Mutual Fund News : SEBI Issues a Consultation Paper On ESG Disclosures, Ratings And Investing

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SEBI has proposed to introduce 5 new fund categories under ESG theme in the consultation paper issued on February 20, 2023.

Environmental, social, and governance (ESG) hazards, as well as the considerable economic and financial consequences of climate change, have gained increasing attention. As a result, a number of ESG funds have been introduced over the past 3 years, including ones in India. Several organisations have been urged to by both investors and regulators to make detailed ESG related disclosures to their stakeholders, as ESG investing becomes mainstream.

In India, SEBI has mandated the top 1000 listed companies (by market capitalization) to make ESG disclosures as per the Business Responsibility and Sustainability Reporting (BRSR) fromFY2021-22 on a voluntary basis and mandatory from FY 2022 -23. SEBI, through AMFI has also mandated disclosures for ESG labelled Mutual Funds.

This consultation paper seeks public comments on the regulatory framework of ESG Disclosures by listed entities, ESG Ratings in the securities market and ESG Investing by Mutual Funds in order to facilitate balance between transparency, simplification and ease of doing business in an evolving domain.

SEBI said, "Presently, mutual funds can launch only one ESG scheme under thematic category of equity schemes. Considering that AMCs may want to launch multiple diversified ESG schemes under the ESG category, a new category for ESG schemes is proposed to be introduced."

The 5 new sub categories under ESG theme will be as follows:

Sub-Categories Indicative Description
ESG Exclusion Scheme Exclude securities based on certain ESG related activities like business practices or business segments.
ESG Integration Scheme Invests in companies after considering ESG related factors to evaluate risk and return of investment along with financial factors.
ESG Best-in-Class & Positive Screening Scheme Aim to invest in companies and issuers that perform better than peers on one or more performance metrics related to ESG matters.
ESG Impact Investing Scheme Seeks to invests in companies that bring positive, measurable social or environmental impact.
ESG Sustainable Objective Scheme Aim to invest in sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG-related trends.
(Source: SEBI)


Do note that Fund houses will be allowed to launch one scheme under each ESG category. Further, SEBI has asked AMFI to prescribe standardized criteria for different ESG strategies.

Each scheme category will have to invest at least 80% of the total corpus based on a particular theme, the remaining portion should also be in line with the broader ESG philosophy.

Moreover, AMCs should include the name of the ESG strategy in the fund name. For example, ABC ESG Exclusionary Fund or ABC ESG Integration Fund. ESG schemes will be required to disclose the name of the ESG rating provider alongside the score disclosures in the monthly portfolio disclosures.

Although this move by SEBI is to promote investment in ESG based themes and encourage fund houses to launch new ESG variants of schemes, it could rather be puzzling for investors.

SEBI has invited public comments/suggestions on the consultation paper by March 06, 2023 in the prescribed format.