SEBI allows fund houses to launch multiple ESG schemes

In a recent circular, SEBI announced that mutual fund houses can now launch more than one equity scheme under the thematic category of Environmental, Social and Governance (ESG) mutual funds.

However, fund houses have been mandated to keep these schemes distinct from each other. It is also mandatory for them to make suitable disclosures of the investment strategy and asset allocation.

The new subcategories are applicable with immediate effect. The announcement is in follow-up to the consultation paper that SEBI issued in March 2023.

What does this mean

• Fund houses will now have an opportunity to launch more funds. It might be confusing for investors to choose from an already long list of funds.
• At Value Research, our timeless advice is to avoid thematic and sectoral funds in general.
• If you're still keen on these funds, wait and watch before investing in any new schemes being launched.

Coming back to the latest piece of news, the new ESG schemes will be launched based on six different strategies.

1. Exclusion of securities based on certain ESG-related activities, business practices, or business segments. The strategy should specify the type of exclusion, the conditions or threshold for it, and the reference to any law, regulation, or framework used to establish or evaluate the criteria for exclusion.

2. Integration of securities based on ESG-related factors that are material to the investment's risk and return, combined with traditional financial factors.

3. Best-in-class & positive screening of companies and issuers that perform better than peers on one or more performance metrics related to ESG. These metrics should be disclosed in detail and specifics.

4. Impact investing to seek a non-financial (real world) impact and evaluate if that impact is being measured and monitored.

5. Sustainable objectives to invest in sectors, industries, or companies that may benefit from long-term macro or structural ESG-related trends.

6. Transition or transition-related investments in companies and issuers that aim to generate a positive and measurable social and environmental transition.

Further, a minimum of 80 per cent of the AUM shall be invested in equity and equity-related instruments. The remaining 20 per cent may be invested in other instruments as long as the investment is not in contrast to the scheme's strategy.

The ESG schemes are mandated to invest at least 65 per cent of their AUM in listed companies which assures BRSR Core disclosures. This requirement shall be applicable with effect from October 01, 2024.

The ESG schemes not in compliance with these criteria as on October 01, 2024, will need to fulfil the requirements by September 30, 2025. During this period, these schemes can only make fresh investments in companies with assurance on BRSR Core.