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  • Pavitra Priyadarshan, Aryaa Parulekar

SEBI’s Expansion of ESG Mutual Funds Schemes: Demystifying its Implications

[Pavitra and Aryaa are students at National Law University Odisha.]

Environmental, social, and governance (ESG) norms are acknowledged as a sustainable standard of investing that facilitates long-term financial goals and positively impacts society. ESG mutual funds scheme is a form of green financing that refers to equity funds investing in companies that satisfy certain established ESG standards. Originating in the United States, the Pax Fund was the first to incorporate ESG standards as the criteria for investment in 1971. The term 'ESG' was popularized by the WHO Report titled Who Cares Wins in 2004, which suggested sustainable methods to integrate ESG into investment activities.

India saw the incorporation of the ESG norms in 2012 when the Securities and Exchange Board of India (SEBI) introduced the Business Responsibility Reports that directed companies to report compliance with the ESG standards. These standards gained substantial traction as a benchmark of investment in nations after COVID-19, as investors saw the need to invest in responsible enterprises. Consequently, there has been a rise in need for vigilance of mis-selling in ESG investments, with international institutions such as OECD and UN emphasizing the efficient implementation of ESG guidelines with a robust disclosure framework.

To meet the demand for green financing and transparency, and to alleviate greenwashing in India, there is a necessity to introduce “consistent, comparable and decision useful schemes.” In line with this objective, SEBI issued a circular on 20 July 2023, notifying the introduction of a new sub-category of ESG mutual funds schemes and enhancing the disclosure requirements. Now, investors are equipped with various ESG schemes and investment strategies.

This article offers an overview of the existing framework and endeavors to examine the essential features and the possible implications of the SEBI’s circular. It subsequently assesses pertinent issues and pushes for effective implementation of the amended framework in the Indian context.

The Existing Framework and Overview of the SEBI Circular

Under the existing regulations, mutual funds can bring out only one ESG scheme under the thematic category of equity schemes. Thematic funds are equity mutual funds that invest in stocks with a particular theme. ESG funds are such thematic mutual funds that invest in companies with a demonstrable commitment to the environment, social causes, and governance. With the increase in ESG investments in the Indian market, SEBI found that mitigation of greenwashing, mis-selling, and ensuring greater transparency through enhanced disclosures was a dire requirement. Consequently, SEBI introduced a circular on 20 July 2023 to facilitate green financing.

The asset management companies (AMCs) can now launch one ESG scheme under the 6 specified categories. These are (i) exclusions, (ii) integration, (iii) best-in-class and positive screening, (iv) impact investing, (v) sustainable objectives, and (vi) transition or transition related investments.

The exclusions sub-category aims to exclude certain securities on the basis of ESG related activities, business practices, or business segments. The integration sub-category considers ESG parameters material to the risk and return of investment along with traditional financial factors. The best-in-class and positive screening sub-category focuses on investing in companies that perform better than their peers on ESG indicators. The impact investing sub-category envisages generating a positive and measurable social or environmental impact in addition to financial return. The sustainable objective sub-category directs investment in sectors, industries, or companies that are anticipated to benefit from long-term macro or structural ESG-related trends. Lastly, the transition or transition related investments sub-category targets companies and issuers that assist environmental transition and just transition, focusing on generating positive and measurable social and environmental impact.

In line with its underlying motive to reinforce ESG commitment and encourage responsible investing in ESG, SEBI has also mandated a minimum investment of 80% of the total assets under management (AUM) in equity and equity-related instruments of the chosen strategy of the scheme. Moreover, it has put in an additional safeguard by placing a restriction on mutual funds from investing the remaining portion of 20% for purposes in contrast to the adopted strategy.

Tackling the issues of transparency and accountability, the SEBI’s circular mandates mutual funds to provide the name of the ESG strategy in the name of the concerned ESG scheme. Mutual funds are to ensure that the monthly portfolio of ESG schemes is inclusive of security-wise Business Responsibility and Sustainability Reporting (BRSR) Core scores, BRSR scores, and the names of the ESG Rating Providers along with their respective ESG scores. These additional disclosures highlight SEBI’s efforts to implement tighter compliances to mitigate greenwashing.

In furtherance of the above-mentioned motive, SEBI now requires ESG schemes to invest a minimum of 65% of their AUM in listed entities which are reporting on comprehensive BRSR disclosures and providing assurance on BRSR Core disclosures. Furthermore, stressing on the need for transparency, SEBI has set a threefold requirement upon AMCs. First, they have to disclose the votes cast on resolutions of their investee companies. Second, they must provide a rationale to support the voting decision. Third, they must mention the environmental, social, or governance reasons for supporting or discouraging the resolution. Further, these voting disclosures must be made on the websites of the respective AMCs every quarter.

