- Date : 30/03/2023
- Read: 3 mins
A look at SEBI measures on ESG-based mutual fund schemes
If you are planning to invest in a stock, you will look for companies that are profitable and/or have good prospects for future growth. In other words, financial robustness is the key criterion in selecting a stock. But non-financial factors are becoming increasingly relevant for investors, particularly with the emergence of ESG.
Environmental, Social and governance (ESG) based investing is a global phenomenon. By considering these criteria, you can ensure the long-term sustainability and growth of your investments. Besides, ESG-based investing promotes better scrutiny of companies, identifying irresponsible corporate behaviour and mismanagement.
SEBI Goes Pro-ESG
The Securities and Exchange Board of India (SEBI) has announced several measures that confirm its encouraging view on sustainable investing. One of these measures is that mutual fund companies can now launch more than one ESG-based scheme. ESG-based schemes have been categorised as thematic funds, and fund houses were allowed to offer one ESG-based fund scheme only.
SEBI has now made it mandatory for fund schemes to invest at least 65% of the fund in companies that have undertaken assurance on the Business Responsibility and Sustainability Report (BRSR) requirements.
AMCs are required to obtain third-party assurance and certification for ensuring ESG-related compliance of companies. They must enhance their disclosures on the voting decisions taken for ESG factors. Besides, they have to explain the ESG strategy applied towards the investments in their scheme commentary.
Also Read: Find out SEBI’s new deadline for furnishing mutual fund nomination details
ESG Funds in India
Presently, there are a handful of ESG funds in India, with most of them being actively managed funds. SBI Magnum Equity ESG fund has the highest asset under management of over Rs 4,456 crores. Quantum India ESG has the highest 3-year CAGR of 26% and also the highest to-date CAGR of 13.3%.
Most of these fund schemes are recent and have a limited track record. Their portfolio comprises companies from all sectors and across market capitalisation, provided they score high on ESG parameters. Companies engaged in products like gambling, liquor, tobacco etc. are unlikely to feature in these schemes.
Also Read: Focused funds vs. diversified mutual funds: Which one to choose
Active ESG and Passive ESG
It is observed that passively managed ESG fund schemes are not in a position to monitor the ESG parameters at all times. An actively managed fund, on the other hand, can emphasise the presence of strong governance in its portfolio companies. Passive, index-based ESG funds consider the ESG score of companies and cap-weight them after eliminating the low-ranked ones. However, as an ESG investor, you should wait for more accuracy in the construction of ESG indices before investing in passive ESG schemes. Until then, an actively managed ESG fund with strong monitoring of the ESG parameters within its portfolio is a better bet for sustainable investing.
Conclusion
The SEBI measures are also expected to bring more transparency and consistency to sustainable investing within the Indian mutual fund segment. This will reduce portfolio risk and promote sustainable investing with a long-term investment horizon. Besides, mutual fund investors will have more scheme options when selecting ESG-based fund schemes.
Source:
If you are planning to invest in a stock, you will look for companies that are profitable and/or have good prospects for future growth. In other words, financial robustness is the key criterion in selecting a stock. But non-financial factors are becoming increasingly relevant for investors, particularly with the emergence of ESG.
Environmental, Social and governance (ESG) based investing is a global phenomenon. By considering these criteria, you can ensure the long-term sustainability and growth of your investments. Besides, ESG-based investing promotes better scrutiny of companies, identifying irresponsible corporate behaviour and mismanagement.
SEBI Goes Pro-ESG
The Securities and Exchange Board of India (SEBI) has announced several measures that confirm its encouraging view on sustainable investing. One of these measures is that mutual fund companies can now launch more than one ESG-based scheme. ESG-based schemes have been categorised as thematic funds, and fund houses were allowed to offer one ESG-based fund scheme only.
SEBI has now made it mandatory for fund schemes to invest at least 65% of the fund in companies that have undertaken assurance on the Business Responsibility and Sustainability Report (BRSR) requirements.
AMCs are required to obtain third-party assurance and certification for ensuring ESG-related compliance of companies. They must enhance their disclosures on the voting decisions taken for ESG factors. Besides, they have to explain the ESG strategy applied towards the investments in their scheme commentary.
Also Read: Find out SEBI’s new deadline for furnishing mutual fund nomination details
ESG Funds in India
Presently, there are a handful of ESG funds in India, with most of them being actively managed funds. SBI Magnum Equity ESG fund has the highest asset under management of over Rs 4,456 crores. Quantum India ESG has the highest 3-year CAGR of 26% and also the highest to-date CAGR of 13.3%.
Most of these fund schemes are recent and have a limited track record. Their portfolio comprises companies from all sectors and across market capitalisation, provided they score high on ESG parameters. Companies engaged in products like gambling, liquor, tobacco etc. are unlikely to feature in these schemes.
Also Read: Focused funds vs. diversified mutual funds: Which one to choose
Active ESG and Passive ESG
It is observed that passively managed ESG fund schemes are not in a position to monitor the ESG parameters at all times. An actively managed fund, on the other hand, can emphasise the presence of strong governance in its portfolio companies. Passive, index-based ESG funds consider the ESG score of companies and cap-weight them after eliminating the low-ranked ones. However, as an ESG investor, you should wait for more accuracy in the construction of ESG indices before investing in passive ESG schemes. Until then, an actively managed ESG fund with strong monitoring of the ESG parameters within its portfolio is a better bet for sustainable investing.
Conclusion
The SEBI measures are also expected to bring more transparency and consistency to sustainable investing within the Indian mutual fund segment. This will reduce portfolio risk and promote sustainable investing with a long-term investment horizon. Besides, mutual fund investors will have more scheme options when selecting ESG-based fund schemes.
Source:
