SEBI - ESG Funds

Why in news?

SEBI recently came out with a consultation paper for introducing disclosure norms for ESG (environment sustainability and governance) mutual fund schemes.

What are ESG funds?

• ESG Mutual Funds are Thematic Mutual Funds that invest in socially responsible companies.
• ESG funds are those funds whose asset allocation mostly includes shares and bonds of companies that are evaluated based on the environmental, social, and governance factors.
• An organisation is said to be ESG compliant if it meets all the criteria of environmental, social, and governance standards.
• The ESG companies are assessed on their sustainability before they are given the tag.
• The ESG parameters reflect on an organisation’s culture, the risk involved, and management, among other things.

Criteria included, among others

Environment: Companies that -

• put out carbon or sustainability reports
• Limit harmful pollutants and chemicals
• Seek to lower greenhouse gas emissions
• Use renewable energy sources

Social: Companies that -

• operate an ethical supply chain
• support LGBTQ rights and encourages diversity
• have policies to protect against sexual misconduct
• pay fair wages

Governance: Companies that –

• embrace diversity on their board
• embrace corporate transparency
• employ a CEO independent of the board chair

What are the SEBI’s recent proposals?

• Earlier in 2017, SEBI had said that sectoral or thematic funds must have at least 80% of investments in specific sectors or themes.
• Now, SEBI has specified that ESG funds should have at least 80% of their total assets in securities following the sustainable theme, since these funds fall under the thematic category.
• The rest 20% assets should not be in stark contrast with the ESG philosophy.
• The AMCs (Asset Management Companies) should disclose the nature and extent of the scheme’s ESG-related objectives and the approach used for screening companies.
• This will help investors judge if the fund meets their requirements.
• ESG funds should only invest in companies which have filed Business Responsibility and Sustainability Report (BRSR) from October 1, 2022.

What is the rationale?

• With the increased emphasis on adopting sustainable growth, there has been a surge in ESG investing globally.
• ESG assets surpassed $35 trillion by the end of 2020.
• The momentum is expected to continue with ESG funds accounting for a third of global assets under management in 5 years.
• Investing based on the ESG theme is beginning to attract higher interest in India too.
• As per SEBI data, at the end of September 2021, there were 8 ESG thematic equity schemes with assets under management (AUM) of ₹12,085 crore.
• However, the regulation of this segment is at a nascent stage, globally and nationally.
• SEBI’s recent norms is an effort to tighten the disclosure, strategies and practices of funds based on the ESG theme.
• It will help check ambiguity and usher in transparency.

Reference

1. https://www.thehindubusinessline.com/opinion/editorial/governing-esg/article37326650.ece
2. https://www.livemint.com/mutual-fund/mf-news/sebi-suggests-esg-funds-must-be-80-invested-in-securities-following-the-theme-11635254078247.html
3. https://cleartax.in/s/esg-funds