Are you interested in sustainable finance and the role of ESG investments in driving economic growth? Learn about the regulatory framework issued by the International Financial Services Centres Authority (IFSCA) for disclosures by fund management entities for Environmental, Social or Governance (ESG) schemes.
Introduction
With the aim to establish GIFT-IFSC as a hub for various sustainable finance related activities, the International Financial Services Centres Authority (IFSCA) has issued a regulatory framework for the disclosure and listing of Green Bonds, Social Bonds, Sustainability Bonds, and Sustainability Linked Bonds. Additionally, IFSCA has also prescribed norms for ongoing monitoring and performance evaluation of ESG schemes.
Background
As investor awareness increases regarding the social and ecological impact of their investments, asset managers globally have been focusing on offering investment products relating to various aspects concerning sustainability. According to Bloomberg Intelligence, by 2025, over a third of assets under management globally will pertain to ESG.
IFSCA Framework
To ensure consistency, comparability, and reliability in disclosures concerning ESG schemes and that ESG schemes in IFSC are true to their label, IFSCA has issued a circular requiring ESG schemes to make certain initial and periodic disclosures. The framework prescribed by IFSCA is principle-based and largely aligned with international best practices.
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Applicability
The circular is applicable to such retail schemes, exchange-traded funds (ETFs), restricted schemes, and venture capital schemes, which have terms such as ‘Environment’, ‘Social’, ‘ESG’, ‘Green’, ‘Sustainability’ or any combination thereof or similar terms, incorporated in their names, or represent or market themselves as ESG focused schemes.
Initial Disclosures
For every ESG scheme launched by a FME, the FME shall ensure the following:
Name of the Scheme: The name of an ESG scheme should be reflective of its ESG focus and consistent with its ESG-related investment objectives and investment strategy.
Investment Objective: FME should transparently disclose the nature and extent of the scheme’s ESG-related investment objectives, including details of the primary components of sustainability addressed by the scheme
Investment Strategy: Detailed explanation of type of investment strategy, including ESG-related investment strategy, that FME intends to pursue which amongst others may be towards Integration, Impact Investing, Engagement, Transition for hard-to-abate and other emission-intensive sectors, etc.
Investment Processes: FME shall disclose the methodology for processes deemed relevant for ESG investments (specifically towards initial investments, monitoring, engagement and exits).
Risks and Risk Management Practices: FME managing an ESG scheme should disclose all the specific risks that arise on account of the scheme’s pursuit of ESG-related investment objectives, related investment strategies, and processes in addition to all the other material risks faced by the scheme.
Benchmark: Wherever feasible, FME may designate a reference benchmark for the ESG scheme to measure the attainment of its ESG focus and/or financial performance vis-à-vis the benchmark.
Periodic Disclosures
For every ESG scheme launched by a FME, it shall disclose to the Authority and investors, on a half-yearly basis for a retail scheme and on an annual basis for other types of schemes, the compliance with the stated ESG-related investment objectives of the scheme, ESG-related performance, actual proportion of the investable corpus / assets under management invested as per the stated investment strategy, and any deviation from the stated investment strategy, if any.
Conclusion
IFSCA’s framework for disclosures by fund management entities for environmental, social, and governance (ESG) schemes is an important step in promoting consistency, comparability, and reliability in disclosures concerning ESG schemes. The framework is aligned with international best practices and aims to ensure that ESG schemes in IFSC are true to their label. The regulatory expectations set by IFSCA will help fund management entities in designing and managing ESG schemes in a transparent and responsible manner, thereby encouraging more investors to invest in such schemes. Overall, the framework is expected to drive sustainable finance in India and contribute to the growth of the ESG investment market.
The detailed framework for ESG Schemes may be accessed here.
