India, a land of vibrant colours and burgeoning potential, is witnessing a new wave of consciousness. With the spotlight on climate change and governance growing brighter, the ESG (Environment, Social and Governance) theme has gained investor traction.
ESG investing offers a powerful tool to address the environmental challenges due to the vast population and rapid economic growth by channelling capital towards businesses that drive sustainable solutions and positive change.
The landscape of ESG investing in India experienced a wave of clarity. In July 2023, the Securities and Exchange Board of India (SEBI) introduced new regulations for ESG mutual funds, mandating a crucial shift – transparently disclosing their specific ESG investment strategies right in their names.
SEBI has mandated the top 1,000 listed companies (by market capitalisation) to make ESG disclosures as per the Business Responsibility and Sustainability Reporting (BRSR) on a mandatory basis from FY 2022 -23. SEBI, through AMFI, has also mandated disclosures for ESG-labelled Mutual Funds.
The market watchdog said mutual funds should clearly disclose the name of ESG strategy in the name of the concerned ESG fund/scheme. The six strategies include –
- Exclusion
- Integration
- Best-in-class and positive screening
- Impact investing
- Sustainable objectives
- Transition or transition-related investments,
[Read: SEBI Issues a Consultation Paper On ESG Disclosures, Ratings And Investing]
But why does a name matter in the world of ESG? Before diving into the specific changes, let’s rewind and understand the significance of this regulatory push.
Why Transparency Matters in ESG Investing?
Imagine stepping into a grocery store looking for organic vegetables. You meticulously scan labels, searching for certifications and specific produce types. Now, imagine entering the ESG investment arena, eager to align your money with responsible companies. Wouldn’t you desire similar clarity?
ESG encompasses many concerns, including reducing carbon footprint and diversity & inclusion practices, sustainable resource management, and ethical supply chains. Lumping all these diverse areas under a single ‘ESG’ banner can be misleading. Investors deserve to know what kind of impact their money is driving.
In order to fulfil this concern SEBI’s new regulations were introduced to protect investors interest. By mandating mutual funds to incorporate their specific ESG strategies in their names, the regulatory body aims to:
- Enhance Investor Awareness: Clear names demystify the fund’s focus, enabling investors to make informed choices aligned with their own values and priorities.
- Combat Greenwashing: Ambiguous fund names often mask their true investment practices. The new rule tackles greenwashing, protecting investors from misleading claims.
- Promote Responsible Investing: Transparency fosters trust and encourages investors to actively engage with the funds they choose.
Mutual funds should ensure that the schemes launched are clearly distinct in terms of asset allocation, investment strategy, and other factors. Presently, the ESG schemes of mutual funds are mandated to invest only in such companies which have comprehensive Business Responsibility and Sustainability Reporting (BRSR) disclosures.
While seemingly like a simple administrative tweak, this move by SEBI to specify ESG strategies in the schemes’ names has triggered a ripple effect, leading to four prominent ESG funds undergoing name changes to embrace greater transparency and align with their focused approaches.
Now, let’s see how the four funds embraced the transparency mandate:
The leading AMCs from the mutual fund industry, such as – ABSL Mutual Fund, Axis Mutual Fund, ICICI Prudential Mutual Fund and Kotak Mahindra Mutual Fund, informed its investors about the changes in ESG Fund names through a notice-cum-addendum.
| Old MF Scheme Name | New ESG MF Scheme Name |
| Aditya Birla Sun Life ESG Fund | Aditya Birla Sun Life ESG Integration Strategy Fund |
| Axis ESG Equity Fund | Axis ESG Integration Strategy Fund |
| ICICI Prudential ESG Fund | ICICI Prudential ESG Exclusionary Strategy Fund |
| Kotak ESG Opportunities Fund | Kotak ESG Exclusionary Strategy Fund |
The securities quoted are for illustration only and are not recommendatory.
Given that, in accordance with the new SEBI standards for ESG investing, ABSL Mutual Fund and Axis Mutual Fund have specified in their revised ESG scheme names that will employ an integration strategy. On the other hand, the ESG schemes of Kotak Mahindra Mutual Fund and ICICI Pru Mutual Fund explicitly stated in their names that they would adopt an exclusionary strategy.
While seemingly administrative, these name changes are a significant step towards a more transparent and informed ESG investment landscape in India. Investors now have a clearer picture of how their money is driving positive change, allowing them to make choices aligned with their values and environmental/social priorities.
According to the market regulator, mutual funds should ensure that at least 80% of the assets under management are invested in equity and equity-related instruments related to that particular scheme strategy. It should also ensure that the remaining 20% is not made in contrast to the scheme.
It should ensure that 65% of the AUM is invested in companies with comprehensive business responsibility and sustainability reporting disclosures and that they are also providing assurance on BRSR Core disclosures. The rest can be invested in companies that comply with the BRSR disclosures.
[Read: The 4 Key Market Trends that Could Drive Mutual Fund Growth]
The Road Ahead for ESG Investing Transparency:
The SEBI’s regulations are commendable, but the journey towards complete ESG transparency is ongoing. Future steps may include:
- Standardisation of ESG Terminology: Clear definitions and metrics for various ESG aspects will ensure consistent interpretations and prevent ambiguity.
- Independent ESG Ratings: Robust third-party assessments can add further credibility and objectivity to fund claims.
- Continuous Disclosure and Reporting: Regular updates on the funds’ ESG performance and impact will keep investors informed and engaged.
These updated names do more than just identify funds; they act as beacons, shedding light on the specific ESG strategies being pursued. This clarity paves the way for Investors to make smart choices aligned with their values and priorities, driving capital towards companies actively tackling critical environmental and social issues.
In conclusion, the SEBI’s regulation is a catalyst, but the journey towards complete ESG transparency requires a collective effort. Standardising terminology, implementing independent ESG ratings, and encouraging continuous disclosure are crucial steps in the right direction.
The Indian ESG landscape, fueled by transparency and investor participation, is poised for continued growth and impact. Remember, transparency is key to unlocking the true potential of ESG investing.
This article first appeared on PersonalFN here
