The mutual fund industry in India is all set to embrace more green initiatives.

The Securities and Exchange Board of India (Sebi), the market regulator, has issued a circular introducing a new category of mutual fund schemes for Environmental, Social, and Governance (ESG) investing. These schemes fall under a distinct subcategory within the thematic category of equity schemes.

Sebi has taken definitive steps to promote green finance. Additionally, Sebi hopes to reduce the risks of mis-selling and greenwashing in MFs as part of the initiative.

“… it is decided to introduce a separate sub-category for ESG investments under the thematic category of Equity schemes. Any scheme under the ESG category shall be launched with one of the following strategies – a. Exclusion, b. Integration, c. Best-in-class & Positive Screening, d. Impact investing, e. Sustainable objectives, f. Transition or transition related investments,” the regulator said.

The strategies:
Exclusion strategies involve excluding securities based on ESG-related operations, corporate strategies, or industry verticals. Integration involves considering both traditional financial and ESG factors in investment decisions. Best-in-class and positive screening involves investing in businesses outperforming peers on ESG-related performance metrics. Fund managers should assess environmental, social, and governance issues, manage them, and invest in sectors with long-term ESG trends for sustainable objectives. Supporting environmental transition companies generates positive social and environmental impacts.

What is mandatory?
Sebi mandates 80% of ESG schemes’ assets under management to invest in equity and equity-related instruments, and 65% in companies with BRSR disclosures. Investment criteria apply from October 1, 2024, with a one-year grace period for non-compliant schemes.

The circular emphasizes enhanced disclosure requirements, including scheme strategy, ESG scores, voting, and annual fund manager commentary. It also calls for independent assurance and certification by AMCs to ensure regulatory compliance and independent assurance on ESG scheme portfolios.

The disclosures:
Sebi also outlined some disclosure requirements for the ESG schemes. Mutual funds must clearly disclose the following:
1. Name of ESG strategy in the name of the concerned ESG fund/scheme
ii. Security wise BRSR Core scores along with the BRSR scores in their monthly portfolio statements of ESG schemes
iii. The name of the ERPs providing ESG scores for the ESG schemes, along with the ESG scores.

The market:
Rating agency Crisil predicts India’s mutual fund industry assets could reach Rs 50 lakh crore by 2025, up from Rs 30 lakh crore in November 2020. It believes independent research and analytics will be crucial. A CRISIL Research analysis revealed that a significant portion of funds are in companies with good ESG scores, with exposure to ‘Leadership’, ‘Strong’, and ‘Adequate’ categories at Rs 2.29 lakh crore, Rs 5.22 lakh crore, and Rs 6.46 lakh crore, respectively.