SEBI Permits the Launch of Multiple ESG Schemes With Different Strategies by Mutual Funds

Circular No. SEBI/HO/IMD/IMD-I –PoD1/P/CIR/2023/125, Dated: 20.07.2023

Earlier, the SEBI allowed Mutual Funds to launch only one scheme with ESG investing under the thematic category for Equity schemes. Now, in view of the industry representations for allowing multiple schemes with different ESG strategies and considering the increasing need for green financing, SEBI has decided to permit the launch of multiple ESG schemes with different strategies by Mutual Funds.

Further, in order to suggest further measures to improve transparency, with a particular focus on the mitigation of risks of mis-selling and greenwashing, an ESG Advisory Committee was set up by SEBI which provided recommendations for expanding the disclosure norms for ESG funds. Accordingly, the SEBI has decided to implement certain measures to facilitate green financing with a thrust on enhanced disclosures and mitigation of greenwashing risk.

Some of the key features include:

1. SEBI introduces a separate sub-category for ESG investments under Thematic Schemes

Earlier, SEBI vide. circular no. [Circular No. SEBI/HO/IMD/IMD-PoD-1/P/CIR/2023/74; Dated: 19.05.2023] dated 19.05.2023 allowed Mutual Funds to launch only one ESG Scheme under the thematic category of Equity schemes, Now, SEBI, has decided to introduce a separate sub-category for ESG investments under the thematic category of Equity schemes. The scheme under the ESG category shall be launched with one of the strategies including Exclusion, Integration, Impact investing, etc.

Further, a minimum of 80% of the total assets under management (AUM) of ESG schemes shall be invested in equity & equity-related instruments of that particular strategy of the scheme. Also, 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. The provisions for ESG schemes shall be applicable with an immediate effect.

2. ESG scheme shall invest a minimum 65% of AUM in companies which are reporting on comprehensive BRSR

Presently, the ESG schemes of Mutual Funds are mandated to invest only in such companies that have comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures.

Now, SEBI has decided that an ESG scheme shall invest at least 65% of its AUM in companies that are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures. This requirement shall be applicable w.e.f October 1, 2024.

ESG schemes that are not in compliance with the aforesaid investment criteria as on October 01, 2024, must ensure compliance with the requirement by September 30, 2025.

Further, during the said period of 1 year, ESG schemes must not undertake any fresh investments in companies without assurance on BRSR Core.

3. Disclosure norms for ESG Schemes

The key disclosure norms applicable to ESG Schemes include:

(a) Mutual Funds must clearly disclose the name of the ESG strategy in the name of the concerned ESG fund/scheme.

(b) Mutual Funds must disclose Security wise BRSR Core scores & Name of the ERPs providing ESG scores for the ESG schemes in their monthly portfolio statements.

(c) The AMCs are required to make disclosures of votes cast on their website on a quarterly basis, along with the specific rationale supporting their voting decision.

(d) The AMCs shall categorically disclose whether the resolution has or has not been supported due to any environmental, social or governance reasons.

(e) A ‘Fund Manager Commentary’ along with the additional disclosures with respect to engagements undertaken by Mutual Funds for ESG schemes, as required to be disclosed should be provided in the Annual Report of ESG schemes.

4. AMCs to obtain an independent reasonable assurance regarding their ESG scheme’s portfolio

Now, the AMCs must obtain independent reasonable assurance on an annual basis regarding their ESG scheme’s portfolio being in compliance with the strategy and objective of the scheme. The Board of AMCs must ensure that the assurance provider for an ESG scheme has the necessary expertise, for undertaking reasonable assurance.

Further, the AMCs must also ensure that there is no conflict of interest with the assurance provider appointed for providing assurance on their ESG schemes.

Such assurance shall be on a “comply or explain basis” for all ESG schemes for FY 2022-23 by December 31, 2023. Thereafter, disclosure of assurance shall mandatorily be made in the scheme’s annual report.

5. Certification by the Board of AMCs

The board of directors of AMCs, based on a comprehensive internal ESG audit, must certify the compliance of ESG schemes with the regulatory requirements in the annual report of the scheme.

The internal ESG audit must include verifying the Scheme Information Documents, Stewardship Reporting and Responsible Investment Policy of the ESG Funds and any other relevant document, to ensure that the statements made in these documents are factual.

This certification shall be applicable with an immediate effect. The board of directors of AMCs shall provide the certificate for FY 2022-23 by December 31, 2023. Thereafter, the certification shall be disclosed in the Annual Reports of the schemes.

6. Conclusion

In conclusion, the SEBI has taken significant steps to promote sustainable and responsible investing through Environmental, Social, and Governance (ESG) funds. To ensure transparency and guard against mis-selling and greenwashing risks, SEBI has established an ESG Advisory Committee, which has recommended enhanced disclosure norms for ESG funds.

These measures are designed to foster green financing, promote sustainable investment practices, and protect investors from potential misrepresentation. By implementing these enhanced disclosure norms and oversight mechanisms, SEBI aims to foster responsible investing and contribute to a greener and more sustainable financial ecosystem in India.

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