Mutual Funds May Introduce 5 New Categories Under ESG; Check Sebi’s Latest Proposal

Capital markets regulator Securities and Exchange Board of India (Sebi) has proposed allowing mutual funds to introduce five new categories under ESG (environmental, social and governance) scheme.

Presently, mutual funds can launch only one ESG scheme under the thematic category of equity schemes.

The five new categories should be exclusions, integration, best-in-class and positive screening, impact investing and sustainable objectives.

Considering that AMCs may want to launch multiple diversified ESG schemes under the ESG category, Sebi has proposed that each asset management company should be permitted to launch one ESG scheme each under the five subcategories.

“AMCs should endeavour to have a higher proportion of the assets under the ESG theme and make suitable disclosures,” the Sebi said in its consultation paper.

Also Read: Whistleblower Protection, Prevention Of Fraud And Market Abuse; Here’s What Sebi Wants From Stock Brokers

ESG schemes under the proposed new category should be permitted with a minimum 80 per cent investment of total assets in equity or debt stocks of a particular theme as per the sub-categories. However, the residual portion of the investment should not be starkly in contrast to the philosophy of the scheme.

For the ESG exclusions scheme, Sebi has suggested that mutual funds should exclude securities based on certain ESG-related activities, business practices, or business segments and the ESG integration scheme should explicitly consider ESG-related factors that are material to the risk and return of the investment, along with traditional financial factors.

ESG best-in-class and positive screening schemes should invest in companies that perform better than peers in ESG parameters.

ESG impact investing schemes should seek a non-financial (real world) impact and evaluate if that impact is being measured and monitored; and ESG sustainable objectives scheme should aim to invest in sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG related trends.

To boost transparency, the regulator has proposed to mandate the AMCs to include the name of the particular ESG strategy in the name of the concerned fund or scheme.

In addition, Sebi has proposed putting in place a regulatory framework for ESG Rating Providers (ERPs).

According to Sebi, ERPs can be allowed to register with the regulator under the CRA (Credit Rating Agencies) norms.

The watchdog said the role of ERPs has become important in making investment decisions but their activities are not typically subject to regulatory or supervisory at present.

“While regulators in certain jurisdictions have opted for a voluntary code of conduct for ERPs, Sebi proposes an enforceable regulatory and supervisory framework for ERPs, in view of Sebi’s experience with credit rating agencies…,” the consultation paper said.

Given the nascent nature of the ERPs and to provide scope for further innovation, Sebi said it has attempted to follow a principles-based approach while balancing the regulator’s mandate of protection of interest of investors in the securities market.

In May 2022, the regulator had constituted an advisory committee on ESG matters in the securities market, wherein ESG disclosures, ESG investing and ESG ratings were deliberated upon in an integrated manner.

Stakeholders’ comments have been sought on the consultation paper till March 8, 2023.

Recently, Sebi released a consultation paper that sought views from market participants on a proposal which requires broking firms and their senior management to be accountable for such detection/ prevention of fraud or marker abuse, by setting up robust surveillance and control systems, and ensuring appropriate escalation and reporting mechanisms.

(With PTI inputs)

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