Market regulator SEBI has allowed asset management companies to launch funds with 6 different strategies under the ESG category. ESG factor based investing is catching up in all parts of the world and Indian policymakers are also encouraging sustainable investing.
Market regulator SEBI has allowed asset management companies to launch funds under six new strategies, expanding the scope of the Environment, Social and Governance (ESG) theme category. At present, the market regulator has allowed mutual funds to launch only one scheme with ESG investments under the theme category for equity schemes. However, considering the growing need for green financing, the capital markets regulator has now decided to allow mutual funds to launch multiple ESG schemes with different strategies. ESG factor based investing is catching up in all parts of the world and Indian policymakers are also encouraging sustainable investments.
What is new category
As per the SEBI circular dated July 20, any scheme under ESG category can be launched with one of these strategies – Exclusion, Integration, Best-in-Class and Positive Screening. in-class & Positive Screening), Impact investing, Sustainable objectives and Transition or transition-related investments.
Let us understand in detail –
- Exclusion:- SEBI said that ‘Exclude’ securities will be based on certain ESG-related activities, business practices or business segments.
- Integration:- Funds with ‘Integration’ theme will consider traditional financial factors as well as ESG-related factors, which are critical to the risk and return of investments, while making investment decisions.
- Best-in-class & Positive Screening:- The best-in-class & positive screening strategy will aim to invest in companies and issuers that outperform their peers on one or more performance metrics relating to ESG matters.
- Impact Investing:- ‘Impact’ investing will seek to generate financial returns as well as a positive, measurable social or environmental impact and then it all depends on the fund managers how they want to achieve their objective with this impact.
- Sustainable Objectives:- ‘Sustainable’ objective funds will invest in sectors, industries or companies that are expected to benefit from long-term macro or structural ESG-related trends.
- Transition or transition-related investments:- Transition or transition related schemes will focus on companies and issuers that support or facilitate environmental transition and or only transition.
How to invest
As per SEBI, ESG schemes will need to invest a minimum of 80% of the total assets under management (AUM) in equity instruments of that particular strategy of the scheme. Currently, it is mandatory for ESG schemes to invest only in companies that have strong Business Responsibility and Sustainability Reporting (BRSR) disclosures.
The regulator has now decided that ESG schemes shall invest at least 65 per cent of their AUM in companies which are reporting on BRSR and also providing assurance on BRSR core disclosure.
