India’s SEBI sets minimum ESG equity fund requirements

ESG equity funds registered in India will be required to invest a minimum proportion of their assets according to sustainability themes, make annual disclosures that include stewardship performance information and obtain third-party assurance to show their compliance.

The new requirements were circulated among fund managers yesterday by domestic regulator the Securities and Exchange Board of India (SEBI).

Fund managers will now be allowed to offer ESG products that incorporate six types of ESG strategies. These are exclusions, ESG integration, best-in-class and positive screening, impact, sustainable objectives and transition.

A minimum of 80 percent of a strategy’s assets must be invested in line with the strategies chosen, while the remaining exposures “shall not be in contrast to the strategy of the scheme”, said SEBI.

Managers will be required to obtain “reasonable assurance” over their compliance with the rules on a comply-and-explain basis by December this year, and on a mandatory basis form 2024 onwards.

Under existing financial market rules, Indian fund houses were allowed to market only one ESG equity fund in their product line-up. This restriction has been removed.

Separately, managers must now include details of the ESG scores of portfolio companies and identify their providers as part of portfolio statements that are published on a monthly basis as per existing requirements. The changes will come into effect immediately.

Managers must also list the number of engagements carried out, provide details of escalation strategies, and explain whether there have been any changes in ESG scores as a result of these activities.

This is to be accompanied by commentary on engagement objectives and outcomes. Disclosures on engagement activities are to be made from 2024 onwards.

In addition, fund managers will now be required to publicly disclose voting rationales for all proxy-voting decisions that relate to ESG factors. Indian mutual funds are already subject to mandatory disclosure of proxy votes on a quarterly basis.

Enhanced voting disclosures will be applicable for AGMs held from April 2024 onwards.

The announcement follows the release of a sustainable finance regulatory package by SEBI earlier this year. This includes a requirement that ESG funds investing in India allocate a minimum 65 percent of assets to companies that obtain reasonable assurance for their sustainability disclosures.

The package is set to come into force from October next year.