicators to measure the ESG impact of the projects.
The issuer must explain the methods used to assess progress towards sustainability targets and the underlying assumptions used in preparing these indicators. If the expected quantitative benefits or impacts cannot be measured, the issuer should clearly disclose this limitation, along with an explanation.
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