SEBI’s Six New Mutual Fund Strategies Under ESG Theme

July 22, 2023

The Securities and Exchange Board of India (SEBI) has broadened the Environmental, Social, and Governance (ESG) thematic category’s scope, enabling asset management companies to introduce funds under six new strategies.

Environmental, Social, and Governance (ESG) Funds

ESG stands for Environmental, Social, and Governance. These factors are used to evaluate a company’s sustainability and ethical practices. Environmental criteria assess a company’s impact on nature, such as its carbon footprint and resource usage. Social criteria focus on the company’s relationships with employees, customers, and communities. Governance criteria evaluate a company’s leadership, transparency, and accountability.

Diverse Strategies for ESG Funds

SEBI permitted six new strategies for ESG funds, providing investors with various options to align their investments with their sustainability preferences. One of these strategies is the “Best-in-class & Positive Screening,” where the focus is on investing in companies that outperform their peers in ESG matters. This approach empowers investors to support businesses that demonstrate superior ESG practices.

Minimum Allocation to Equity Instruments

For an ESG scheme to qualify as such, it must adhere to specific guidelines set by SEBI. At least 80% of the assets under management (AUM) in ESG schemes must be allocated to equity instruments associated with the selected sustainable strategy. This ensures that a significant portion of the fund’s investments directly contributes to sustainable initiatives.

Business Responsibility and Sustainability Reporting (BRSR)

BRSR, short for Business Responsibility and Sustainability Reporting, plays a vital role in promoting corporate transparency and accountability. Companies are encouraged to disclose their efforts towards sustainability through BRSR, providing investors with valuable insights into their ESG practices.

ESG Scheme Investment in Companies with BRSR Disclosures

SEBI requires ESG schemes to invest at least 65% of their AUM in companies that have comprehensive BRSR disclosures. This stipulation incentivizes companies to actively report on their sustainability efforts and ensures that ESG funds invest in businesses committed to transparency and responsible practices.

Impact Investing Funds

Impact investing funds are a specific type of sustainable investment that seeks to generate positive social or environmental impact alongside financial returns. These funds offer investors an opportunity to contribute to meaningful change while still achieving their financial objectives.

Global Efforts towards Sustainable Investing

Sustainable investing is not limited to India; policymakers and investors worldwide are recognizing the importance of incorporating ESG factors into investment decisions. Governments, institutions, and individuals from different countries are increasingly encouraging sustainable practices in the financial sector to address pressing global challenges.

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