In a landmark development to promote sustainable investing and provide greater transparency for investors, the Securities and Exchange Board of India (SEBI) has taken significant steps to bolster Environmental, Social, and Governance (ESG) investing within the Mutual Fund industry.
Previously, Mutual Funds were limited to launching only one ESG scheme under the thematic category of Equity schemes. However, responding to industry representations and the rising demand for green financing, SEBI has now permitted the launch of multiple ESG schemes with diverse strategies.
To ensure that investors can make informed decisions and to prevent greenwashing, SEBI had earlier prescribed disclosure norms for ESG schemes. Recognising the importance of consistent and comparable scheme disclosures for ESG investments, SEBI established an ESG Advisory Committee. This committee provided recommendations to enhance transparency and mitigate the risks of mis-selling and greenwashing. After extensive public consultation, SEBI recently amended the SEBI (Mutual Funds) Regulations, empowering funds under ESG schemes to be invested in accordance with SEBI’s instructions.
ESG schemes can now be launched with strategies such as Exclusion, Integration, Best-in-class & Positive Screening, Impact investing, Sustainable objectives, and Transition or transition-related investments. To ensure a higher level of commitment to ESG principles, SEBI mandates that ESG schemes invest at least 65% of their total assets in companies with comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures and assurance on BRSR Core disclosures. This requirement will be applicable from October 01, 2024, and schemes not in compliance must achieve compliance by September 30, 2025.
To promote transparency and provide investors with valuable insights, SEBI has set out specific disclosure requirements for ESG schemes. These include clearly reflecting the ESG strategy in the scheme’s name, disclosing ESG scores of securities in monthly portfolio statements, providing the specific rationale for voting decisions based on environmental, social, or governance reasons, and including an Annual Fund Manager Commentary covering examples of how the ESG strategy was applied.
To enhance accountability, Asset Management Companies (AMCs) will be required to obtain independent reasonable assurance on their ESG scheme’s compliance with the stated strategy and objective. This assurance will be provided on a “comply or explain basis” for all ESG schemes for FY 2022-23 by December 31, 2023. Subsequently, disclosure of assurance will be made in the scheme’s annual report. The board of directors of AMCs will also certify the compliance of ESG schemes with regulatory requirements, including disclosures, in the annual report of the scheme.
These measures have been introduced by SEBI under its powers to protect investor interests and regulate the securities market. The circular aims to promote ESG investing and facilitate green financing while ensuring transparency and responsible investment practices within the Mutual Fund industry.