SEBI Proposes To Introduce 5 New Categories Under ESG Funds

Capital markets regulator SEBI has proposed allowing mutual funds to introduce five new categories under ESG (environmental, social and governance) scheme. The five new categories should be exclusions, integration, best-in-class and positive screening, impact investing and sustainable objectives.

Presently, mutual funds can launch only one ESG scheme under the thematic category of equity schemes. Considering that AMCs may want to launch multiple diversified ESG schemes under the ESG category, SEBI has proposed that each asset management company should be permitted to launch one ESG scheme each under the five subcategories. 

ESG schemes under the proposed new category should be permitted with a minimum 80 per cent investment of total assets in equity or debt stocks of a particular theme as per the sub-categories. However, the residual portion of the investment should not be starkly in contrast to the philosophy of the scheme.

"AMCs should endeavour to have a higher proportion of the assets under the ESG theme and make suitable disclosures," the Securities and Exchange Board of India (SEBI) said in its consultation paper issued on Monday. For the ESG exclusions scheme -- the regulator has suggested that mutual funds should exclude securities based on certain ESG-related activities, business practices, or business segments and the ESG integration scheme should explicitly consider ESG-related factors that are material to the risk and return of the investment, along with traditional financial factors.

ESG best-in-class and positive screening scheme should invest in companies that perform better than peers in ESG parameters. ESG impact investing scheme should seek a non-financial (real world) impact and evaluate if that impact is being measured and monitored; and ESG sustainable objectives scheme should aim to invest in sectors, industries, or companies that are expected to benefit from a long-term macro or structural ESG related trends.

To boost transparency, the regulator has proposed to mandate the AMCs to include the name of the particular ESG strategy in the name of the concerned fund or scheme. In addition, the regulator has recommended mandating ESG schemes to disclose the name of the ESG rating provider alongside the score disclosures in the monthly portfolio disclosures.

The requirement should be made mandatory from April 1, 2023, Sebi suggested and sought comments from the public till March 6 on the proposals.