Environmental, social and governance (ESG) schemes will now have to invest at least 65 per cent of their assets under management (AUM) in companies which are reporting on comprehensive business responsibility and sustainability reporting (BRSR) disclosures.
This requirement shall be applicable with effect from October 1, 2024, the Securities and Exchange Board of India (Sebi) has announced in a notification dated July 20, 2023.
ESG schemes are mandated to invest only in companies which have comprehensive BRSR disclosures. Now, this limit has been fixed at 65 per cent. The balance AUM can be invested in companies having BRSR disclosures, Sebi said.
Sebi further announced that ESG schemes which are not in compliance with the aforesaid investment criteria as on October 1, 2024, shall ensure compliance with the requirement by September 30, 2025.
“During the said period of one year, ESG schemes shall not undertake any fresh investments in companies without assurance on BRSR Core,” Sebi said in the notification.
Disclosure Requirements For ESG Schemes
Sebi also announced the disclosure requirements for the ESG schemes.
The scheme strategy will have to be reflected in the scheme name. Further, mutual funds will have to disclose the name of the ESG strategy in the name of the concerned ESG fund and/or scheme.
The ESG scores of the securities will also have to be mentioned. Lastly, mutual funds also need to disclose the security-wise BRSR core scores (as and when made available by the Sebi-registered ESG Rating Provider (ERPs), and name of the ERPs providing ESG scores for the ESG schemes, along with the ESG scores in their monthly portfolio statements of ESG schemes.
“Where there is a change in ERP, the reason for such change will also have to be disclosed in the next monthly portfolio statements of ESG schemes,” Sebi said in its notification.
Other requirements include voting disclosures by ESG schemes, including details on their website on a quarterly basis along with specific rationale supporting their voting decision, details of annual general meetings held from April 1, 2024 onwards, and the annual fund manager commentary and disclosure of case studies.
The fund manager commentary should include, among others, examples on how the ESG strategy was applied on the fund, how engagements were carried out, any escalation strategy that the fund manager may have applied on the portfolio companies, and annual tracking of ESG rating movements in the investee companies etc, Sebi said.
The commentary should also include case studies where the fund manager had engaged with the portfolio companies. This should also include details on the number of engagements carried out in a year, the modes of communication employed, and the outcomes, if any, that were achieved in the reporting year, Sebi said in the notification.
Besides these, the commentary should also include the annual tracking of ESG rating and/or score movements in the investee companies.
“The fund manager’s commentary should also suitably disclose percentage of AUM invested in such companies where there is no BRSR disclosures. Where there is change in ERP, reason for such change recorded by AMCs shall also be disclosed in the fund manager’s commentary,” Sebi further said.
