India announces new ESG norms for investment funds

New rules mandate asset managers to obtain independent assurance that their ESG schemes comply with their strategies.

The Securities and Exchange Board of India (SEBI) has recently issued new rules for ESG (Environmental, Social, and Governance) investment funds in India.

According to these regulations, ESG funds must allocate a minimum of 80% of their assets to securities that align with their specific strategies. Additionally, asset managers are now obligated to provide monthly ESG scores for the holdings in these funds.

SEBI has introduced a new ESG investment sub-category for funds, allowing mutual funds to offer multiple ESG schemes to investors. This is a departure from the previous rules, which allowed only one ESG scheme under the thematic category.

The purpose of these new measures is to promote green financing and emphasize enhanced disclosures while mitigating the risk of greenwashing.

Under the updated guidelines, asset managers can now offer various ESG funds based on defined strategies, such as Exclusion, Integration, Best-in-class & Positive Screening, Impact investing, Sustainable objectives, and Transition or transition-related investments. Funds must adhere to the strategy by investing at least 80% of their assets under management (AUM) in securities aligned with the chosen approach, with the remaining assets not following the strategy.

Furthermore, a minimum of 65% of AUM must be invested in companies that comply with comprehensive Business Responsibility and Sustainability Report (BRSR) guidelines introduced in 2021 and provide assurance on BRSR disclosures.

The new disclosure requirements include explicitly mentioning the ESG strategy in the fund’s name and providing BRSR scores in monthly portfolio statements, along with the name of the ESG ratings provider.

Asset managers handling ESG schemes are also obliged to disclose their voting decisions and rationale, particularly if the vote was based on ESG reasons.

In their annual commentary, fund managers are expected to provide examples of how they applied the ESG strategy, conducted engagements, and employed escalation strategies. They must also include engagement case studies, details on the number and modes of communication used for engagements, and the outcomes.

Additionally, the new rules mandate asset managers to obtain independent assurance that their ESG schemes comply with their strategies and objectives. Moreover, the board of the asset management company is required to certify the schemes’ compliance with regulatory requirements.

  • Press release