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The authors are Mahima Chaudhary and Pritha Lahiri, B.Com LL.B. (Hons.) Final Year students at Institute of Law, Nirma University, Ahmedabad.


In recent times, Environmental, Social and Governance (hereinafter referred to as “ESG”) investment has been gaining traction in India, with projections predicting it to rise in unprecedented amounts in the coming years. ESG investment refers to a form of responsible investing that considers ESG factors alongside financial performance to create a positive impact on society and the environment, aligned with sustainable and ethical principles. According to a report, investments in ESG strategies experienced a remarkable growth of 42%. As of today, approximately one-third of all assets under management are allocated to ESG strategies. This reflects the increasing importance investors place on sustainable and responsible investment practices.

The Securities and Exchange Board of India (hereinafter referred to as “SEBI”) too, has been welcoming of the new investment practice and has from time to time introduced various frameworks to keep up with the ever-changing ESG landscape in the country. In a recent instance, it has decided to permit the launch of multiple ESG schemes with different strategies by mutual funds (hereinafter referred to as “MF”) along with a slew of disclosure requirements to promote transparency and investor trust.

While the move is a welcome step in the right direction, it suffers from a number of challenges with much room for improvement. Through this article, the authors analyze the recent SEBI circular and address the challenges by providing practical solutions that can help India to become a leader in ESG Investment.


Under the new circular, SEBI has provided the following:

Sub-categorization of ESG Investments by Mutual Funds

Earlier, mutual funds were limited to one ESG program in the equity schemes category. Now, SEBI has introduced a new ESG sub-category within equity schemes. This allows for various ESG investment approaches like exclusion, integration, impact investing, and more. Also, these schemes are required to invest at least 80% of their funds in equity-related securities.

Investment criteria prescribed

ESG schemes covered by the new circular are required to invest at least 65% of their assets under management in businesses with comprehensive Business Responsibility and Sustainability Reporting (hereinafter referred to as “BRSR”) and assurance on BRSR Core beginning October 1, 2024. During this one-year period, no fresh investments in companies lacking BRSR Core assurance are allowed. Earlier, investment was made in companies that had comprehensive BRSR disclosures.

New Disclosure norms

The new disclosure norms provides for clearly stating the strategy along with disclosing the monthly ESG score. Further, it mandatorily requires disclosure of votes cast on the Asset Management Companies, and provides for including fund manager commentary and relevant engagements in the annual report.

Obtaining Independent Reasonable Assurance

Under the new circular, AMCs must annually obtain independent assurance on the compliance of ESG scheme portfolios with objectives. The assurance provider's expertise and absence of conflicts of interest must be ensured by the AMC's board.

Certification requirement by Board of Asset Management Company (AMC)

Based on an internal ESG audit, AMCs' board must certify compliance with regulatory requirements in the annual report. The audit should cover scheme information documents, stewardship reporting, responsible investment policy, and other relevant documents for factual accuracy.


The new regulatory framework for the ESG MF has been introduced with the aim of preventing greenwashing, enhancing disclosures, and enabling investors to make informed decisions. Although the regulatory framework seeks to promote transparency and accountability in the ESG MF market, this framework also has some challenges to deal with.

Following are the positive impacts of the new regulatory regime:

1) Encouragement for Sustainable Investment: The emergence of a distinct ESG sub-category encourages MFs to include sustainable investment techniques in their portfolio plans. As a result, companies that follow ESG guidelines may receive more funding, which encourages the use of sustainable business methods.

2) Informed decision making: By introducing distinct ESG investment methods (exclusion, integration, best-in-class, impact investing, sustainable objectives, and transition investments), SEBI seeks to improve transparency and clarity in the ESG investing landscape. As a result, investors will be better able to decide depending on their preferences for sustainability and ethics.

3) A step to prevent Greenwashing: The recent development of ESG investments has highlighted the problem of "greenwashing", in which companies exaggerate their environmental and social credentials in order to draw in investors. In order to keep ESG investing credible and effective, greenwashing must be avoided. Investors would be able to deploy their assets to genuinely sustainable and socially responsible businesses thanks to SEBI's requirement for uniform and similar disclosures.

Following are the Challenges of the new regulatory regime:

1) Lack of Standardization: According to the latest circular, certain disclosure statements with respect to (a) security wise BRSR Core scores, and (b) name of the ERPs providing ESG Score, must be mentioned in the MF's monthly portfolio. However, it does not provide any standard criteria for assessing the actual impact and sustainability of these ESG schemes. Thus, with the lack of these standards of disclosure, investors may find it difficult to evaluate the ESG schemes.

