In order to create uniformity in ESG funds, SEBI has released a consultation paper inviting comments from stakeholders and investors.
As per the consultation paper, ESG schemes will be prohibited from investing in companies who do not disclose Business Responsibility and Sustainability Report (BRSR). Funds which have already invested in non-BRSR companies will get one year time to liquidate their holdings.
According to the paper, AMCs may look at considering these ESG strategies:
Exclusion: In this strategy, funds can set parameters to identify companies in which they won't invest
Integration: Take into consideration ESG factors that have a major impact on risk and return of the investment
Best-in-class & positive screening: Set metrics to invest in companies that perform better than their peers on the ESG front
Impact investing: This strategy aims to generate a positive social and environmental impact along with financial returns
Sustainable objectives: Aim to invest in sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG trends
Decision-making process for investing: This process uses an in-house or third-party ESG scoring methodology to identify the best ESG compliant companies
SEBI said there's a need to develop common ESG definition and financial terms for the industry and that AMFI should come up with it. "AMFI should also promote financial and investor education initiatives relating to sustainability," the paper said.
According to the regulator, the investment policy should include the broad universe of the companies in which the fund will invest. Other than that, AMCs will have to "clearly state the intended ‘real world’ outcome in qualitative terms, especially for strategies related to integration, impact investing and sustainable objectives," said SEBI.
