The Securities & Exchange Board of India (SEBI), the financial market regulator, has announced a slew of measures to boost ESG factor-based investing in India through mutual funds. Mutual fund houses henceforth, can launch more than one scheme, the investment mandate of which is governed by ESG factors.
ESG ― Environmental, Social and Governance ― factors-based investing is catching up in all parts of the world. Indian policymakers are also incentivising sustainable investing. In order to address the risk of mis-selling and greenwashing, to enhance stewardship reporting requirements, and to promote ESG investing SEBI has made some key announcements today, which are expected to impact mutual funds.
As per extant rules of categorisation of mutual fund schemes, ESG schemes are considered thematic funds. And fund houses are allowed to launch only one ESG scheme. Now with the regulator allowing multiple schemes based on ESG-related factors, investors may get more alternatives in this space that suit their requirements.
There are 10 ESG mutual fund schemes that manage Rs 10,216 crore. Mirae Asset Nifty 100 ESG Sector Leaders ETF is the only passively-managed equity fund, the rest are actively-managed ESG schemes. ESG schemes gave 21.47 percent returns compared to 24.67 percent in the three years ended March 28, 2023, as per Value Research.
ESG funds invest in companies that have high scores on environmental, social and governance factors. Industries such as tobacco, liquor, and gambling are absolute no-go for the ESG framework. Though ESG schemes in India have limited track record, ESG-based portfolios include companies across sectors and of all sizes.
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SEBI has also made it mandatory for the mutual fund managers running ESG schemes to invest at least 65 percent of the funds in listed shares of companies for which assurance on BRSR Core is undertaken. Business Responsibility and Sustainability Report (BRSR) is an important reporting document on sustainability measures undertaken by corporate entities.
It is made mandatory for the AMC to seek third-party assurance and certification for compliance with the objective of the ESG scheme. The fund houses are told to enhance the disclosures on voting decisions that are related to ESG factors. The fund managers are further instructed to explain how the ESG strategy is applied to the investments held in the ESG scheme, while writing the scheme commentary. Put simply, going forward, the working of the ESG schemes will become more transparent and investors will have more information to fall back on while selecting a scheme for their portfolios.
The ESG investing framework aims to reduce the portfolio risk by focusing on sustainable investing in the long term. At a time when the stock markets are under pressure as financial institutions are going down in the developed markets, more investors are expected to opt for sustainable investing.