In a significant move towards promoting sustainable and responsible investing, the Securities and Exchange Board of India (SEBI) has taken a bold step to broaden the scope of Environmental, Social, and Governance (ESG) thematic category for asset management companies. This development enables mutual fund houses to introduce funds under six new strategies, empowering investors to align their financial goals with their ethical and environmental values
Exclusion Theme
Under this theme, ESG funds can exclude securities based on certain ESG-related activities, business practices, or other criteria. The strategy must ideally specify the type of exclusion with possible impacts and conflicts. Additionally, it should outline the threshold or condition for exclusion and reference applicable laws, regulations, guidelines, or frameworks used in establishing or evaluating the criterion. By adopting an exclusionary approach, investors can avoid funding companies involved in controversial practices and industries that do not align with their values.
Integration Theme
The integration theme allows ESG funds to explicitly consider ESG-related factors that are material to the risk and return of investments. This goes beyond traditional financial metrics and aims to enhance returns while minimizing risk. By incorporating ESG considerations into the investment decision-making process, fund managers can identify companies with sustainable and responsible practices, potentially yielding better long-term performance.
Best-in-class Theme (Positive Screening Theme)
This sub-theme of ESG investing focuses on selecting companies that outperform their peers on one or more performance metrics related to ESG matters. Fund managers must explicitly disclose the details and specifications of such metrics. By investing in industry leaders in terms of environmental, social, and governance practices, investors can support businesses with a positive track record of responsible behavior.
Impact Investing Theme
The impact investing theme is designed to generate a positive, measurable social or environmental impact alongside financial returns. ESG funds under this category seek to invest in projects, companies, or initiatives that contribute to sustainable development, social welfare, and environmental conservation. Investors can actively participate in driving positive change while achieving their financial objectives.
Sustainable Objectives Theme
ESG funds operating under the sustainable objectives theme focus on sectors, industries, or companies that are expected to benefit from long-term macro or structural ESG-related trends. Such trends may include shifting consumer preferences, climate change mitigation efforts, or advancements in renewable energy technologies. The criteria for selection should be quantifiable and monitorable, ensuring transparency and accountability.
Transition or Transition-Related Investments Theme
The transition theme emphasizes investments in companies and issuers that support or facilitate environmental transitions, such as the move towards green energy or decarbonization. This category enables investors to contribute to companies that are actively working to reduce their environmental impact. The investments made under this theme should generate a positive and measurable social and environmental transition, aligning financial interests with sustainability objectives.