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Overview of sustainability-linked loans

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-An emerging and promising financing substitute

Surabhi Chura | corplaw@vinodkothari.com

There has been a growing emphasis on sustainability across various sectors including finance, especially, with a growing mandatory requirement of disclosure of sustainability practices by companies around the world. Various sustainability-linked finance products are designed to promote the ESG objectives of the borrower while providing financial solutions.

Traditionally, loans have remained the most common way of raising finance, and sustainable finance is no exception to the same. These loans may be labelled as green loans, social loans, sustainable loans etc. Various organisations have issued voluntary guiding principles around the same[1]. A commonality in these loans is the restriction on the “use of proceeds” – that are directed towards the green, social or sustainable objectives of the borrower. Another form of sustainable finance through loans is Sustainability-linked Loans (SLLs), where the loan contains certain sustainability-linked terms. Contrary to typical green finance products, which allocate funds for designated green projects or assets, SLLs align the loan conditions with the sustainability performance of the borrower.

Other instruments of raising sustainable finance can be through the issuance of labelled bonds or GSS+ bonds. Read more about the same in our article – Sustainable finance and GSS+ bonds. One of the more recent innovative ways of financing sustainability objects of the borrower can be through Sustainability-linked derivatives.

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BRSR Core: SEBI comes up with additional disclosures and assurance on Core matters

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As social stock exchanges seem imminent, auditors get ready with social audit standards

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ICAI and ICSI issue social audit standards

– Sharon Pinto & Kaushal Shah (corplaw@vinodkothari.com)

Background

As we understand, the concept of Social Stock Exchanges (‘SSEs’) have been brought under the regulatory purview of Securities and Exchange Board of India (‘SEBI’) for listing and raising of capital by Social Enterprises, the details of which can be read in our article Social stock exchanges: philanthropy on the bourses as well as our other resources linked with the concept of SSEs and social sectors.

Social Enterprises are defined under regulation 292A (h) of the SEBI (ICDR) Regulations, 2018 (‘ICDR Regulations’) and are expected to be engaged in the specified activities provided therein. With the objective to assess the impact created by such social activities by the Social Enterprises, Self Regulatory Organisations (‘SRO’s) recognised under ICAI, ICSI and such other bodies as may be prescribed by SEBI have been considered to be eligible to act as platforms to register Social Auditors. ICAI has approved the formation of an SRO named ‘Institute of Social Auditors of India’ while ‘ICSI Institute of Social Auditors’ is the recognsied SRO under ICSI. Such auditors are also required to undergo a certification program conducted by National Institute of Securities Market (‘NISM’).

ICAI has recently sought interest for the initial empanelment of Social Auditors.[1] The eligibility criteria for empanelment as a Social Audit firm requires having a track record of minimum three years of conducting social impact assessment. Further, average annual grants or expenditure of social enterprise of the last 3 financial years should be atleast Rs. 50 lakhs and the firm should have suitable human resources in the field of social development having experience of usage of relevant methodology of social audit. The disqualifications includes any individual or any of the partner/director of an entity being convicted for an offence of moral turpitude or declared as an undischarged insolvent/bankrupt or has been debarred by SEBI.  

To put it in simple terms, Social Auditors are required to conduct Social Audit of the activities carried on by Social Enterprises. To aid the Social Auditors in carrying out the Social Audit, both the SROs being ICAI and ICSI have rolled out the Social Audit Standards (‘SAS’) to assist and guide their empanelled auditors for the purpose of carrying out the audit in accordance with the SAS Framework. Looking at the imminence of SSEs to come into reality with SEBI granting in-principle approval to both BSE and NSE in December, 2022, SROs have rolled out SAS for the quick reference and guidance for their registered auditors.

In this write-up, we have covered the key takeaways from the SAS and its relevance, applicability as well as mapping with the global principles on social audit.

