ESG investment: SEBI paper gives clarity on the concept

K. S. Badri Narayanan | | Updated on: Oct 29, 2021

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MFs have to remain true-to-label

The Securities and Exchange Board of India has proposed tighter norms in a recent consultation paper on ESG (environment sustainability and governance) funds, to ensure that these theme-based schemes remain true-to-label.

“While all mutual fund schemes are subject to disclosure norms, disclosures assume further significance for ESG schemes, in order for them to be true-to-label which should reflect consistently in its name, stated objectives, its documented investment policy and strategy and its investments,” the paper said.

Transparency and accuracy

According to the consultation paper, the name of the scheme should accurately reflect the nature and extent of the scheme’s ESG focus taking into account investment objective and type of strategy followed.

It should provide transparency about the nature and extent of the scheme’s ESG-related investment objectives. Detailed objectives of the scheme need to be laid down stating how it aims to achieve this objective through its investment policy and strategy including the approach used for screening companies.

The strategy should include the broad universe of the companies in which they intend to invest. The investments should be designed to generate a beneficial ESG/sustainability impact alongside a financial return and the AMC should clearly state the intended ‘real world’ outcome in qualitative terms, especially for strategies related to integration, impact investing and sustainable objectives.

One should whole-heartedly welcome the SEBI proposals giving much clarity on ESG investments by mutual funds. Besides, this will not only ensure transparency but also make fund houses more accountable and responsible, as more investors will be attracted to these type of schemes to become socially responsible while investing.

These steps will check that investors are not lured into investing on the basis of greenwashing.

India Inc too acknowledges the importance of socially responsible business. A recent study by rating agency ICRA said the top 150 listed entities by market cap have shown marked improvement in their ESG performance over the last year, given their focus on sustainability reporting and ESG metrics.

If more companies follow suit, that will make the fund managers job too easy.

Published on October 29, 2021
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