Mutual funds: According to the Sebi framework, which ESG subcategories are permitted?

You might look into the ESG, or environmental, social, and governance, category if you want to invest in high-performing mutual funds while still following your moral convictions.

The good news is that although ESG funds have been available for a while, their reach has recently expanded.

In July of last year, the capital markets regulator Sebi approved many ESG programs, provided that they were introduced with distinct investment approaches.

About ESG funds

These are topical mutual funds that support the principles of ESG by investing in companies that have a clear commitment to the environment, social reasons, and governance. Even if a company is providing high returns to its shareholders, these funds are not intended for use in investments in low-ESG enterprises.

Multiple ESG plan

Previously, under the theme category of equity program, mutual funds were only allowed to introduce one ESG scheme. It was agreed to create a distinct sub-category for ESG investments under the thematic category of equity schemes, as per the Sebi master circular on mutual funds dated May 19, 2023.

A. Exclusion of particular stocks: According to specific business practices, business segments, or ESG-related activities, this approach excludes particular stocks.

B. Integration of traditional financial accounts: When making investment decisions, this technique clearly takes into account traditional financial considerations as well as ESG-related aspects that are relevant to the investment’s risk and return.

C. Screening: This approach looks to invest in businesses and issuers who outperform competitors on one or more ESG-related performance measures.

D. Investing with financial returns: In addition to a financial return and the fund manager’s plan for achieving the impact goal, this technique aims to provide a positive, quantifiable social or environmental impact. The fund ought to look for a non-financial (real world) impact and assess whether or not it’s being tracked and assessed.

E. Sustainable goals: The goal of this strategy is to invest in businesses, sectors, or industries that are anticipated to gain from structural or long-term macro-ESG developments.

F. Transition-based investments: The goal of this strategy is to make investments in businesses and issuers that help/support just and environmental transition.

Distinct regulations

1. Currently, mutual fund ESG schemes are required to invest exclusively in companies that have disclosed complete business responsibility and sustainability reporting (BRSR).
2. In contrast, the new regulations require an ESG scheme to allocate a minimum of 65% of its AUM to businesses that both guarantee BRSR Core disclosures and report on full BRSR.
3. The amended requirement will take effect on October 1, 2024.