Market regulator Securities and Exchange Board of India (SEBI) has proposed detailed norms for fund houses that intend to launch or already have Environmental, Social and Governance (ESG) schemes.
The move comes at a time when the industry is seeing a gradual increase in the launch of ESG funds. ESG or social impact funds are already very popular in developed markets. The increased disclosures are proposed so that ESG funds remain true to label.
As of September 30, 2021, there are eight ESG thematic equity schemes with an AUM of Rs 12,085 crore. There is one ESG ETF and one ESG ETF Fund of Fund with AUM of Rs 174 crore and 144 crore respectively, as on September 30, 2021.
SEBI has proposed that a minimum of 80% of total assets of ESG scheme should be invested in securities following ESG theme. Hence, these guidelines would apply only to the portion of investment towards ESG theme. However, the residual portion of the investment should not be starkly in contrast to the philosophy of the scheme from the theme, said SEBI.
Here are some of the key proposals:
- All AMCs will be required to have a Responsible Investment Policy incorporating aspects of ESG investing.
- The investments should be designed to generate a beneficial ESG/sustainability impact alongside a financial return and the AMC should clearly state the intended ‘real world’ outcome in qualitative terms, especially for strategies related to integration, impact investing and sustainable objectives.
- Responsible Investment Policy of AMCs should be revised to contain a clause that from October 1, 2022, AMCs shall only invest in securities that have Business Responsibility and Sustainability Report (BRSR) disclosures.
- Monitor and evaluate the investments in terms of key performance indicators, real world outcomes, active engagement and stewardship activities with investee companies.
- Stewardship policy reflecting that the exercise of voting rights is in accordance with the objectives of the scheme.
- Develop common sustainable finance-related terms and definitions in line with global standards.
SEBI has sought feedback on whether the Responsible Investment Policy of AMCs should be revised to contain a clause that from October 01, 2022, AMCs shall only invest in securities that have Business Responsibility and Sustainability Report (BRSR) disclosures. Whether the existing investments in the schemes for which there are no BRSR disclosures should be grandfathered by SEBI for a period of one year i.e., till September 30, 2023?
SEBI has sought feedback from industry stakeholders till November 17, 2021.
Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Advisers, says that SEBI’s intended disclosure is a step in the right direction as the Indian ESG fund space is evolving and is a positive sign for setting the framework. With respect to SEBI’s suggestion of ESG schemes to invest at least 80% of their assets in securities, Kaustubh says that Indian ESG funds follow an ESG integration and/or best in class investment approach. “Setting minimum standards for ESG funds is a good way to ensure that the funds are true to the label.”
Sandeep Tandon, Founder, quant Mutual Fund, says there are areas to work on even at a very high level, particularly with respect to sustainability. “Since financial markets will need to rely on fulsome, accurate and timely disclosure of financial and ESG data, there need to be work done to improve the consistency, comparability and reliability of such data. Global organizations such as (IOSCO) International Organization of Securities Commissions are working in this area and there are still some leaps to be taken by the supply side to enable the mutual fund industry and investors at large to be able to evaluate and monitor investee companies on the basis of sustainability-related performance and disclosures.”
Some fund managers have welcomed SEBI’s move. “We have been proponents of and thereby concur with the recommendation of more disclosures on Sustainability linked products to not only showcase its true-to-label characteristics but also help address any forms of “greenwashing” from product manufacturers. There is a need to align investor interest, fiduciary obligations of asset managers for greater transparency, credibility, communication and engagement with stakeholders,” says Chirag Mehta, Senior Fund Manager - Alternative Investments, Quantum Mutual Fund.
Chirag says that it is necessary to communicate the subtle differences in the ESG approaches well to set the right expectations, instill confidence and drive investors towards sustainable investments. “The subjective nature of ESG assessments will necessitate a prescriptive and guiding framework that prescribes enough disclosure that empowers investors to arrive an at an informed decision,” he adds.