With the introduction of the new categories and enhancement of disclosures, SEBI’s effort of aligning investment schemes with ESG principles and guiding the financial sector towards a positive social and environmental change becomes apparent.

Implications of the SEBI Circular

The SEBI, through its circular, has attempted to reinforce the existing framework of ESG mutual funds schemes by introducing categorization of the schemes and enhanced disclosure requirements. The incorporation of the changes introduced has wide implications.

Pertinent issues that need to be addressed

The introduction of the new category of ESG schemes offering unique strategies will add to an already extensive list of schemes available to investors. This will make the retail investment vehicle complex, resulting in more confusion when choosing the correct scheme with the right investment strategy from the pool of available schemes.

Secondly, institutional investors are the driving force behind revamping ESG compliances in the international setting. However, the trend has been different in India, where fund managers prompt the need to bolster these guidelines and regulations. This has led to investors’ lack of awareness, increasing the possibility of greenwashing. The intended impact of SEBI’s amended framework can only be realized if the investors are aware of the various ESG schemes. Investor knowledge is crucial for making informed investment choices which will give way to responsible investing and mitigation of greenwashing.

Lastly, after an investment of a minimum of 80% of total assets by an investor in a particular strategy, they are barred from adopting a new investment strategy for the remaining portion of the total assets. This bar, to a certain extent, affects investing autonomy. Further, it significantly reduces the scope for correcting an error in picking the right strategy. Therefore, it needs to be ensured that investment is made in the correct strategy. As investors rely upon advisors to recommend the correct scheme with the right strategy which aligns with their objective, proper training of the investment advisors becomes vital. Further, proper guidance will ensure the integration of ESG compliances while evaluating investment opportunities.

Is the circular fulfilling its objective?

While SEBI’s amended framework is a welcome move towards achieving the set ESG standards, it is necessary to assess how the amendments fare in the practical scenario.

First, to tackle the inconsistencies in ESG labelling of mutual funds, the regulators mandated mutual funds to state the name of the schemes adopted. However, to ensure clarity, additional filters were needed in ESG schemes. With the introduction of a sub-category of thematic equity funds, mutual funds have to disclose the underlying category of investment strategy along with the name of the scheme adopted. This fulfills the requirement of clarity by providing greater transparency.

Second, fund managers will be accountable for the approach adopted as the amended framework will prevent the earlier practice of managers relying on the company’s or third parties’ reports for the purpose of disclosure. These reports often use discretionary methods and apply unscientific evaluation standards of risk management. This, coupled with additional disclosure requirements, will ensure greater transparency in the ESG market, thereby significantly reducing the scope of greenwashing and mis-selling on the grounds of fake compliance with ESG standards.

Third, despite the circular bringing about a significant advancement in the current ESG norms, India is still at a nascent stage. Therefore, the concerted effort by SEBI to uplift the Indian finance market to global standards needs to be steady and in a phased manner. Considering the country’s unique and diverse nature of the market, specific financial situation, and transition goals for various industries, the approach adopted should be adaptable and sustainable. This will contribute to the effectiveness of ESG disclosures by enabling them to meet the worldwide criteria.


The SEBI’s circular primarily introduced sub-categorization of ESG mutual funds schemes and enhanced the disclosure requirements. The steps taken by SEBI are commendable for facilitating a framework for a fair assessment of ESG schemes. The initiative to expand the offering basket in ESG will encourage mutual funds and provide investors with much-needed flexibility to bring their investments in line with their ESG principles. In furtherance of the ESG goals in the investment landscape, this circular has brought in necessary safeguards for investor protection, transparency, corporate governance, and accountability to mitigate greenwashing. Consequently, the investor’s trust in the thematic funds will increase, allowing an increased focus on environmental protection and investor protection.

The newly instituted ESG categories and enhanced disclosures are a major step towards harmonizing Indian ESG standards with global markets. Moreover, the continuous growth of the Indian ESG Market warrants a periodic review of regulations as this will allow the framework to be updated with the recent market practices and investment opportunities. Lastly, despite the circular opening up new investment avenues, more options mean more confusion in picking the correct strategy. This accentuates the need for investor knowledge, as awareness of ESG schemes and what they entail is a key prerequisite for responsible and effective investing.


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