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Sustainable finance and GSS+ bonds: State of the Market and Developments

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– Vinod Kothari and Payal Agarwal | corplaw@vinodkothari.com

The topic of sustainable finance has become as critical as sustainable development, since finance is the prerequisite for sustainable development. “Finance can play a leading role in allocating investment to sustainable corporates and projects and thus accelerate the transition to a low carbon and more circular economy. Moreover, investors can exert influence on the corporates in which they invest.  In this way, long-term investors can steer corporates towards sustainable business practices.”[1] Hence, there is momentum towards organising funds and resources to transition from low energy efficiency to high energy efficiency, or renewable energy devices.

The expression “sustainable finance” is broader, as it encompasses the use of ESG considerations in financing decisions.[2] However, sustainability bonds are capital market instruments issued with a stated end-use. The term GSS+ bonds, which has recently been much in vogue, has G, S, S and then augmented by the + sign. The components of “GSS+” are as follows:

G : Green

S: Social

S: Sustainability

+ :  Other labeled bonds, particularly, transition bonds, and depending on the usage, may also include sustainability-linked bonds.

The other labeled bonds may also include blue bonds, gender bonds, climate bonds, yellow bonds etc., although the same may already be covered under one of the components of the GSS bonds. For instance, blue bonds are taken as a part of green bonds, and gender bonds are taken as a part of social bonds.

GSS+ bonds are also called “thematic” or “labeled” bonds, with the use of their proceeds linked with the respective theme represented by such bonds. These expressions may be somewhat overlapping[3].

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Understanding the budding concept of green securitization

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  • Awaiting standardization and widespread adoption

– Payal Agarwal, Senior Executive ( payal@vinodkothari.com) Amidst the upward trends in green financing and developing complex securitization structures, the evolution of green securitization comes naturally and inevitably. While the concept may not be very familiar in the country at present, in view of the increasing attention on the need of sustainability and demands for sustainable financing, both from the corporates and the investors, green securitization is likely to witness a successful market in India. In this article, we try to develop an idea on green securitization with its present position throughout the world and the potential future of green securitization. Read more →

Business Responsibility and Sustainability Reporting

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Business Responsibility and Sustainability Reporting

Other ‘I am the best’ presentations can be viewed here

Our other resources on related topics –

  1. https://vinodkothari.com/2021/06/brsr-reporting-actions-and-disclosures-required-for-business-sustainability/
  2. https://vinodkothari.com/wp-content/uploads/2020/08/Cartload-of-details-in-BRSR.pdf
  3. https://vinodkothari.com/2020/08/brr-in-process-to-become-a-fully-loaded-electronic-form/
  4. https://vinodkothari.com/2016/01/global-overview-of-business-responsibility-reporting/

Our resource center on Business Responsibility and Sustainable Reporting can be accessed here –
https://vinodkothari.com/resource-center-on-business-responsibility-and-sustainable-reporting/

BRSR Reporting: Actions and disclosures required for business sustainability

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Abhishek Saraf, Manager and Payal Agarwal, Executive (corplaw@vinodkothari.com)

Background

The Business Responsibility and Sustainability Reporting (“BRSR”), originating from the MCA report on Business Responsibility Reporting, has found its way into the regulatory provisions by way of an amendment to the Regulation 34(2)(f) of the Listing Regulations[1], notified on 5th May, 2021. Further, SEBI vide circular dated 10th May, 2021 introduced the format of BRSR and the guidance note to enable the companies to interpret the scope of disclosures.

The BRSR will replace the existing BRR format w.e.f. FY 2022-23. For the FY 2021-22, the top 1000 listed entities may voluntarily submit the BRSR and from FY 2022-23 onwards, the same has to be submitted mandatorily. It is notable that the BRSR, though replacing BRR, is actually an extension of the existing BRR reporting While the BRSR has been made effective from FY 2022-23, it has to be understood that reporting is secondary, and needs to be backed by the company taking appropriate actions to ensure a positive report. Where the BRSR reporting of a company is negative, the same, though not a non-compliance of the regulatory provisions, will result in a negative impact on the minds of the stakeholders.

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