ESG funds in India will be required to have at least 80% of their assets invested in securities aligned with their specific strategies, and asset managers will be required to provide monthly ESG scores for holdings, according to new rules released for ESG investment funds by the Securities and Exchange Board of India (SEBI).
SEBI also announced that introduced a new ESG investment sub-category for funds, in order to enable mutual funds to offer several ESG schemes to investors. Under the prior rules, mutual funds were able to offer only one ESG scheme under the thematic category.
According to SEBI, the new measures are being introduced in order to “facilitate green financing with thrust on enhanced disclosures and mitigation of green washing risk.”
Under the new rules, asset managers will now be able to offer multiple ESG funds under a series of defined strategies, including Exclusion, Integration, Best-in-class & Positive Screening, Impact investing, Sustainable objectives, and Transition or transition related investments. Funds will be required to have at least 80% of AUM invested in securities aligned with the strategy, with remaining assets not invested in securities in contrast to the strategy. Additionally, at least 65% of AUM will be required to be invested in companies which are reporting on comprehensive Business Responsibility and Sustainability Report (BRSR) guidelines (introduced in 2021) and that provide assurance on BRSR disclosures.
New disclosure requirements for ESG schemes include a requirement for the name of the fund to clearly include the ESG strategy, and for BRSR scores to be included in monthly portfolio statements, along with the name of the ESG ratings provider.
Asset managers for ESG schemes will also be required to disclose on their voting on resolutions with rationale supporting their voting decision, including whether the vote was made for ESG reasons.
In their annual commentary, fund managers will be required to provide examples of how the ESG strategy was applied, how engagements were carried out and on the application of escalation strategies, as well as engagement case studies, and details on engagements including the number of engagements, modes of communication used and outcomes.
The new rules also require asset managers to obtain independent assurance that their ESG schemes are in compliance with their strategies and objectives, and that the board of the asset management company certify the compliance of the schemes with regulatory requirements.