July 26, 2023
The Securities and Exchange Board of India (SEBI) has taken significant steps to bolster green financing and enhance transparency in Environmental, Social, and Governance (ESG) investments. These new measures aim to mitigate the risk of greenwashing and create a more conducive environment for sustainable investments.
Under the recently released rules for ESG investment funds, asset managers in India will now be required to allocate a minimum of 80% of their funds’ assets to securities that align with their specific ESG strategies. Additionally, they will need to provide monthly ESG scores for their holdings to offer investors a clearer understanding of the funds’ sustainability performance.
SEBI has also introduced a new ESG investment sub-category for mutual funds, enabling them to offer a diverse range of ESG schemes to investors. Previously, mutual funds were limited to offering only one ESG scheme under the thematic category.
The new rules enable asset managers to launch multiple ESG funds under various defined strategies, including Exclusion, Integration, Best-in-class & Positive Screening, Impact investing, Sustainable objectives, and Transition-related investments. At least 80% of the assets under management (AUM) must be invested in securities aligned with the chosen ESG strategy, while the remaining assets may be allocated differently.
Furthermore, SEBI mandates that a minimum of 65% of AUM must be invested in companies that follow comprehensive Business Responsibility and Sustainability Reporting (BRSR) guidelines, which were introduced in 2021. These companies must also provide assurance on their BRSR disclosures.
The new disclosure requirements for ESG schemes are equally stringent. Fund names must now clearly indicate the ESG strategy, and monthly portfolio statements should include BRSR scores along with the name of the ESG ratings provider.
Additionally, asset managers overseeing ESG schemes must disclose their voting decisions on resolutions, along with the rationale behind their choices, particularly if the votes were made for ESG reasons.
Fund managers will also need to provide detailed annual commentary on how they applied the ESG strategy, carried out engagements, employed escalation strategies, and present case studies of their engagements, including the number of engagements, modes of communication used, and outcomes.
To ensure compliance with their strategies and objectives, asset managers must obtain independent assurance for their ESG schemes. Furthermore, the board of the asset management company is responsible for certifying the schemes’ compliance with regulatory requirements.
These new measures represent a significant leap towards promoting sustainable and responsible investments in India, providing investors with greater clarity, disclosure, and confidence in ESG funds. The move also reinforces India’s commitment to the global drive for a greener and more sustainable financial system.
photo source: google
Delino Gayweh
Serrari Financial Analyst
