Why ESG Investing is Gaining Popularity: What You Need to Know for Indian Investors

Why ESG Investing is Gaining Popularity: What You Need to Know for Indian Investors

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Introduction

In recent years, ESG (Environmental, Social, and Governance) investing has gained significant traction among Indian investors. As sustainability and ethical business practices become a priority, investors are seeking opportunities that align with their values while delivering solid financial returns. But what exactly is ESG investing, and why is it becoming a mainstream trend in India? This article explores the driving factors, benefits, challenges, and strategies for incorporating ESG investments into your portfolio.

What is ESG Investing?

ESG investing refers to an approach where environmental, social, and governance factors are considered alongside financial metrics when making investment decisions. Companies that score well on ESG criteria tend to have sustainable business practices, ethical governance, and positive social impact.

Key Components of ESG Investing

• Environmental: Includes a company’s carbon footprint, renewable energy usage, waste management, and climate change policies.
• Social: Evaluates workplace conditions, Labour practices, employee relations, diversity and inclusion, and community engagement.
• Governance: Assesses leadership ethics, transparency, shareholder rights, Anti corruption and regulatory compliance.

Why ESG Investing is Gaining Popularity in India

ESG (Environmental, Social, Governance) investing has surged in India, with ESG-themed mutual funds attracting over ₹12,000 crore in assets by 2023.

1. Growing Awareness and Regulatory Support

SEBI mandated the BRSR framework in 2023, requiring top 1,000 listed companies to disclose ESG risks. This transparency helps investors make informed choices, fuelling ESG adoption. 

The Indian government and regulatory bodies, such as SEBI (Securities and Exchange Board of India), have been actively promoting sustainable investing. SEBI has introduced Business Responsibility and Sustainability Reporting (BRSR), requiring listed companies to disclose their ESG performance.

2. Strong Performance of ESG Funds

Historically, ESG mutual funds in India have outperformed traditional equity funds. Data from AMFI (Association of Mutual Funds in India) shows that ESG funds have provided better risk-adjusted returns in volatile market conditions.

ESG funds in India have outperformed benchmarks: 

SBI ESG Fund: 18% CAGR since 2019. 

Axis ESG Equity Fund: 22% returns in 2022 vs. Nifty 50’s 14%. 

3. Increasing Investor Demand

Indian investors, especially millennials and institutional investors, are becoming more conscious of sustainability. A survey by Morningstar India found that nearly 75% of Indian investors prefer companies with strong ESG credentials.

4. Global Influence and FII Inflows

International investors are allocating more capital to ESG-compliant companies. As Foreign Institutional Investors (FIIs) increase their ESG-focused investments, Indian markets are witnessing greater inflows into sustainable businesses.

5. Government Policies and Initiatives

Initiatives like ‘Net Zero by 2070’, the National Hydrogen Mission, and renewable energy (500 GW by 2030) investments are making ESG-centric companies more attractive.

Benefits of ESG Investing

1. Strong Long-Term Returns

Contrary to the myth that ESG investing compromises profits, companies with strong ESG ratings have shown better long-term performance due to risk mitigation and sustainable growth strategies.

2. Lower Risk Exposure

ESG-compliant firms tend to have stronger governance and ethical practices, reducing risks related to regulatory fines, fraud, and environmental liabilities.

3. Better Brand Reputation

Companies that prioritize ESG factors tend to attract loyal customers and investors, enhancing their brand value and stock stability.

4. Resilience in Market Downturns

During market downturns, ESG funds have demonstrated greater resilience compared to traditional funds, making them a safer bet in uncertain times.

5. Tax Incentives:

Green bonds and renewable projects offer tax exemptions under Section 80CCF. 

6. Outperformance:

70% of ESG funds in India beat their benchmarks in the last 5 years. 

