In a decisive move to enhance transparency and combat greenwashing, the Securities and Exchange Board of India (SEBI) has issued a comprehensive framework for Environmental, Social, and Governance (ESG) investing by mutual funds. These new rules aim to ensure that ESG-labelled mutual funds genuinely invest in sustainable assets and follow globally aligned disclosure practices.

The updated regulations introduce new ESG sub-categories, enforce minimum allocation standards, strengthen disclosures and audit mechanisms, and expand the scope of ESG assessment to include value chains. Here's a detailed look at SEBI’s newly introduced ESG guidelines and their implications.

📂 1. Creation of ESG Sub-Categories in Equity Schemes

Previously, mutual funds could only launch one ESG-themed fund under the thematic equity category. However, under the new rules, SEBI now allows multiple ESG schemes, provided each follows a distinct investment strategy.

🔍 The following six ESG strategies are recognised:                                  

• ❌ Exclusion: Screening out companies involved in unethical or unsustainable practices.

• 🔗 Integration: Combining ESG factors with fundamental financial analysis.

• ✅ Best-in-Class/Positive Screening: Investing in companies with superior ESG performance in their industry.

• 💡 Impact Investing: Targeting investments that aim to generate measurable environmental or social impacts.

• 🎯 Sustainable Objectives: Focusing on investments aligned with specific sustainability goals like renewable energy or water conservation.

• 🔄 Transition Strategy: Supporting companies that are actively transitioning towards sustainable business models.

Each ESG fund must clearly mention the adopted strategy in its name—for example, “XYZ ESG Impact Fund” or “ABC ESG Exclusion Fund.”

📊 2. Mandatory Allocation Rules to ESG Aligned Assets

To ensure that ESG-labeled funds maintain their thematic integrity:

• At least 80% of the fund’s assets must be invested in securities aligned with the stated ESG strategy.

• A minimum of 65% of the fund’s assets must be invested in companies that publish Business Responsibility and Sustainability Reports (BRSR) with reasonable assurance on core ESG indicators.

This is a significant upgrade from previous standards, where fund houses had wide discretion on portfolio composition. The remaining 20% of the portfolio must not contradict the ESG theme, thereby reinforcing genuine intent behind the fund’s objective.

📄 3. Enhanced Disclosure and Reporting Standards

Transparency forms the cornerstone of the revised ESG regime. SEBI mandates the following disclosures by fund houses:

• 📝 Monthly BRSR Score Disclosure: Each ESG fund must disclose BRSR and BRSR Core scores for its investee companies, along with details of the ESG rating providers.

• 🗳️ Voting Rationale: Mutual funds must disclose their voting patterns and provide justifications, particularly on ESG-related shareholder resolutions.

• 📘 Annual ESG Commentary: The fund manager must provide an annual review outlining ESG engagement, impact analysis, stewardship outcomes, and investment decisions.

These stringent reporting requirements aim to empower investors with granular and actionable insights into how ESG principles are implemented in practice.

✅ 4. Audit and Oversight Mechanism                                                                                              

• 📋 External Audit: Third-party assurance is required for ESG disclosures made by the mutual funds.

• 🔍 Internal Compliance Review: Fund houses must perform regular internal reviews and compliance checks regarding adherence to ESG strategy and disclosure  norms.

This two-tier audit mechanism ensures that ESG schemes function transparently and in alignment with investor expectations.

🔗 5. Expansion to Value Chain ESG Reporting

In a major development, SEBI extended ESG responsibilities to a broader ecosystem. Now, ESG disclosures must also cover value-chain partners, including:

• Suppliers or customers accounting for more than 2% of trade value.

• Disclosure covering at least 75% of a company's upstream and downstream transactions.

This expanded scope ensures that not only companies but also their supply chain stakeholders uphold ESG values, thereby reinforcing holistic sustainability.

These requirements will become mandatory for the top 250 listed companies by FY 2026–27, while the same will remain voluntary until FY 2025–26.

📆 Implementation Timeline                                                                                                 

SEBI’s ESG reforms are structured with an implementation roadmap:

• 
  Immediate Effect: New ESG sub-categories and strategy disclosures are applicable to new fund launches.

• October 1, 2024: The 65% BRSR investment requirement will be enforced.

• September 30, 2025: Grace period ends for funds holding investments in companies not aligned with BRSR Core.

• FY 2025–26 Onward: Voluntary supply chain disclosures begin.

• FY 2026–27: Mandatory ESG disclosures for top 250 companies covering value chain partners.

This phased rollout gives time to both AMCs and corporates to prepare infrastructure and processes for compliance.

🎯 Impact on Mutual Funds and Investors

💼 For Fund Houses (AMCs):

• Greater responsibility to maintain data accuracy, portfolio purity, and regulatory compliance.

• Need to build capacity for ESG audits and BRSR alignment.

• More options to innovate and launch differentiated ESG products.

🧾 For Investors:

• Increased transparency and credibility in ESG investments.

• Ability to align personal values (e.g., climate action or ethical investing) with financial goals.

• Easier comparison across ESG funds due to standardised strategies and metrics.

🌍 For the Industry:

• Strengthens India’s ESG ecosystem.

• Positions Indian markets in alignment with international ESG standards.

• Deters greenwashing by enforcing disclosure-led authenticity.

Conclusion                                                                                                                                                            

SEBI’s new ESG rules for mutual funds represent a paradigm shift in the Indian sustainable investing landscape. With clear definitions, strict allocation norms, mandatory audits, and extended disclosure requirements, these reforms are poised to create a credible, robust, and investor-friendly ESG market in India.

While the transition may require fund houses to invest in capacity-building and technology, the long-term benefits—better investor trust, improved governance, and sustainable returns—far outweigh the initial challenges. These rules also signal India’s serious commitment to environmental and social accountability in financial markets.  

Created & Posted by Twinkle Jha

Operations Head at TAXAJ

TAXAJ is a consortium of CA, CS, Advocates & Professionals from specific fields to provide you a One Stop Solution for all your Business, Financial, Taxation & Legal Matters under One Roof. Some of them are: Launch Your Start-Up Company/Business, Trademark & Brand Registration, Digital Marketing, E-Stamp Paper Online, Closure of Business, Legal Services, Payroll Services, etc. For any further queries related to this or anything else visit TAXAJ

Watch all the Informational Videos here: YouTube Channel                                                                                               

TAXAJ Corporate Services LLP

Address: 1/3, UGF, Sulahkul Vihar, Old Palam Road, Dwarka, New Delhi-110078

Contact: 8961228919 ; 8802812345 | E-Mail: connect@taxaj.com