The capital markets regulator Sebi on Thursday approved mutual funds’ introduction of five new ESG (environmental, social, and governance) categories and established a framework for their disclosure.
Exclusions, integration, best-in-class and positive screening, impact investment, and sustainable aims are the five new categories.
Mutual funds are now only permitted to introduce one ESG equity strategy within the theme category.
The Securities and Exchange Board of India (Sebi) said in a circular that the introduction of a new category for ESG programs would be applicable with immediate effect.
The regulator said that these steps would make it easier to finance green projects, with an emphasis on improved disclosures and the reduction of “greenwashing.”
ESG schemes are required by Sebi to invest at least 65% of their assets under management (AUM) in publicly traded companies who undertake assurance on their BRSR (Business Responsibility and Sustainability Reporting) Core.
The remaining AUM of the plan may be invested in businesses that disclose their BRSRs. The deadline for this requirement is October 1, 2024. According to Sebi, mutual funds would have to clearly declare the name of the ESG strategy in the name of the relevant ESG fund when it comes to disclosure requirements for ESG schemes.
Mutual funds will be required to disclose specific information on ESG schemes in their monthly portfolio statements, such as security-related BRSR Core ratings and the names of the ERPs that provide the ESG scores.
The next monthly portfolio statements of ESG schemes will now include information on any changes to ERP, including their cause.
According to the law, AMCs must publish on their website on a quarterly basis the votes cast as well as the precise justification for such votes.
The AMCs will have to explicitly report whether or not the resolution has received support for any environmental, social, or governance concerns in order to increase transparency on votes cast by ESG programs.As of April 1, 2024, the expanded voting disclosures will be in effect.
According to Sebi, AMCs must annually acquire independent, reasonable assurance that the portfolio of their ESG plan is in line with the goals and objectives of the scheme as indicated in the relevant plan Information Documents.
All ESG programs for FY2022-23 will be subject to this guarantee on a “comply or explain basis” by December 31, 2023. The annual report for the plan will thereafter be required to include disclosure of assurance.
According to the regulation, AMCs will also make sure that the assurance provider chosen to give assurance on their ESG schemes does not have any conflicts of interest. The board of directors of AMCs will have to verify that ESG schemes comply with all regulatory obligations, including disclosures in the annual report of the scheme, based on a thorough internal ESG audit. The internal ESG audit comprises examining the Stewardship Reporting, Responsible Investment Policy, and Scheme Information Documents of the ESG Funds. This certification will be valid starting right now.
By December 31, 2023, the board of directors of AMCs must submit the certificate for FY2022-23. The certification will then be made public in the scheme’s yearly reports.
The markets regulator recommended in a consultation document published earlier in February to let mutual funds to add five additional categories to the ESG program. The idea was accepted by the Sebi board in the following month.
