Source: LM
Context: The Securities and Exchange Board of India (Sebi) has permitted mutual funds to introduce five new categories under the ESG (environmental, social, and governance) scheme.
- Currently, mutual funds can launch only one ESG scheme under the thematic category of equity schemes.
What is ESG Scheme?
ESG aims to encourage sustainable and ethical business practices, including climate change, pollution, human rights, corporate governance, and more. SEBI issued a guidance note in 2012, urging companies listed on Indian Stock Exchanges to disclose their ESG performance in annual reports.
- With effect from the financial year 2022-2023, filing of Business Responsibility and Sustainability Report (BRSR) has been made mandatory for the top 1000 listed companies by SEBI.
- ESG schemes are mandated to invest at least 65% of assets in listed entities with BRSR Core assurance, while the balance can be invested in companies with BRSR disclosures, starting from October 1, 2024.
How ESG differs from corporate social responsibility (CSR)?
- India has a robust CSR policy codified in the Companies Act 2013, mandating that corporations engage in initiatives that contribute to the welfare of society by spending at least 2% of their net profit over the preceding 3 years on CSR activities.
- ESG regulations differ in process and impact. For example, The U.K. Modern Slavery Act requires companies to publish the efforts they have taken to identify the risks of child labour in their supply chain, etc.
Five New Categories of Mutual Funds:
| Categories | Description | |
| Exclusions | Exclude certain industries or companies based on ESG criteria. | Avoiding investments in fossil fuel companies. |
| Integration | Integrating ESG factors into investment decision-making. | Assessing companies’ environmental practices before investing. |
| Best-in-Class and Positive Screening | Selecting companies with leading ESG performance in their industry. | Investing in companies with top-notch labour practices. |
| Impact Investing | Investing in businesses or projects with positive social and environmental impact. | Funding renewable energy projects. |
| Sustainable Objectives | Investing in alignment with specific sustainability goals. | Supporting companies committed to reducing waste. |
Aim of the New measures: It aims to facilitate green financing and requires enhanced disclosures to mitigate greenwashing.
