In a significant move to promote responsible investing and sustainable practices, the Securities and Exchange Board of India (SEBI) has given the green light for mutual funds to launch five new categories under the Environmental, Social, and Governance (ESG) scheme. The regulator’s decision comes with the stipulation that mutual funds must also implement a robust disclosure framework.
The newly introduced categories under the ESG scheme include exclusions, integration, best-in-class and positive screening, impact investing, and sustainable objectives. This expansion is expected to open up avenues for mutual funds to align their investment strategies with ESG principles, driving positive change in the financial sector.
SEBI’s circular emphasized the importance of enhanced disclosures and mitigation of greenwashing, indicating its commitment to ensuring transparency and accountability within the investment landscape. The provision of the new ESG categories will be effective immediately, encouraging fund managers to explore sustainable investment options for their clients.
Regarding disclosure requirements, SEBI mandates mutual funds to clearly state the name of the ESG strategy in the concerned ESG fund’s title. Additionally, monthly portfolio statements of ESG schemes should include security-wise BRSR (Business Responsibility and Sustainability Reporting) Core scores, along with the names of ESG Rating Providers (ERPs) and their respective ESG scores.
To foster green financing and reinforce ESG commitment, SEBI has set a requirement for ESG schemes to invest a minimum of 65% of their assets under management (AUM) in listed entities with assured BRSR Core scores. The remaining AUM can be invested in companies that have BRSR disclosures. This regulation will take effect on October 1, 2024.
Furthermore, any changes in ERPs used by mutual funds must be disclosed in subsequent monthly portfolio statements. This measure aims to ensure transparency and informed decision-making for investors.
As part of SEBI’s ongoing efforts to enhance transparency, Asset Management Companies (AMCs) will now be required to disclose votes cast on their websites on a quarterly basis, along with specific rationales supporting their voting decisions. This will provide investors with greater insight into the voting actions of ESG schemes. Notably, AMCs will need to categorically disclose whether resolutions were supported or not due to environmental, social, or governance reasons. This new disclosure requirement will be effective from April 1, 2024, onward.
With these progressive measures, SEBI is bolstering India’s sustainable finance ecosystem, encouraging mutual funds to embrace ESG principles, and empowering investors to make informed decisions that align with their ethical and social values.