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SEBI expands categories for ESG investments by Mutual Funds

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SEBI has recently issued a circular in order to facilitiate green financing in India by permitting mutual funds to introduce multiple schemes for ESG investments based on different strategies such as: (a) Exclusion (b) Integration (c) Best-in-class & Positive Screening (d) Impact Investing (e) Sustainable Objectives (f) Transition or transition related investments. Earlier, mutual funds could launch only one ESG scheme under the thematic category of Equity schemes.

Further, the SEBI circular also introduced measures to enhance disclosures and mitigate the risk of green washing.

SEBI has mandated that the ESG Schemes shall invest 80% of its Assets Under Management (AUM) in equity & equity related instruments of that particular strategy of the scheme and the remaining portion cannot be invested in contrast to the strategy. Further, at least 65% of the AUM would be in companies which are reporting on comprehensive BRSR (Business Responsibility and Sustainability Reporting) along with assurance on BRSR core disclosures. The balance AUM of the scheme can be invested in companies having BRSR disclosures. This requirement shall be applicable with effect from October 01, 2024.

SEBI has mandated mutual funds to clearly disclose the name of ESG strategy in the name of the concerned ESG fund / scheme and make disclosure in their monthly portfolio statements of Security wise BRSR Core scores, Name of the ESG Ratings Providers (ERPs) providing ESG scores along with the ESG Scores. In case there is a change in ERP, the reason for such change shall also be disclosed in the next monthly portfolio statements of ESG schemes.

The Asset Management Companies (AMCs) are required to make disclosures of votes cast on resolutions of investee companies on their website on a quarterly basis, along with the specific rationale supporting their voting decision. Further, the AMCs shall disclose whether the resolution has or has not been supported due to any ESG reasons. The enhanced voting disclosures shall be applicable for Annual General Meetings held from April 01, 2024 onwards.

The AMCs shall obtain an independent reasonable assurance on an annual basis regarding their ESG scheme’s portfolio being in compliance with the strategy and objective of the scheme by December 31, 2023.

The board of directors (BOD) of AMCs, based on comprehensive internal ESG audit, shall certify the compliance of ESG schemes with the regulatory requirements including disclosures, in annual report of the scheme. This certification requirements shall be applicable with immediate effect and the bod of AMCs shall provide the certificate for FY 2022-23 by December 31, 2023. Thereafter, the certification shall be disclosed in the Annual Reports of the schemes.

A copy of the SEBI Circular is enclosed below.

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