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