SEBI Unveils News ESG Investing Schemes for Mutual Funds

SEBI Unveils News ESG Investing Schemes for Mutual Funds

The Securities and Exchange Board of India (SEBI), has taken a remarkable step towards promoting sustainable and responsible investing. In a groundbreaking move, SEBI has introduced a dedicated sub-category for ESG (Environmental, Social, and Governance) investments under the thematic category of equity schemes.

The circular permits mutual funds to launch multiple ESG schemes, each with distinct strategies, addressing the burgeoning demand for green financing and socially conscious investments with the aim to enhance transparency in the investment process.

The circular stresses on the need for consistent and comparable disclosures in ESG schemes to enable investors to make informed decisions and prevent greenwashing. It highlights the recommendations of the ESG Advisory Committee and the amendments made to the SEBI (Mutual Funds) Regulations, 1996 to expand the disclosure norms for ESG funds.

At present the mutual funds are permitted to launch only one ESG scheme under the thematic category for equity schemes. However, in view of the industry representations for allowing multiple schemes with different ESG strategies and considering the increasing need for green financing, SEBI decided to permit launch of multiple ESG schemes with different strategies by mutual funds.

Under the new measures, Mutual Funds can launch ESG schemes under a separate sub-category within the thematic category of Equity schemes. Different strategies such as:

(i) Exclusion;

(ii) Integration;

(iii) Best-in-class screening, impact investing;

(iv) Sustainable objectives and;

(v) Transition-related investments are defined for ESG schemes.

The circular stipulates that a minimum of 80 per cent of the Assets Under Management (AUM) of ESG schemes should be invested in equity and equity-related instruments aligned with the chosen strategy.

Moreover, the circular introduces investment criteria, requiring ESG schemes to invest at minimum 65 per cent of their AUM in companies with comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures, along with assurance on BRSR Core disclosures. The circular clarified that the remaining portion of the investment can be made in companies with BRSR disclosures. This requirement will be effective from 1 October, 2024, with a one-year grace period for non-compliant schemes.

The circular outlined enhanced disclosure requirements, including reflecting the scheme strategy in the scheme name, disclosing ESG scores of securities, voting disclosures highlighting environmental, social, or governance reasons, and annual fund manager commentary with case studies.

Lastly, the circular emphasized the need for independent assurance on ESG scheme portfolios and certification by the Board of Asset Management Companies (AMCs) to ensure compliance with regulatory requirements.