At a time when ESG (environmental, social, and corporate governance) is becoming increasingly important in the world of investing, the Indian capital markets regulator Securities and Exchange Board of India (Sebi) has allowed mutual funds to expand their basket of offerings in this segment.
On Thursday, the watchdog announced that a separate sub-category for ESG investments will be allowed and fund houses can launch various strategy-based funds within the category.
“… it is decided to introduce a separate sub-category for ESG investments under the thematic category of Equity schemes. Any scheme under the ESG category shall be launched with one of the following strategies - a. Exclusion, b. Integration, c. Best-in-class & Positive Screening, d. Impact investing, e. Sustainable objectives, f. Transition or transition related investments,” stated a Sebi circular.
This assumes significance as currently mutual fund houses are allowed to launch only one ESG scheme under the thematic category of equity schemes.
Meanwhile, the regulator has further clarified that minimum 80 per cent of the total assets under management (AUM) of ESG schemes will have to be invested in equity & equity related instruments of that particular strategy of the scheme.
“The remaining portion of the investment shall not be in contrast to the strategy of the scheme. Mutual Funds shall endeavour to deploy a higher proportion of the assets towards the scheme’s strategy under the ESG theme and make suitable disclosures,” stated the circular.
The regulator has further directed the fund houses to ensure that the schemes are clearly distinct in terms of asset allocation and investment strategy among other things.
In terms of investment criteria, while currently the ESG schemes are allowed to invest only in such companies that have comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures.
As part of the latest development, ESG schemes have been allowed to invest at least 65 per cent of its AUM in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.
“The balance AUM of the scheme can be invested in companies having BRSR disclosures. This requirement shall be applicable with effect from October 01, 2024,” stated the Sebi circular while adding that ESG schemes which are not in compliance with this investment criteria as on October 1, 2024, will have to ensure compliance with the requirement by September 30, 2025.
Mutual funds houses will also have to obtain an independent reasonable assurance on an annual basis regarding their ESG scheme’s portfolio being in compliance with the strategy and objective of the scheme.