[By Aditya Kumar and Samridhi Singh]
The authors are students of Chanakya National Law University, Patna
Introduction
In the era of online campaigns and global movements, corporate entities have found a place for themselves to engage with the larger social discourse either through their strong advertising campaigns or their ESG commitments. What has become a trendy PR activity for most companies, especially post the success of the Nike campaign on the lines of Black Lives Matter, was initially set out to instil a sense of broader responsibility towards society and governance. This is precisely where the threat of purpose washing knocks at the door of corporate giants, with the tide turning on their faces in several instances when their practical actions fall short of their larger PR budgets. Companies like Gillette, Coca-Cola, and McDonald’s have done their fair share of what is known as Woke Washing, a subset of Purpose Washing apart from Greenwashing. Although these terms have minute differences, they share the common thread of inconsistent action when it comes to purposes beyond profit maximisation.
Purpose washing, as defined in the Securities Exchange Board of India (“SEBI”) Circular titled ‘Framework for Environment, Social and Governance (“ESG”) Debt Securities (other than green debt securities)’ (hereinafter referred to as the “SEBI Circular”) dated June 05, 2025, refers to false, misleading, unsubstantiated, or otherwise incomplete claims regarding the purpose of issuance of bonds. The SEBI Circular, in pursuance of the Circular dated December 2024 and Securities and Exchange Board of India (Issue and Listing of Non-Convertible Securities) Regulations, 2021 (“NCS Regulations”), introduced the regulatory framework for social bonds, sustainability bonds, and sustainability-linked bonds. Notably, one of the regulatory parameters covered the compliance for curbing purpose washing in cases of issuance of social and sustainability bonds.
The SEBI Circular on ESG Debt Securities excludes sustainability-linked debt securities from the ambit of compliance, and it mandates keeping purpose washing in check. This specific lacuna, apart from the others, poses a serious threat to the overall purpose of the Circular itself. With this premise, the article explores the regulatory compliance for sustainability-linked debt securities and critically evaluates the void in the framework curbing purpose washing.
Differing Compliances for Debt Securities
ESG Debt Securities, other than green debt securities, are largely distinguishable from each other on the basis of the primary objective for which they are to be utilized. Social bonds, on the one hand, are utilized for social projects initiated to alleviate a social issue (a list of which is mentioned in the SEBI Circular). Sustainability bonds are issued for financing or refinancing of green projects and social projects as defined in the Circular. However, the third category of debt securities, i.e., sustainability-linked debt securities, does not have any set parameters of activities or objectives for which it is issued. These instruments address the predetermined goals of the issuer, furthering their broader sustainability objectives. Contrary to social and sustainability bonds, which are ‘use proceeds’ and are utilized for a specific purpose, sustainability-linked bonds attend to the sustainability goals of the issuer itself.
Due to the differences in the nature of the debt security, the compliance that follows also differs significantly. Sustainability-linked debt securities are measured using Sustainability KPIs against predefined Sustainability Performance Targets (SPTs). The initial disclosures to be made by the issuers of sustainability-linked bonds revolve around the rationale for the issuance and its consistency with the broader sustainability strategy of the issuer. Moreover, the details of the KPIs and SPTs, and their modus operandi for carrying out risk assessment, need to be disclosed initially. The issuer, under this, can also elect an ESG committee in order to monitor the performance under the issuance of debt securities. These initial disclosure compliances differ significantly from those of social and sustainability bonds as they are more inward-looking in nature. They demand contemplation and introspection from the issuer as it functions as its own assessor while achieving the sustainability targets defined by it. The compliances enable the issuer (who is more of a self-serving referee in this case) to play from both sides of the fence Where the reality differs from this presupposition is when the independent third-party report surfaces in the continuous disclosures filed by the issuer.
