Mutual funds: What are ESG sub-categories allowed as per Sebi framework? MintGenie explains

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ESG funds have been around for a while, the good news is that their scope has widened in the recent past. Earlier each mutual fund house was permitted to launch only one scheme under the ESG category. The capital markets regulator Sebi, in a circular issued in July last year, gave a green signal to multiple ESG schemes, so long as they are launched with different investing strategies.

Let us first understand what ESG schemes are! These are thematic mutual funds which invest in those entities which have demonstrable commitment to environment, social causes and governance, thus living up to the cause of ESG. These funds are not meant to invest in the companies which are low on ESG, even if they are delivering high returns to their shareholders. For example, a company that makes cigarettes or which has been accused of a large financial fraud in the past cannot make it to an ESG fund’s portfolio.

Earlier, mutual funds were permitted to launch only one ESG scheme under the thematic category of equity scheme. As per the Sebi master circular dated May 19, 2023 on mutual funds, it was decided to introduce a separate sub-category for ESG investments under the thematic category of equity schemes. ALSO READ: These small cap schemes gave over 70% returns inn just one year.

Do you own any? The circular had clarified that any scheme under the ESG category will be launched with one of the following strategies: A. Exclusion: This strategy excludes securities based on certain ESG related activities, business practices, or business segments B. Integration: This strategy explicitly considers ESG related factors that are material to the risk and return of the investment, alongside traditional financial factors, when making investment