Sebi allows mutual funds to introduce new categories under ESG scheme

The regulator said these measures will facilitate green financing with a thrust on enhanced disclosures and mitigation of greenwashing

New Delhi: Capital markets regulator Sebi on Thursday allowed mutual funds to introduce five new categories under ESG (environmental, social and governance) scheme and put in place a disclosure framework for them.

The five new categories are — exclusions, integration, best-in-class and positive screening, impact investing and sustainable objectives.

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Presently, mutual funds can launch only one ESG scheme under the thematic category of equity schemes.

The provision of a new category for ESG schemes will be applicable with immediate effect, the Securities and Exchange Board of India (Sebi) said in a circular.

The regulator said these measures will facilitate green financing with a thrust on enhanced disclosures and mitigation of greenwashing.

Sebi has mandated ESG schemes to invest at least 65 per cent of assets under management (AUM) in listed entities, where assurance on the BRSR (Business Responsibility and Sustainability Reporting) Core is undertaken.

The balance AUM of the scheme can be invested in companies having BRSR disclosures. This requirement will be applicable from October 1, 2024.

With regards to disclosure requirements for ESG schemes, Sebi said mutual funds will have to clearly disclose the name of the ESG strategy in the name of the concerned ESG fund.

Mutual funds will have to make certain disclosure in their monthly portfolio statements of ESG schemes like security-wise BRSR Core scores and name of the ESG Rating Providers (ERPs) providing ESG scores, along with the ESG scores.

In case there is a change in ERP, the reason for such change will also be disclosed in the next monthly portfolio statements of ESG schemes.

Under the rule, 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.

In order to enhance transparency on votes cast by ESG schemes, the AMCs will have to categorically disclose whether the resolution has or has not been supported due to any environmental, social or governance reasons. The enhanced voting disclosures will be applicable from April 1, 2024, onwards.

Sebi said that AMCs will have to 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, as stated in respective Scheme Information Documents.

Such assurance will be on a “comply or explain basis” for all ESG schemes for FY2022-23 by December 31, 2023. Thereafter, disclosure of assurance will mandatorily be made in the scheme’s annual report.

The regulator said AMCs will also ensure that there is no conflict of interest with the assurance provider appointed for providing assurance on their ESG schemes.

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

The internal ESG audit includes verifying the Scheme Information Documents, Stewardship Reporting and Responsible Investment Policy of the ESG Funds. This certification will be applicable with immediate effect.

The board of directors of AMCs will have to provide the certificate for FY2022-23 by December 31, 2023. Thereafter, the certification will be disclosed in the annual reports of the scheme.

Earlier in February, the markets regulator came out with a consultation paper, whereby it proposed to allow mutual funds to introduce five new categories under the ESG scheme. In the subsequent month, the board of Sebi approved the proposal.