As opposed to the use proceeds, where the majority of post-issue compliance obligations revolve around reporting the utilization of the proceeds and their subsequent social impact, KPI-based securities depend on the international standards for post-issue compliance. The predicament with international standards arises from the leniency granted by the regulator to issuers in choosing the standard they wish to comply with. Certain standards, like indicators of the European Union, present a discrepancy in the compliance requirement for green bonds and sustainability-linked bonds, where, on one hand, for the former, it offer robust protections to investors, and for the latter, the disclosure requirements remain voluntary in nature. This, in pursuance of the prior heavy-handedness of the issuer in the initial disclosure, puts the investor in a dubious situation. Essentially, it demands that the investor be active in ascertaining the protections offered by the international standard to be adopted by the issuer, as mentioned in the offer document, along with the report of the reviewer for the issue of sustainability-linked debt securities.
The curious case of purpose washing
Although it appears that the SEBI Circular intends to remain consistent with the international standards by requiring SPTs to be ambitious and material, it fails to maintain a robust mechanism to keep the threat of purpose washing in check. Interestingly, the compliance mentioned in the Circular to curb purpose washing does not require any such compliance on the part of issuers of sustainability-linked bonds. For debt securities with the flexibility and lack of end-use restrictions, like that of sustainability-linked bonds, a complete absence of adherence to any set of rules for purpose washing puts investors in a turbulent position, as the fluctuations in the interest rates on these bonds rely on the fulfillment of the targets set by the issuer. Considering the overbearing control of the issuer, the susceptibility of greenwashing or even woke-washing, for that matter, remains high in the case of sustainability-linked bonds.
Even though a contradiction to this deduction can be the strict compliance offered by the international standards to be adhered to by the issuer post-issue of the debt securities (i.e., continuous disclosures), the argument falls flat as the standard with which the issuer wishes to remain compliant is again left to their discretion. The lack of scrutiny on purpose washing makes it a favourable option for the issuer but a highly dangerous investment for the investor. The primary issue it proposes is the distortion of the market through the incentivization of certain instruments on the basis of regulatory gaps rather than the sustainability impact they could have had. Irrespective of choosing to opt for a more positive outlook on the circumstances by virtue of the argument that the regulation might incentivise companies to fulfil their sustainability goals or achieve their ESG targets, the lack of any post-issue compliance ensuring the fulfilment of the same makes it all a game of dead ducks for the investor and the market.
Apart from being turbulent investments, these unfulfilled KPI-based debt securities also pose a bigger question of deviating corporate responsibility from sustainability objectives. On paper, the targets present a desirable picture of reduced CO2 emissions, a shift to renewable or green energy, certifications for clean energy, increased gender diversity, better facilities for employees, etc., yet the lousy compliance and lack of penal provisions pinch a hole in this dreamy picture. Expecting corporations to be enthusiastic sustainability activists or compliers is to be under an illusion or chasing rainbows. Incentivization, from one perspective, is necessary and pragmatic to lure corporations and trend sustainability; however, the absence of a regulatory mechanism makes the Circular unpalatable. Yet, the reduction of sustainability-linked debt securities as a questionable investment remains the most regrettable part.
Conclusion
While the SEBI Circular is largely hailed as a step in the right direction post the issuance of previous circulars (which did not lay down any regulatory framework for ESG Debt Securities), it poses piercing questions as far as compliance with sustainability-linked debt securities is concerned. The Gillette campaign ‘The best a man can be, as mentioned at the outset, serves as a glaring example that purpose cannot serve exclusively as a marketing discipline. With the global rise in the total volume of green debt securities and ESG Debt Securities, thorough compliance assumes the significance of the highest order in the best interests of all stakeholders, from issuers to the debenture trustees and the rating providers.
With the deletion of Chapter IX of the NCS Master Circular via Third Amendment Regulation, 2024, the compliance under the SEBI Circular is further pushed into a delirium. Overall, the Circular attends to the funding gap in the market of sustainable finance, which will ideally encourage parties to invest by boosting investor confidence. However, what remains of the ambiguous case of the sustainability-linked debt securities is disputable and can be best left for time to decipher.