Are you interested in sustainable or impact investing? Do you want to achieve your financial goals and invest ethically? You may consider investing in ESG or Environmental, Social and Governance funds. It is a thematic mutual fund that focuses on the ESG theme. You may find ESG assets rising to around $50 trillion worldwide by 2025.
However, ESG investing is still a developing concept in India. SEBI, the capital market regulator, wants to introduce a disclosure and investment framework for mutual fund schemes that follow the ESG (Environmental, Social and Governance) philosophy. Let’s look at the SEBI disclosure norms for ESG Funds?
What are ESG Funds?
ESG Funds are thematic mutual funds that follow the Environmental, Social and Governance theme. It helps to understand the ESG philosophy, which focuses on environment protection, its social responsibility (CSR) and how ethically a company conducts its business.
Top credit rating organisations assign scores to companies based on their ESG-compliance. You must understand that ESG funds invest in companies with high ESG scores after using their internal proprietary tools to measure ESG compliance.
ESG Funds invest in ESG-compliant firms across market capitalisation in India and abroad. However, ESG Funds avoid investing in environmentally and socially harmful products and services such as tobacco, gambling and alcohol.
What are SEBI’s proposed disclosure norms for ESG funds?
According to SEBI rules, the top 1,000 listed Indian companies must furnish a Business Responsibility and Sustainability Report (BRSR) to the stock exchanges such as NSE and BSE. SEBI proposed that from 01 October 2022, ESG focused mutual funds must invest only in securities with BRSR disclosures.
The BRSR contains details on different initiatives taken by a company on the ESG front. Moreover, SEBI has specified a format for the requisite disclosures. Companies other than the top 1,000 listed firms submit their BRSR voluntarily. Moreover, according to SEBI rules, all existing investments in existing mutual fund schemes with no BRSR disclosures will be grandfathered until 30 September 2023.
SEBI proposed that ESG funds must have a minimum of 80% of their net assets in securities following the sustainable theme as they are thematic funds. Moreover, the remaining 20% of the assets cannot be in stark contrast to the ESG philosophy of the scheme.
SEBI wants ESG mutual funds to remain true-to-label to ensure that you reach your investment objectives. It means AMCs will have to disclose the investment strategy followed by ESG mutual fund schemes in-line with the nomenclature of the ESG fund. Moreover, ESG funds will have to clearly define their policy and objectives to help you understand how an ESG focused strategy makes a difference materially.
SEBI asked mutual fund houses to disclose companies and sectors they would avoid depending on why they are ESG-unfriendly. Moreover, according to SEBI rules, mutual fund houses will have to show the selection criteria for identifying ESG-compliant firms. ESG focused funds display a scoring technique developed in-house or by third parties to separate ESG-complaint firms from ESG-unfriendly ones.
SEBI proposed several changes for ESG focused funds. Moreover, mutual fund houses will have to disclose investment philosophy and processes, key ESG factors and due diligence methodology on their websites. In a nutshell, SEBI wants ESG focused funds to be true-to-label and help investors attain their financial goals.
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