Sankar Chakraborti, Chairman, ESGRisk.ai and Group CEO, Acuité

"Enhanced disclosures of ESG MF schemes could widen the scope of ESG investments" said Mr. Chakraborti.

Oct 28, 2021 07:10 IST India Infoline News Service

Market regulator SEBI recently released a consultation paper for enhancing disclosures by ESG mutual fund schemes. It has proposed existing investments in the schemes for which there are no BRSR disclosures would be grandfathered by SEBI till September 30, 2023.

In conversation with Sheetal Agarwal, Sankar Chakraborti, Chairman, ESGRisk.ai and Group CEO, Acuité deciphers these recommendations in detail.

What are your key takeaways from the consultation paper?

The discussion paper floated by SEBI indicate:

ESG Focused funds need to remain aligned to their stated investment objectives and the objectives and policy needs to be disclosed to investors.

All ESG schemes must define what it aims to achieve by following an ESG – focused strategy and how it would materially make a difference.

ESG focused MFs must invest in only those companies that are covered under the mandatory Business Responsibility and Sustainability Reporting (BRSR).

80% of an ESG fund's corpus has to be invested in ESG-compliant companies that meet the schemes' objectives. Residual portfolio of ESG theme funds should not be in stark contrast of the theme.

Fund houses should either state explicitly the sectors or companies they'll specifically avoid, depending on what way such companies may be ESG-unfriendly, and/or put down detailed selection criteria on how they intend to identify ESG-friendly companies.

ESG-focused schemes must use a scoring technique (either developed in-house or by a third party) that distinguishes ESG-compliant companies from those that are ESG-unfriendly.

How do these recommendations stack up versus global best practices?

These recommendations are well aligned with global practices for the most part. In addition to the above, the regulator can also specify the frequency of portfolio re-balance and mandatory engagement/stewardship with companies where the MFs have invested. The MFs should also report adverse impact caused by their portfolio investments.

Do the suggestions cover all important aspects? If not, what are your additional recommendations?

MFs should be requested to make additional disclosures such as adverse impact of MF investment, carbon footprint of portfolio companies and their progress to Net Zero and participation in proxy and voting on key company policies, engagement and stewardship.

How prepared are the AMCs to implement these suggestions?

The AMCs today need to enhance their transparency substantially. They will have to articulate their strategy, develop scoring methodologies, create consistent scores and disclose their portfolio performance.

How will the suggestions made in the consultation paper impact key stakeholders - ESG rating agencies, corporates and AMCs?

To find favor with investors, corporates have to quickly adopt BRSR disclosures. At the same time, AMCs have to define their ESG strategy and align their research to support the strategy.

With BRSR being linked to these disclosure norms, do you expect India Inc to enhance its ESG practices?

Yes, inadequate transparency is no longer an option.

Will these norms help in reducing the risks from green washing?

Greenwashing will reduce if independent research is made mandatory, since the AMCs can depend on in-house research, there is still scope for using wider interpretation of green vs brown.

The paper suggests focusing on achieving and disclosing 'real world impact'. How can this be achieved?

Real world impact is the emissions, other environmental and social impact a company makes through its business. Forsaking investments in companies that make an adverse real world impact, will help all stakeholders notice and act.

Will these suggestions help expand investor interest in quality midcap companies? (so far, ESG funds have played it safe by sticking with larger companies).

Absolutely. It is categorically established that ESG leaders provide better investor returns, so this initiative will reward ESG leaders with higher investor interest and start a virtuous cycle.

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