SEBI introduces new category of Mutual FundSchemes for Environmental, Social andGovernance Investing and related disclosures by Mutual Funds.

Under the current regulatory requirements, Mutual Funds are permitted to launch only one scheme with ESG investing under the thematic category for Equity schemes, however in view of the industry representations for allowing multiple schemes with different ESG strategies and considering the increasing need for green financing, it has been decided to permit launch of multiple ESG schemes with different strategies by Mutual Funds.
The concept of ESG investments is emerging and therefore a consistent, comparable, and decision-useful scheme disclosures are required to enable investors to make informed investment decision and to prevent greenwashing.
Therefore, in this regard, SEBI, vide letters dated February 08, 2022 and June 21, 2022 to Association of
Mutual Funds in India (AMFI), had prescribed disclosure norms for ESG schemes of Mutual Funds.
In order to further improve the transparency and to mitigate the risk of mis-selling and greenwashing, an ESG Advisory Committee was set up by SEBI which provided recommendations for expanding the disclosure norms for ESG funds. Considering the recommendations of the ESG Advisory Committee and pursuant to public consultation on the matter, the provisions of the SEBI (Mutual Funds) Regulations, 1996 were amended on June 27, 2023 specifying the manner in which ESG funds are to be invested from time to time.

Accordingly, the following measures have been implemented to facilitate green financing with thrust on enhanced disclosures and mitigation of green washing risk:

• Introduce a separate sub-category for ESG investments under the thematic category of Equity schemes.
• Minimum 80% of the total assets under management (AUM) of ESG schemes shall be invested in equity & equity related instruments of that particular strategy of the scheme, however the remaining portion of the investment shall not be in contrast to the strategy of the scheme.
• AMCs shall ensure that the schemes launched by Mutual Funds are clearly distinct in terms of asset
  allocation, investment strategy etc.
• It is decided that an ESG scheme shall invest at least 65% of its AUM in companies which are reporting on comprehensive BRSR and are also providing assurance on BRSR Core disclosures.
• Mutual Funds shall be clearly disclosing the name of ESG strategy in the name of the concerned ESG
  fund/scheme.
• Monthly portfolio should disclose security wise BRSR Core scores and names of the ERPs providing ESG scores for the ESG schemes.
• In context of disclosure on voting decisions (whether” in favour” or “against”), the AMCs shall categorically disclose whether the resolution has or has not been supported due to any environmental, social or governance reasons.
• The Annual Report of the ESG schemes should include ‘Fund Manager Commentary’ along with the
  additional disclosures with respect to engagements undertaken by Mutual Funds for ESG schemes.
• 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, as stated in
  respective Scheme Information Documents.

Once above compliances are done, the board of directors of AMCs, shall certify the compliance of ESG
schemes in annual report of the scheme.

Manasvi Khanna, Audit Executive, SW India