Market regulator Sebi introduces new MF categories for ESG funds

Mandates additional disclosures, audit for ESG-thematic funds

Asset management companies (AMCs) will now be able to launch more than one environmental, social, governance (ESG) thematic fund, following six new sub-categories introduced by the Securities and Exchange Board of India (Sebi).

The capital markets regulator, however, has also mandated more disclosures, internal assurance, and ESG audits for mutual funds (MFs) to curb mis-selling and greenwashing.

In a circular issued on Thursday, the regulator introduced six sub-categories to the ESG theme, namely exclusion, integration, best-in-class and positive screening, impact investing, sustainable objectives, and transition-related investments.

Each new ESG fund will have to be launched under these six strategies. Fund managers said that the existing ESG funds will have to be recategorised into these sub-segments. 

Sebi had first approved the decision at its March board meeting where it also introduced a more comprehensive framework for ESG rating called ‘BRSR Core’. It has also standardised the norms for ESG rating providers.

AMCs will have to invest 80 per cent of the total assets under management (AUM) in equity or equity-related instruments in these categories.

Further, the ESG scheme will have to invest at least 65 per cent of the AUM in companies reporting comprehensive BRSR and providing assurance on BRSR Core disclosures. MFs have also been directed to ensure that these schemes are distinct in terms of strategy and asset allocation.

“Such ESG schemes which are not in compliance with the aforesaid investment criteria as on October 1, 2024, shall ensure compliance with the requirement by September 30, 2025. During the said period of one year, ESG schemes shall not undertake any fresh investments in companies without assurance on BRSR Core,” said Sebi.

However, Sebi has mandated BRSR Core for only the top 150 listed companies from 2023-24 and will be extended to the top 1,000 listed companies only by 2025-26 through 2026-27. Experts feel that this could limit the scope of investments for ESG-themed funds.

MFs have been mandated to disclose BRSR Core scores for companies and rating providers’ names in monthly disclosures. They will also have to compulsorily disclose cast votes in resolutions of investee companies and provide a reason and explain if it has not been supported due to ESG reasons.

Tightening the disclosure norms for ESG funds, the watchdog has also asked AMCs to independently provide on an annual basis the scheme’s portfolio being in compliance with the objective.

Additionally, the board of directors of AMCs will have to certify compliance based on an internal ESG audit and disclose it in the annual report.