ESG Funds in India: Driving Towards a Sustainable Future

The Environmental, Social and Governance (ESG) landscape worldwide has been undergoing quite the transformation in recent years reflecting a growing emphasis on sustainable and responsible investing. There has been quite a rise in investment in mutual funds segment, with the ESG funds gaining popularity.

What are ESG funds?

ESG funds are more like regular mutual funds but with one main difference. ESG funds are mostly invested in companies that prioritize environmental protection, social responsibility and strict governance practices. ESG mutual fund portfolios often include companies known for their initiatives in energy efficiency, sustainability, and renewable energy.

Investing in ESG funds come with various benefits-

• Not only does this give you great financial returns but by investing you are also supporting businesses that are committed to create a positive impact in the world.
• Companies adhering to ESG principles manage risks much better, are more innovative, leading to better financial performance and higher returns.
• ESG funds generally invest in companies with strong ethical standards and responsible management practices, reducing the risk of scandals and financial mismanagement, thus safeguarding your investments.

Why ESG investing is becoming popular in India?

There are several reasons why ESG has gained traction in India. Some of the major ones are-

1. There has been a mandate from SEBI that the top 1000 listed companies must make and disclose their efforts, promoting transparency and efficiency through the Business Responsibility and Sustainability Reporting (BRSR) mandates. This rule allows investors to make informed decisions and investment choices in companies with well-defined sustainability practices.
2. During recent times a lot of Indian companies have actively stepped forward and shown a commitment towards sustainability resulting in better long-term performance. Investing in these companies not only offers stable returns but is also very ethical.
3. ESG funds promote transparency and reduce the risk of investing in poorly managed or environmentally harmful businesses.
4. India’s commitment to achieving Net Zero emissions by 2070 has sparked significant capital flows into ESG-friendly projects. This initiative is projected to require over $10 trillion in green investments. This is further fuelling the growth of ESG investing in India.

Current State of ESG funds in India

• ESG funds in India at present– ESG focused equity funds have grown quite a bit since the year 2020 from Rs.2747.36 crore to Rs. 9753 crores in 2024.
• SEBI BRSR Coverage:Top 1,000 listed companies by 2027.
• Future Projections:ESG investments could make up 34% of total domestic AUM by 2051.

Why a robust ESG Framework is crucial to driving a sustainable future?

The changes taking place in the present world demands a robust ESG framework to not just tackle the crisis but also move towards a more sustainable future.

• According to the Global Climate Risk Index 2024, India stands at the 7^th position as the most vulnerable country to climate change, with droughts, heatwaves, floods disrupting the GDP growth. The country suffered losses in billions, in the service, manufacturing, agriculture and construction industry. IntegratingESG principles ensures robust adaptation and mitigation strategies. 
• India’s6% of exports of iron ore pellets, iron, steel, and aluminium products go to the EU. These products will be hit by CBAM (Carbon Border Adjustment Mechanism). Failure to adopt ESG would be a serious concern for India.  The CBAM will come into effect from 1st January 2026for 7 carbon-intensive sectors.
• As India is ambitious on becoming a $5 trillion economy, sustainable growth stands at the forefront in turning this vision into reality. ESG adoption in sectors like manufacturing, energy, and real estateensures resource efficiency and long-term development.  Companies, like Adani Green, that invested in the ESG frameworks saw a 30% rise in clean energy production in FY24, aligning profits with sustainability goals.
• India has become the world’s third-largest solar power generator surpassing Japan. Solar energy contributed to 5.5% of the world’s total electricity, with India’s production increasing significantly.
• The ESG driven industries and companies will be creating millions of jobs in clean energy, waste management etc. There is a projection that India’s green economy could contribute more than $1 trillion by 2030 creating over 50 million jobs. Turning this into reality, National Green Hydrogen Mission is alone set to create 6 lakh jobs,while EV manufacturing under the FAME II scheme promised 10 million direct and indirect jobs by 2030.
• ESG adoption can significantly promote clean energy, efficient industries, and better waste management,which would ultimately lead to the reduction of pollution.
• According to a report by TERI (Energy and Resources Institute), India generates around 62 million tons of waste in a year. With ESG funds focusing on circular economy, it will be easier to minimize waste and maximize recycling efforts. Companies like Hindustan Unilever are now plastic neutral, recycling more plastic than they produce.
• The ESG’s emphasis remains with the social component, driving investments inhealthcare, education, and community development, critical for India’s demographic dividend because 68% of India’s population still lives in rural areas where the condition is really bad and required ESG intervention.
• As of now, India is the 6th largest issuer of GSS+ (Green, social, sustainability and sustainability-linked) bonds in the Asia Pacific region, with green bonds constituting more than 62% of overall GSS + bonds issued in India, that demonstrate strong investor confidence in sustainable growth.

What are the Top Performing ESG Companies in India?

Some of the best performing ESG stocks in India are-

• Infosys Limited
• Lupin Limited
• Nestle India Limited
• Hindalco Industries Limited
• DLF Limited
• ICICI Lombard General Insurance Company
• HCL Technologies Limited
• Vakrangee Limited
• Aditya Birla Fashion and Retail
• Zensar Technologies Limited
• The Federal Bank Limited
• Hindustan Unilever Limited
• Vesuvius India Limited

Wrapping Up

ESG funds in India hold immense potential to drive a sustainable future. However, this can only be realised with the right alignment of financial growth with environmental supervising, social equity, and ethical governance. ESG funds can foster innovation, reduce environmental impact, and create inclusive economic opportunities. By embracing ESG principles, India can not only attract conscious investors but also set an example on the global stage for integrating sustainability into economic development.