ESG funds In India

“Explore the rising trend of ESG investing in India as MFs launch thematic equity schemes. Understand the current landscape with top ESG funds and recent SEBI proposals, paving the way for new ESG categories, sub-categories, and enhanced transparency measures. Stay informed about the evolving ESG investment scenario in India.”

In the past couple of years the Environmental, Social, and Governance (ESG) investing has been getting into mainstream investing, and India as a country has been actively involved in going sustainable and hence the MF’s have already started launching new ESG funds, the step has also come at a time when India is experiencing a boom in inflow of capital and participants in the capital markets. Well, in this article we will be understanding how ESG investing is happening in India.

First let’s understand about ESG investing, ESG investing is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact.  An investment’s ESG score measures the sustainability of an investment in those specific categories.

So, in India there are very few ESG funds but, they all are classified under one category, the thematic category of equity scheme.

The ESG investing is at infancy stage, however the ambitions are very high, also as there is no particular guidelines on ESG investing the numbers seems to be this low, for example the list of funds available for investors looking for ESG investing is mentioned below:

Hence, considering the present scenarios, SEBI has released consultation papers on February 20,2023. the paper was made considering the AMCs who want to launch multiple diversified ESG schemes under the ESG category, so for them a new category for  ESG  schemes  is  proposed  to  be  introduced. Thus, each AMC may be permitted to launch one ESG schemes each under following ESG sub-categories:

i. Exclusions

ii. Integration

iii. Best-in-class & Positive Screening

iv. Impact investing

v. Sustainable objectives

In this regard, the standardized criteria for different ESG strategies may be prescribed by Association of Mutual Funds in India (AMFI).

Further, ESG schemes under the proposed new category may be permitted with minimum 80% investment  of  total  assets  in  equity/debt  stocks  of  a particular theme as per the sub-categories. However, residual portion of the investment should not be starkly in contrast to the philosophy of the scheme from the theme.  AMCs should endeavor to have a higher proportion of the assets under the ESG theme and make suitable disclosures.

Also, Presently,  the  Mutual  Funds  are  required  to  ensure  that  the  name  of  the scheme accurately reflects the nature and extent of the scheme’s ESG focus taking into account investment objective and strategy followed. In this regard, to  have  increased  transparency,  it  is  proposed  to  mandate  the  AMCs  to include the name of the particular ESG strategy in the name of the concerned fund/scheme. For example, XYZ ESG Exclusionary Fund, or ABC ESG Best-in-class Fund etc. This requirement may be made mandatory from April 01, 2023.

As mentioned above, ESG schemes are required to use scores arrived at by AMFI empaneled ESG rating providers to publish securities wise score  along  with  weighted  average  Fund  Score  in  the  monthly  portfolio disclosures. However, disclosure  of  the  name  of  rating  provider  is  not mandated by SEBI. Thus, it is proposed to mandate ESG schemes to disclose name  of  the  ESG  rating  provider  alongside  the  score  disclosures  in  the monthly portfolio disclosures. This requirement may be made mandatory from April 01, 2023.

The papers further discuss about Annual Fund Manager Commentary, which is discussed below:

i. It is proposed that under the Fund Disclosures, annually a section of ‘Fund Managers’ Commentary may be added which may highlight the following:

ii. Explanation of how ESG strategy is applied on the fund

iii. How engagements are carried out

iv. Any escalation strategy that the FM may have applied with respect to ESG factors on the portfolio companies

v. Specific examples or  comment  on  observations  in  the  portfolio companies in the reporting year.

vi. Annual tracking of ESG rating movements in the investee companies

Further, with respect to annual tracking of ESG rating movement, as the ESG  schemes  may  continue  to  have  investments  in  companies  where there  is  no  BRSR  disclosures  till  September  2023,  the  FM  commentary should suitably disclose percentage of AUM invested in such companies and its impact, if any, on the Fund score.

It is proposed to make disclosure of Annual FM Commentary from April 01, 2024 (i.e, for FY 2023-24) onwards.