In a significant move, the market regulator Securities and Exchange Board of India (Sebi) has allowed mutual funds to expand the basket of offerings in the environmental, social, and corporate governance (ESG) category.

ESG funds are thematic mutual funds that invest in companies that have a demonstrable commitment to the environment, social causes and governance. Presently, the ESG schemes of Mutual Funds are mandated to invest only in such companies which have comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures.

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Under the new arrangement, the regulator has permitted the launch of multiple ESG schemes with different strategies by Mutual Funds.

What is SEBI’s new arrangement for ESG?

SEBI has launched five new categories of offerings in ESG which are: exclusions, integration, best-in-class and positive screening, impact investing, and sustainable objectives.

An ESG Advisory Committee was set up by SEBI which provided recommendations for expanding the disclosure norms for ESG funds.

A minimum of 80 per cent of the total assets under management (AUM) of ESG schemes shall be invested in equity & equity-related instruments of that particular strategy of the scheme.

While the remaining portion of the investment shall not be in contrast to the strategy of the scheme.

The regulator further instructed that AMCs shall ensure the schemes launched by Mutual Funds are clearly distinct in terms of asset allocation, investment strategy etc.

On the investment, it said an ESG scheme shall invest at least 65% of its AUM in companies that are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.

Significance for investors

There is more clarification sought on the SEBI circular, more disclosures in terms of security-wise BRSR core scores, and the name of the ESG rating providing agency along with the ESG rating.

Investors can get more clarity with each scheme having a distinct investment strategy and asset allocation under various themes.

However, the move provides the flexibility to align one’s investments more precisely with their ESG beliefs. This will encourage Mutual Funds and provide investors with responsible investment avenues, as well as, open doors for impactful retail investing.