The Securities and Exchange Board of India (SEBI) has recently implemented a groundbreaking change by introducing a separate sub-category for ESG (Environmental, Social, and Governance) investments under the thematic category of equity schemes.

Under the existing guidelines, mutual funds were allowed to launch only one ESG scheme within the thematic category. However, given the emergence of ESG investments and the need for transparency, SEBI now permits the launch of multiple ESG schemes with different strategies by mutual funds.

The initial proposal in February 2023 allows mutual funds to introduce ESG schemes with any of the six strategies provided by the market regulator. These strategies include exclusion, integration, best-in-class and positive screening, impact investing, sustainable objectives, and transition or transition-related investments.

To ensure clarity and distinction, mutual funds must ensure that the schemes they launch have clearly defined asset allocation and investment strategies.

In the past, ESG schemes were required to invest solely in companies with comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures. However, the new SEBI decision mandates that at least 80% of the assets under management (AUM) should be invested in equity and equity-related instruments related to the particular strategy of the scheme.

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The remaining 20% should not contradict the scheme, and at least 65% of the AUM should be invested in companies with comprehensive BRSR disclosures, accompanied by assurance on BRSR Core disclosures. The rest of the AUM can be invested in companies that comply with BRSR disclosures.

To ensure transparency and informed decision-making for investors, mutual funds must clearly disclose the ESG strategy's name in the name of the concerned ESG fund/scheme (e.g., XYZ ESG Exclusionary Strategy Fund, ABC ESG Best-in-class Strategy Fund). Additionally, they must provide quarterly voting information for investments and monthly ESG ratings of securities, along with details of the ESG ratings provider.

With these progressive changes, SEBI aims to enhance the ESG investing landscape in India by offering investors a more comprehensive range of options and promoting sustainable and responsible investment practices.

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Source: Personal FN