What exactly is an ESG theme and what does it mean? So much of thrust actually is going on in the ESG space, even from the regulator. Why so much thrust all of a sudden?
ESG funds are the funds which are thematic in nature. The requirement from a guideline perspective is at least 80% of the investments of the fund should go into this particular theme. What is an ESG theme? It is a theme which focuses on environmental, social and governance factors, along with the normal business and financial parameters that would anyways evaluate for any fund so to that extent, these are the additional factors on which there will be focus.
The companies which are rated better on ESG rating would be the ones which would probably make the cut. Obviously, they have to look good even on the financial expectations and the valuations etc. But generally, these are the companies which also score highly on the ESG theme so that will be the core of the portfolio and that is how the fund is managed.
We are seeing a lot of guidelines coming up from the regulator. What are the few guidelines that you would want to highlight regarding ESG?
Over the years, a lot of new regulations have come into this space, not just in India but globally as well. As far as India is concerned, this is at a very nascent stage. We are seeing a few guidelines coming up every few quarters or every half year. The first set of guidelines were from October 1, 2022, when it was made mandatory that any fresh investments in this particular fund will be in those companies where business responsibility and sustainability (BRSR) reports are part of the annual reports.
Currently in India, these are not mandatory reports but from FY2024 onwards, the annual reports for the past financial year would start coming into the market. This would become mandatory for the top 1000 companies, but as of now it is not mandatory. However, for the fund, we can only invest in such companies which have done this BRSR reporting on a voluntary basis as of now.
Secondly, from October 1, 2023, we will not be able to even hold companies which do not have BRSR reports. As I mentioned, currently only the new investments have to be in BRSR reported companies. Going forward from October 1, 2023, even if you have something existing in the portfolio and that company has not provided BRSR reports, then it will be out of the portfolio. This is something that is going to come in.
Apart from this, a few other requirements have been spelt out by regulators in the recent meeting in March. So to that extent, the conditions are getting stringent and the focus on ESG keeps improving and that should be helpful for the investors as well because there is so much regulatory scrutiny around how the ESG theme is focused upon in each of these funds in the category.Considering these guidelines, why do you think ESG as a theme has a brighter future prospect and looking at this area and looking at the kind of focus from the regulator, from the AMCs, even from investors, how do you look at ESG becoming one of the mainstream themes for an investor portfolio?
It is about whether you are interested in making just the money and not care about environment, society, etc., or you also want to nudge the investee companies in terms of doing right things for the environment, society, and various other factors.
I am sure all of us would want to make money, make wealth but at the same time would want to leave our planet, our society in a better shape for our next generation. In a way, ESG funds focus on some of these aspects which are not to be ignored at all if you want to create that kind of an environment or society. That is where the prominence of ESG funds is continuously increasing across the globe.
Also that governance is a very important factor apart from environmental and social factors. If there is not great governance in terms of the company, then clearly the promoters or the majority shareholders are not aligned with the minority shareholders and at some point of time that is going to become a real risk for investors. So when you analyse ESG factors, governance also takes a lot of prominence.
