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SEBI’s upcoming ESG regulation for MFs

SEBI has proposed a disclosure framework for local ESG-theme mutual funds based on global best practices, such as by IOSCO and the FSB.

Key proposals: i) From Oct-22 “AMCs must only invest in securities with BRSR disclosures”; non-BRSR investments to be grandfathered till Sep-23. ii) Disclose the strategy (exclusions, integration, positive, impact investing, etc) of the underlying ESG fund. iii) Processes to review the strategy for making investments and the investment itself. iv) 80% of assets should be invested in securities following an ESG theme (20% must not sharply contrast core). v) Disclose unique risks arising from schemes’ focus on sustainability. In our view, this would boost transparency and help investors make informed decisions.

Standardised norms are absent, or still at implementing stage

Investments in ESG are garnering increasing focus globally, but standardised global norms is yet absent. Standard bodies such as IOSCO/FSB are working on developing more standardized disclosure norms for ESG-based funds. In order to strengthen sustainable investments, the EU introduced SFDR in Mar-21. Besides, IOSCO has also published final recommendations on sustainability disclosures. Such emerging standards call for in-sync disclosure norms for domestic ESG MF schemes. Hence SEBI floated a consultation paper proposing disclosure norms for ESG schemes.

SEBI proposes disclosure norms for ESG-themed MF schemes

In its latest consultation paper dated 26th October, SEBI has proposed certain disclosure norms for ESG-theme based mutual fund schemes. This move is likely to enhance transparency and enable investors to make informed decisions. SEBI proposes 80% of total assets under ESG schemes to be invested in securities that meet ESG criteria (in line with 2017 announcements). However, the remaining 20% should not sharply contrast the core. It mandated all AMCs to have an RIP for ESG investing and that the investment objectives shall be as per RIP. Investments must be designed to generate sustainability impact besides generating financial returns. Companies were to give feedback on the consultation paper by 1st December, 2021.

ESG investments gaining prominence globally albeit nascent now

Investments in the ESG space are gaining strong interest and focus across the world. The GSIR 2020 report suggests global sustainable investments have risen in the range of 25–48% (2018–20) in major countries across the world (Europe: -13%). AMCs in India as well have been launching equity schemes in the ESG domain under the thematic category. AMCs have also launched exchange traded funds (ETFs) and ETF Fund of Funds (FoF) in the ESG space in India. SEBI mentions there are eight ESG thematic equity schemes with AUM of ~INR121bn, one ESG ETF with AUM of ~INR1.7bn and one ESG ETF FoF with AUM of 1.4bn as on 30 September 2021.

We view SEBI’s proposed disclosure recommendations as constructive efforts at developing a good framework for ESG theme based MF schemes.

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