How to Start ESG Investing in India

1. Invest in ESG Mutual Funds and ETFs

Several AMCs (Asset Management Companies) in India offer ESG-focused funds, including:

• SBI Magnum ESG Fund
• ICICI Prudential ESG Fund
• Axis ESG Equity Fund
• Aditya Birla Sun Life ESG Fund

2. Look for ESG-Compliant Stocks

Some Indian companies with strong ESG rankings include:

• Tata Consultancy Services (TCS) – Strong governance and social initiatives
• Infosys – Sustainability leadership
• Reliance Industries – Investment in renewable energy
• HDFC Bank – Ethical governance policies

3. Analyse ESG Ratings

Global agencies like MSCI, Sustainalytics, and Morningstar provide ESG ratings for companies, helping investors make informed decisions.

4. Consider Green Bonds

Investing in green bonds issued by companies and governments for sustainable projects is another way to include ESG in your portfolio.

5, Research ESG Funds 

Top picks for 2023: 

·         Quant ESG Equity Fund (5-year CAGR: 20%) 

·         ICICI Prudential ESG Fund (Lowest expense ratio: 0.65%) 

 

Comparative Analysis: ESG vs. Traditional Investments

Criteria	ESG Funds	Traditional Funds
Focus	Sustainability + Profits	Pure Profit Maximization
Risk	Lower governance risks	Higher regulatory risks
Returns (2020-23)	Avg. 18% CAGR	Avg. 14% CAGR
Liquidity	Moderate	High
Tax Benefits	Available for green bonds	Limited

 

Case Study: Tata Consultancy Services (TCS) 

TCS reduced its carbon footprint by 30% since 2016 while delivering 15% annual revenue growth. Investors in TCS stock enjoyed 200% returns over 5 years, proving ESG and profitability coexist. 

Challenges of ESG Investing in India

1. Lack of Standardized Reporting

Unlike developed markets, India is still in the early stages of implementing consistent ESG reporting frameworks.  Inconsistent ESG reporting by SMEs. 

2. Greenwashing Concerns

Some companies falsely claim ESG compliance, making it difficult for investors to identify genuine sustainable businesses. SEBI’s new labelling norms aim to combat this. 

3. Limited Investment Options

While ESG funds are growing, the availability of diverse ESG investment products remains limited in India. Only 8-10 dedicated ESG funds exist in India, vs. 100+ in the US. 

Famous Investor Quotes on ESG Investing

"Price is what you pay; value is what you get." – Warren Buffett
"The individual investor should act consistently as an investor and not as a speculator." – Benjamin Graham
"Know what you own, and know why you own it." – Peter Lynch

Future of ESG Investing in India

The ESG investment landscape in India is expected to expand rapidly with regulatory advancements, better disclosures, and increasing investor demand. As sustainability becomes a central theme, integrating ESG factors into portfolios will no longer be optional but a necessity for long-term wealth creation.

FAQs

1. Is ESG investing profitable in India?

Yes, ESG funds have shown strong performance, especially during market downturns, due to their focus on ethical and sustainable businesses.

2. How do I evaluate ESG stocks in India?

Look at ESG ratings from agencies like MSCI, Sustain analytics, and Morningstar and check a company’s sustainability reports.

3. Are there risks associated with ESG investing?

Yes, risks include greenwashing, limited options, and lack of standardization, but thorough research can mitigate them.

4. Which are the best ESG mutual funds in India?

Some of the top ESG funds include SBI Magnum ESG Fund, Axis ESG Equity Fund, and ICICI Prudential ESG Fund.

5. Will ESG investing grow in India?

Yes, with government policies, regulatory support, and investor interest, ESG investing is poised for strong growth in India.

Conclusion

ESG investing is more than just a trend—it’s a fundamental shift in how investments are evaluated. With increasing regulatory support, growing investor awareness, and strong long-term returns, ESG investments are becoming a crucial component of a smart investment strategy for Indian investors. Whether you're a retail or institutional investor, adopting ESG principles can help build a resilient and responsible portfolio.

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Disclaimer: This article is for informational purposes only. Please consult a financial advisor before making any investment decisions.