SEBI Well-Positioned To Give A Push To Circular Economy In India

With disastrous climate change impacts constantly making the news, the relevance and need for effective climate action interventions has become more pronounced. The conversation around circular economies falls within the ambit of the same. By dissociating economic activity from the consumption of limited resources, circular economies create a multiplier effect that benefits the environment, people, and businesses. Such economies also hold promise for achieving multiple Sustainable Development Goals (SDGs). Consequently, such an economy seeks to address important global concerns like climate change, sustainable development or biodiversity loss while unlocking new business opportunities.

Currently, India stands at an inflection point in its economic growth journey. To balance the shortfalls of fast-paced urbanization, industrialization, growing population, pollution and climate change, the country’s expeditious movement in the direction of a circular economy is unequivocal. It is estimated that if India embraces this path, it could bring in annual benefits of $624 billion by 2050, along with Greenhouse Gas (GHG) emissions reduction of 44%, according to ‘Circular economy in India: Rethinking growth for long-term prosperity, a report by Ellen MacArthur Foundation. India possesses an investment opportunity of about $45 billion by 2030 in the circular economy space, according to venture capital fund Kalaari Capital. However, according to estimates, it could only attract $1.8 billion between 2016 and 2021, clearly indicating investment deficits.

Having said that, there has been a policy push in India to accelerate the shift to a regenerative model. The SMART Cities Mission seeks to transform India’s urban spaces by spurring economic growth and improving citizens’ quality of life. By embedding waste management as a key success parameter, this initiative works towards circularity. Some cities are already making great strides in this space. Surat is a frontrunning circular city that is generating about $17.9 million in revenues from reusing its wastewater. Its municipal corporation now aims to be a net zero liquid discharge city.

Additionally, the Indian government is also preparing comprehensive transition plans for a circular economy, primarily focusing on 11 areas, including municipal solid waste and liquid waste, toxic and hazardous industrial waste and end-of-life vehicles. India is also building international partnerships to stimulate the circular economy by collaborating with the European Union (EU) to establish an India-EU Resource Efficiency and Circular Economy Partnership.

These actions demonstrate commitment from Indian policymakers and regulators towards a regenerative, low-carbon future for the country. Moreover, given that the circular economy has intricate connections to the SDGs and the global Environment, Social and Governance (ESG) agenda, sustainable finance has the potential to accelerate the circular economy. Accordingly, the contribution of financial institutions (FIs) is significant in effecting this massive transition. Nonetheless, investment gaps are holding the country back in its journey toward circularity. A significant barrier is the longer-term horizon for meaningful returns on circular economy investment or lack of investor knowledge or appetite for such longer-term models. Additionally, high transaction costs, lack of capacities and coordination amongst stakeholders have impeded the successful uptake of the circular models.

In this context, a regulatory thrust to circularity can reshape the markets and spur the circular economy in India. The Securities and Exchange Board of India (SEBI) has the capacity to create an enabling environment to realize substantial investments in the circular economy by encouraging novel sustainable finance issuances focussed on circular economy and strengthening existing regulations for institutional investors.

Strengthening alternative finance instruments

Alternative ESG and sustainable finance instruments are gaining momentum for sustainability and climate action. Innovative products and offerings are increasingly penetrating developing markets and are emerging as successful, replicable and scalable models for ‘unconventional’ investment. Instruments such as municipal bonds can unlock significant investment for circular economy projects.

SEBI issued detailed guidelines in 2019 allowing utilities to raise funds through municipal bonds, resulting in steady and successful issuances in the Indian municipal bond market. Recently, the Vadodara Municipal Corporation issued green municipal bonds for urban development projects such as water supply and sewage treatment. Supported by a central government incentive, the bonds were oversubscribed by 10 times and raised ~ US $12 million. Such issuances have reflected strong investor appetite in the municipal bond market.

In 2017, SEBI also established issuance requirements for green bonds, which has also led to a sharp rise in green debt securities in the country. In 2021, India’s cumulative green bond issuances stood at $19.5 billion. While green bonds are a sustainable debt juggernaut, newer and smaller variants of sustainable debt, including the nascent circular finance instruments, can significantly benefit from similar guidelines.

SEBI can establish specific requirements around issuances of innovative circular finance products. SEBI can also articulate circular economy as a specific priority area within existing regulations (such as in green or municipal bond guidelines). SEBI’s green bond guidelines already mention sustainable waste and water management and land use as investment areas. However, specifying circular economy within these could lead to greater capital flows in this space

Stewardship Code

SEBI’s Stewardship Code is a framework composed of six principles that aid institutional investors in meeting their responsibilities to protect and enhance the value of their clients and beneficiaries. This ensures active participation of institutional investors in the governance of investee companies.

Institutional investors are required to formulate and disclose a comprehensive policy on how they intend to fulfill their stewardship responsibilities. This policy articulates performance strategies, corporate governance, material ESG risks and opportunities, among other factors.

Here, SEBI can insert “circular economy” as one of its stewardship responsibilities so that businesses would be encouraged to move from linear to circular economic models.

In addition, institutional investors could be required to articulate a specific roadmap to circularity with tenets including internal operations as well as transforming investee companies. These roadmaps could be inspired from international best practices from frontrunning countries like Germany which have comprehensive circular economy strategies. Such roadmaps for investee companies can specifically mention how voting responsibilities would be discharged in service of circular modules with an emphasis on voting against linear models. Investors may also establish poor performance on ESG parameters or other metrics, as sufficient grounds for intervention, in collaboration with other investors. Roadmaps can include specific Key Performance Indicators (KPIs) for investee companies, against which timely disclosures are required.

Besides, institutional investors’ own disclosures may also demonstrate progress against the portfolio and the specific tenets of investee companies’ roadmaps.

India's continually evolving market and great development potential could provide it with a competitive edge to bring about a circular economy transition. Modifications to existing financial regulations or leveraging the booming sustainable debt market could encourage investors to direct greater capital to circular models. In this manner, SEBI could pave the path for swift and resilient progress to effect the long-term ambition of a circular economy for India.

(Namita Vikas is Founder and Managing Director of auctusESG, a global advisory firm for sustainable finance and ESG.)