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The capital market regulator, SEBI has recently introduced a separate sub-category for ESG (Environmental, Social and Governance) investments under thematic category of equity schemes.
Under the current regulatory guidelines, mutual funds are permitted to launch only one ESG scheme under the thematic category for equity schemes. The concept of ESG investments is emerging and therefore consistent, comparable, and decision-useful scheme disclosures is desirable to enable investors to make informed investment decision and to prevent greenwashing. In this regard, SEBI has decided to permit launch of multiple ESG schemes with different strategies by mutual funds.
This proposal was initially made in February 2023, a scheme can be introduced under the ESG category with any of the six strategies provided by the market regulator. This includes:
Mutual funds should ensure that the schemes launched are clearly distinct in terms of asset allocation, investment strategy etc.
Presently, the ESG schemes of mutual funds are mandated to invest only in such companies which have comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures.
Whereas now, SEBI has decided that the mutual funds should ensure that at least 80% of the assets under management are invested in equity and equity-related instruments related to that particular strategy of the scheme. It should also ensure that the remaining 20% is not made in contrast to the scheme. It should ensure that 65% of the AUM is invested in companies with comprehensive business-responsibility and sustainability reporting disclosures and that they are also providing assurance on BRSR Core disclosures. The rest can be invested in companies that comply with the BRSR disclosures.
As per the SEBI circular, Mutual Funds shall clearly disclose the name of ESG strategy in the name of the concerned ESG fund/scheme. For eg; XYZ ESG Exclusionary Strategy Fund, ABC ESG Best-in-class Strategy Fund etc. Additionally, they must reveal the quarterly voting information for investments and the monthly ESG ratings of securities, as well as details of the ESG ratings provider.
Download SEBI Circular: New category of Mutual Fund schemes for ESG Investing and related disclosures by Mutual Funds