2) Greenwashing Risks: To mitigate the risk of greenwashing, a monitoring mechanism has been established within the new framework. However, despite these measures, there are still challenges in effectively preventing greenwashing. One such challenge is the limited resources available with SEBI for oversight, as ESG is a relatively new area. Additionally, companies may manipulate or selectively present data to project a more positive image, making it difficult to prevent greenwashing. Thus, to mitigate the greenwashing risk, along with mandatory disclosures, SEBI must implement stricter monitoring mechanisms.

3) Confusion in scheme selection: Under the new regulatory framework, mutual funds are permitted to launch five categories of ESG schemes. However, the inclusion of this sub-category may result in confusion among investors when selecting a scheme for investment. It is therefore important that investors are provided with clear and comprehensive information regarding the nature and benefits of these schemes to facilitate informed decision-making.


The initiative taken by SEBI is a positive step towards promoting sustainable investing in India. However, to ensure that the ESG investment environment develops favourably and produces a real sustainable effect while providing investors with competitive returns, the following suggestions put forth by the authors should be taken into consideration:

Phasing of ESG Investment Mandates

To address the potential restriction caused by the mandate for ESG schemes to invest only in companies with comprehensive BRSR disclosures, a phased approach can be implemented wherein ESG schemes can focus on companies with comprehensive BRSR disclosures initially. In subsequent phases, the mandate can gradually expand to include companies that demonstrate strong ESG practices even if they have not yet provided comprehensive BRSR reports. Furthermore, SEBI could introduce specific criteria for ESG progression, enabling companies to be included in ESG schemes based on their commitment to improving ESG practices and reporting. This would encourage companies to work towards enhanced ESG transparency while still allowing them to be considered for ESG investments.

Inclusion of Impact Assessment in the framework:

MFs should provide periodic reports or disclosures on the social and environmental impact of the ESG schemes' investments. This assessment should include quantifiable metrics and qualitative narratives highlighting the positive changes brought about by the investments along with the specific ESG issues addressed during engagements and the outcomes of these interactions. It is also pertinent to disclose their efforts to mitigate negative impacts associated with ESG investments. This disclosure would highlight the fund's commitment to avoiding investments in companies linked to harmful activities or practices. India, which currently does not follow impact assessment in its framework, can take guidance from France wherein the government has issued guidelines for companies to report on their environmental and social impacts, promoting greater transparency and accountability to foster positive change in companies' ESG practices, and aligning investments with sustainable goals while managing risks for informed investors.

Tax relief for investors investing in any scheme of ESG Mutual Funds:

For mutual funds that exhibit remarkable dedication to ESG principles and sustainability, SEBI may consider providing tax credits for the investors investing in any scheme of mutual fund. From the point of view of any retail investor, returns over any investment are the main criteria for making the investment and similarly tax relief is another factor that influences the decision of investing in any sector. So, a form of tax credit or tax relief for anyone investing in the ESG MF schemes would act as a catalyst for investing in the ESG MF Schemes.

Collaboration with the Stakeholders:

SEBI should collaborate with stakeholders such as industry experts, sustainability organizations, asset management professionals, companies, issuers, retail investors, etc. to gain insights and expertise in ESG investing. Engaging each and every stakeholder from diverse sectors will aid in developing an effective and holistic framework for promoting sustainable investments. Recently, the Sustainable Stock Exchange in the USA released their first Communication to Stakeholders. This document outlines the Exchange’s strategies and initiatives in advancing responsible investment and sustainable business practices so as to engage with the stakeholders and work towards a friendly framework. India can likewise consider similar initiatives from the nascent stage itself.


ESG investment is gaining significant traction in India. SEBI's proactive approach to embrace and regulate ESG investment is a positive step towards promoting transparency and trust in the financial markets. However, challenges such as standardized metrics, greenwashing risks, and impact assessment complexities should be carefully addressed to ensure the credibility and effectiveness of ESG investing. By fostering a collaborative effort, India can become a premier destination for ESG investment, driving positive societal and environmental impact while generating competitive financial returns.

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3 commentaires

Sahil Chandarana
Sahil Chandarana
29 août 2023

The article was really very helpful and I gained so much knowledge on the ESG mutual funds. Thank you very much to the authors!

Mahima Chaudhary
Mahima Chaudhary
29 août 2023
En réponse à

Thank you very much!

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