SEBI Proposes New Requirements for ESG Funds in India

ESG-labelled funds will have to invest at least 80% of total assets in ESG themed securities, and disclose measures taken to mitigate greenwashing risks and reliance on third party scores.

The Securities and Exchange Board of India (SEBI) has issued a new consultation paper proposing new requirements for mutual fund schemes that use ESG labels. The consultation paper is open for comment until 16 November.

As of 30 September, there are eight ESG themed equity schemes in India, with total assets under management of INR 120 billion (US$ 1.6 billion). There is also one ESG ETF (INR 1.74 billion in AUM) and one ESG ETF Fund of Fund (INR 1.44 billion in AUM).

The consultation proposes enhanced disclosure requirements for ESG-labelled funds, including to ensure the name of the mutual fund scheme accurately reflects the nature and extent of its ESG focus, taking into account the investment objective and type of strategy followed.

“All asset management companies will be required to have a Responsible Investment Policy incorporating aspects of ESG investing,” SEBI says.

Funds should also provide transparency about their ESG related investment objectives and how they aim to achieve these objectives through their investment policies and strategies – including the approach used for screening companies and conducting due diligence.

From 1 October 2022, fund managers will only be able to invest in securities that have Business Responsibility and Sustainability Report (BRSR) disclosures, where existing investments without such disclosures would be grandfathered by SEBI for a period of one year (until 30 September 2023).

Funds that invest in overseas securities will have to choose any global equivalent of the BRSR – this will be further specified by the Association of Mutual Funds in India (AMFI).

Fund managers will also have to disclose any “unique risks” that arise from their focus on sustainability, as well as measures taken to mitigate risks related to greenwashing and reliance on third party scores, if any, given “the dispersion in scores across providers”.

ESG-labelled funds will have to invest a minimum of 80% of total assets in securities following an ESG theme. However, the paper also proposes that the residual investment “should not be starkly in contrast to the philosophy of the scheme” from the ESG theme.

Fund managers will also be required to monitor and evaluate their investments in terms of KPIs, real world outcomes, active engagement and stewardship activities with investee companies.

They should also disclose policies on stewardship and shareholder engagement that reflect the exercise of voting rights in accordance with the objectives of the scheme.

The consultation also covers obligations relating to governance, resourcing, marketing materials, and investor education.

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