Sebi’s proposed ESG disclosure to address risk of ’green washing’: Experts

New Delhi: The proposed disclosure norms for mutual fund schemes with the ESG (environment sustainability and governance) theme will keep a tight rein on such products and provide transparency to enable investors take a more informed decision, industry experts said on Friday.       

zc. The move aimed at ensuring that ESG-focused mutual fund schemes remain true to label.        

In its consultation paper, the regulator has proposed various disclosures in the Scheme Information Documents(SID) that will ensure that the type of strategy followed by the scheme, with regards to sustainability or ESG characteristics merit the nomenclature of an ESG fund.          

"This is a step in the right direction to ensure that adequate information is available to investors before investing in ESG related schemes," Anup Bansal, Chief Investment Officer, Scripbox, said.         

He, further, said the ongoing and periodic disclosures for the selected securities provide a framework for checks and balances to ensure that the schemes do not diverge from the ESG theme at any point in time.         

Making similar statement, Harshad Chetanwala, Co-Founder MyWealthGrowth.com, said the proposed disclosure on ESG funds are in the right direction as there are investors who have started looking at ESG-based investment from an allocation perspective.           

"While ESG investing continues to evolve, getting disclosure norms in place at this stage will be helpful. There is also a need to create a proper benchmark where creators too follow strong ESG standards along with mutual funds," he added.         

The proposal requires schemes to only invest in securities that have Business Responsibility and Sustainability Report (BRSR) disclosures or equivalent in case of overseas securities. Link to BRSR disclosure or equivalent should be provided for each security.         

Though the mandated allocation for securities with ESG theme is at least 80 per cent and the disclosure norms apply to these securities only, the regulator has proposed not too much deviation from the scheme philosophy for the remaining 20 per cent allocation.         

"Sebi has come out with a consultation paper on introducing disclosure norms for ESG mutual fund schemes that not only keep a tight rein on these products but also provide transparency and divulgence to enable investors to learn, understand and take a more informed decision," said Priti Rathi Gupta, Founder of LXME --  financial platform for women.         

Globally there is a spotlight on ESG disclosures as regulators around the world look to avoid the risk of greenwashing by increasing ESG disclosures from asset managers.       

"Sebi's intended disclosures on ESG funds is a step in the right direction as the Indian ESG funds space is  evolving and it's a positive sign to set the framework at the outset," Kaustubh Belapurkar, Director Manager Research, Morningstar India, said.       

Also, there is a recommendation under the general obligation section for Amfi to encourage industry participants “to develop common sustainable finance-related terms and conditions in line with global standards” which is in line with long-term thinking.       

Scripbox's Bansal said the move will create a common framework and language for the evolving landscape of ESG related investments.       

"We have been proponents of and thereby concur with the recommendation of more disclosures on sustainability linked products to not only showcase its true to label characteristics but also help address any forms of 'green washing' from product manufacturers," Chirag Mehtaa, SR fund manager -Alternative investment- at  Quantum Mutual Fund, said.        

According to him, there is a need to align investor interest, fiduciary obligations of asset managers for greater transparency, credibility, communication and engagement with stakeholders.       

 "The subtle differences in the ESG approaches need to be communicated well to set right expectations, instill confidence and drive investors towards sustainable investments," he added.        "As the world struggles with multiple crises – climate and social unrest, we are seeing tremendous growth in sustainable investing across the globe. Investors are now shifting focus on investments in the ESG space globally," LXME's Gupta said.        

In India, an on September 2021, there were eight ESG Thematic equity schemes with assets under management of ₹12,085 crore. There is one ESG ETF and one ESG ETF Fund of Fund with an asset base of ₹174 crore and ₹144 crore, respectively.         

Sebi, in its consultation paper, suggested that investments should be designed to generate a beneficial ESG/sustainability impact alongside a financial return.       

The regulator has proposed additional disclosure to monitor and evaluate the investments and ensure they encompass investment strategies to meet the standards of ESG investments.         

It also suggested periodic portfolio disclosures to keep the investors apprised of their investments.