India increases ESG strategies available to mutual funds

India’s financial regulator, the Securities and Exchange Board of India (Sebi), has created a set of sub-categories for mutual funds interested in investing in ESG initiatives to address an increasing need for sustainable finance.

Following recommendations from the regulator’s ESG advisory committee, it has decided to allow six types of ESG equity strategies for mutual funds: exclusion; integration; best-in-class and positive screening; impact investing; sustainable objectives; or transition-related investments.

At present, mutual funds are only permitted to launch one of these strategies. Under the new rules, however, managers will be allowed to launch multiple strategies.

A minimum of 80% of the total assets under management (AUM) within any of these strategies has to be invested in line with its ESG requirements, while the remaining 20% can be outside that, as long as it’s not something that directly contradicts its ESG investments.

Sebi has also said 65% of AUM has to be invested in companies that are reporting on comprehensive Business Responsibility and Sustainability Reporting, providing assurance on such disclosures. This comes into effect from 1 October 2024, with those not in compliance expected to ensure they will be by 30 September 2025.

Asset management companies will also be expected to obtain independent reasonable assurance annually to show that their funds comply with these rules. These assurances will be on a ‘comply or explain’ basis for the 2022-2023 financial year and then become mandatory.

This story first appeared on our sister publication, ESG Clarity.