SEBI’s move to allow 6 new ESG fund categories may confuse investors
The Securities and Exchange Board of India (SEBI) recently allowed asset management companies (AMCs) to launch up to six different types of funds under the environmental, social, and governance (ESG) category of mutual funds. This is in line with the regulator’s efforts to promote green finance and channel more investments towards ESG-compliant companies.
However, some experts believe that this move may confuse investors, who are already overwhelmed with the multitude of fund categories and schemes that are available.
The six new ESG sub-categories are:
- ESG-exclusion: Funds in this category will exclude companies that are involved in activities that are considered harmful to the environment or society, such as tobacco, coal, and gambling.
- ESG-integration: Funds in this category will integrate ESG factors into their investment decisions, such as by considering a company’s environmental impact or its employee relations when making investment decisions.
- ESG-best-in-class & positive screening: Funds in this category will invest in companies that are considered to be the best in their industry in terms of ESG performance, or that have positive ESG practices.
- ESG-impact investing: Funds in this category will invest in companies that are working to solve environmental or social problems.
- ESG-sustainable objectives: Funds in this category will invest in companies that are committed to achieving specific ESG goals, such as reducing their carbon emissions or improving their water usage.
- ESG-transition or transition-related: Funds in this category will invest in companies that are transitioning to a more sustainable business model.
While the intention behind this move is to give investors more options to invest in ESG-compliant companies, it is important to note that these new sub-categories may limit the number of companies that are available for investment in each bucket. This could make it difficult for investors to find funds that match their investment goals and risk appetite.
In addition, the new ESG sub-categories are still relatively new, and there is limited data on their performance. This means that investors may find it difficult to assess the risks and rewards of investing in these funds.
Overall, it is important for investors to do their research before investing in any ESG fund, regardless of the sub-category. They should carefully consider their investment goals, risk appetite, and time horizon, and they should also understand the fees and expenses associated with the fund.
It is also worth noting that there is no guarantee that ESG funds will outperform other types of funds in the long run. In fact, some studies have shown that there is no significant difference in the performance of ESG funds and traditional funds.
Therefore, investors should not invest in ESG funds solely for the sake of doing good. They should only invest in these funds if they believe that they can generate a reasonable return on their investment.
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