The Securities and Exchange Board of India’s (Sebi) latest guidelines on environmental, social and governance norms (ESG) introduced a slew of measures to promote and streamline investing in the theme. A new category for the theme will be introduced, allowing for launch of multiple schemes.
However, the theme could face hurdles in India, said mutual fund players. “While ESG had taken off globally as a concept, there has been a pause and rethink of late. In India, it’s still in its nascent stages as the industry is still working around how to define the theme,” said Sahil Kapoor, head of products and market strategist (product management), DSP Investment Managers.
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He pointed out that the objective of ESG is the ‘impact’, so the focus shouldn’t be on numbers, but rather the components of the theme — environmental, social and governance. On the other hand, it could take time before it sees traction in India as fund houses will have to strategise on designing products.
Another fund manager (fixed income) of a leading fund house said: “ESG has not seen the kind of traction in India as it has in Europe. While everybody speaks about it as the future, the truth is that it is yet to spark investor interest to that extent. People will not get into something they lack awareness in, and in which questions are still being asked. The regulator is ensuring enablement for the theme to pick up with its efforts, but a market has to be built first for schemes to be introduced, as people still lack confidence.”
The markets watchdog approved inter alia key amendments to the SEBI (Mutual Funds) Regulations, 1996, in order to facilitate a balanced approach to ESG. A new category for the theme will be introduced, allowing for launch of multiple schemes.
According to a Bloomberg Intelligence study last year, ESG assets were on track to reach $50 trillion by 2025, one-third of the projected total AUM globally.
The Sebi board has mandated that ESG schemes invest at least 65% of their assets under management (AUM) in listed entities, which are compliant with the Business Responsibility and Sustainability Report (BRSR) Core.
BRSR Core is a planned framework comprising key performance indicators, for which listed entities shall need to obtain reasonable assurance.
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In addition, boards of asset management firms (AMCs) have to ensure third party assurance and certification with respect to compliance with the objective of the ESG scheme, while disclosure norms will become more stringent as regards voting on ESG factors. Fund managers also have to provide commentary and case studies highlighting how the strategy is applied on fund/investments.
This is with the objective to “address the risk of mis-selling and greenwashing, enhance stewardship reporting requirements, and promote ESG investing”, the regulator said.