Sebi proposes disclosure norms for ESG mutual fund schemes

Capital markets regulator Sebi on Tuesday proposed disclosure norms for domestic ESG mutual fund schemes amid increasing activity in that space.

ESG refers to Environment Sustainability and Governance, and the concept is gaining momentum with increased focus on sustainability.

"While all mutual fund schemes are subject to disclosure norms, disclosures assume further significance for ESG schemes, in order for them to be true to label which should reflect consistently in its name, stated objectives, its documented investment policy and strategy and its investments," Sebi said in a consultation paper.

With increased interest and focus on investments in the ESG space globally, Asset Management Companies (AMCs) in India have also been launching equity schemes in the ESG space under the thematic category.

Also, AMCs are launching Exchange Traded Funds (ETFs) and ETF Fund of Funds in India in the ESG space.

Globally, the concept of ESG investments is still emerging and there are no universally agreed norms and standards.

"While such standards are yet to emerge, in the meanwhile, there is a need to introduce disclosure norms for domestic ESG mutual fund schemes considering the increased activity in this area," Sebi said.

According to the regulator, these disclosure norms would further evolve and undergo changes based on learnings and experience, both on the domestic and international front.

Sebi has proposed mandating disclosures pertaining to investment objectives, investment policy, investment strategy, sustainable objectives, disclosure of material risks, asset allocation and decision making process of investing in the Scheme Information Documents (SIDs) for mutual funds which launch ESG schemes.

The Securities and Exchange Board of India (Sebi) has sought comments from the public on the proposals till November 16.

Mutual funds which already have ESG schemes in existence are required to update their SIDs with these disclosures, as per the consultation paper.

With regard to investment policy, Sebi suggested that investment policy of AMCs should include the broad universe of the companies in which they intend to invest.

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 which have Business Responsibility and Sustainability Report (BRSR) disclosures," Sebi said.

"The existing investments in the schemes for which there are no BRSR disclosures would be grandfathered by Sebi for a period of one year i.E., till September 30, 2023," the consultation paper said.

The regulator said that schemes which invest in overseas securities would choose any gobal equivalent of the BRSR which will be specified by the Association of Mutual Funds in India (AMFI).

In respect of asset allocation, Sebi said these schemes fall under the thematic sub-category and so a minimum of 80 per cent of total assets of the scheme should be invested in securities following the ESG theme.

However, the regulator has proposed that the residual portion of the investment should not be starkly in contrast to the philosophy of the scheme from the theme.

In addition to the disclosures in the SIDs, AMCs should make additional disclosures with respect to engagements undertaken by the asset management firms for ESG schemes.

AMCs should monitor and evaluate the investments in terms of key performance indicators, real world outcomes, active engagement and stewardship activities with investee companies.

ESG Funds should disclose about ESG engagement and stewardship activities on material/relevant ESG issues at the completion of every financial year.

AMCs should disclose on their websites information covering various aspects of ESG investing such as source of ESG information of underlying investments, investment process and philosophy, key ESG factors to be considered in decision making, due diligence methodology and its limitations, engagement policies including stewardship and monitoring of investments and evaluation.

In general disclosures, Sebi suggested that the board of an AMC should submit a declaration to the trustees of mutual fund that the scheme is following its disclosed strategy and is in compliance with its Responsible Investment Policies on a quarterly basis.

As on September 2021, there were eight ESG Thematic equity schemes with assets under management of Rs 12,085 crore. There is one ESG ETF and one ESG ETF Fund of Fund with an asset base of Rs 174 crore and Rs 144 crore, respectively.