ESG Investing in India: Trends, Funds & Growth Potential

The growth in the number of investors practicing ESG investing reflects a global shift in how they evaluate businesses. ESG stands for Environmental, Social, and Governance; these are three critical factors that assess a company's long-term sustainability and ethical impact. Traditionally, investment decisions focused on financial performance alone. However, with rising awareness around climate change, corporate governance, and social responsibility, ESG principles are increasingly influencing capital flows worldwide, including in India.

This blog explores the rise of ESG investing in India, the available funds, key trends shaping the market, and its growth potential.

Understanding ESG Investing in India

ESG investing in India involves selecting companies on financial metrics, and also on how well they perform across three dimensions:

• Environmental: Evaluates a company's impact on climate change, carbon emissions, renewable energy adoption, and resource efficiency.
• Social: Considers labour practices, employee well-being, community engagement, and diversity and inclusion initiatives.
• Governance: Reviews corporate governance, business ethics, shareholder rights, and transparency.

This framework ensures that investors allocate capital towards businesses that demonstrate long-term resilience and responsible practices.

Why ESG Investing in India is Trending?

The surge in ESG investing in India is a combination of global and domestic factors:

• Rising Environmental Awareness: With India among the most climate-vulnerable nations, regulators and investors are recognising the importance of sustainable practices.
• Corporate Transparency: With the SEBI (Securities and Exchange Board of India) guidelines around the UN's SDG, which require the top 1000 listed companies to provide Business Responsibility and Sustainability Reports (BRSRs). Many companies are increasingly disclosing their sustainability reports and ESG metrics, enabling investors to make informed decisions.
• Government Initiatives: Policies that are made to promote renewable energy, carbon reduction, and sustainable finance are encouraging businesses to align with ESG principles.
• Millennial & Gen Z Investors: Younger investors often prefer companies with strong environmental and social credentials, further fueling demand.

Key ESG Investing Trends in India

Several ESG investing trends are shaping the market landscape:

• Shift in Investor Behaviour: Investors are considering not only financial returns but also a company's social and environmental impact.
• Integration of Technology: Use of AI and big data analytics to assess ESG performance is improving transparency.
• Focus on Renewable Energy & Green Infrastructure: Many companies in the renewable energy and clean technology space are attracting significant ESG-linked investments.
• Global Alignment: Indian firms are aligning with international ESG frameworks like GRI (Global Reporting Initiative) and SASB (Sustainability Accounting Standards Board)

ESG Funds in India

The ESG funds reflect the growing appetite for responsible investment. These funds invest in companies that score high on ESG parameters. Currently, several asset management companies (AMCs) offer ESG mutual funds in India, allowing retail investors to participate in this growing segment.

These mutual funds often focus on sectors that offer clean energy, healthcare, IT, and consumer goods, industries, as these companies' ESG scores are likely to be on the positive side. While ESG funds are relatively new compared to traditional equity or debt funds, they have shown strong potential in terms of both performance and investor interest.

ESG Investment Strategies

Investors and fund managers in India are adopting diverse ESG investment strategies to align portfolios with sustainable outcomes. These include:

• Negative Screening: They try to avoid companies that are associated with tobacco, weapons, or high carbon emissions.
• Positive Screening: Investors pick companies with superior ESG ratings and practices.
• Thematic Investing: They go for themes like renewable energy, green buildings, or water conservation while picking the companies.
• Active Engagement: Investors engaging with companies to improve their ESG practices.

Each strategy is designed to balance financial performance with ethical considerations, helping create sustainable long-term value.

Growth Potential of ESG Investing in India

The future of ESG investing in India looks highly promising:

• Rising Capital Inflows: Global institutional investors are increasingly allocating funds to Indian ESG-compliant companies.
• Regulatory Push: SEBI is requiring the top 1000 listed companies to disclose their BRSRs.
• Market Opportunities: With India's push toward renewable energy and sustainable infrastructure, the ESG investment universe is set to expand.
• Risk Management: Companies with strong ESG credentials tend to be more resilient during market downturns, attracting long-term investors.

Overall, ESG-based allocation is likely to become a mainstream investment approach in India in the coming years.

Conclusion

ESG investing in India is no longer a niche strategy; it is becoming an integral part of modern portfolio building. As awareness, regulation, and corporate responsibility converge, ESG-based funds and strategies are expected to see exponential growth.

If you are planning to explore this area further, start by learning about different ESG investment strategies, reviewing the performance of available funds, and understanding how global sustainability trends may influence the Indian market. At Indiabulls Securities Limited (formerly known as Dhani Stock Limited), we aim to keep investors informed with insights on emerging opportunities like ESG, helping you make well-informed financial decisions for the future.

FAQs

1. What is an ESG score, and how is it calculated?

An ESG score rates a company's environmental, social, and governance performance. It is calculated using metrics like carbon footprint, labour practices, and corporate governance standards.

2. What are the key ESG investing trends in India?

Trends include rising investor awareness, regulatory mandates, focus on renewable energy, and adoption of global ESG reporting frameworks.

3. Are ESG mutual funds in India profitable?

While returns may vary, ESG mutual funds in India have shown strong potential, as companies with better ESG practices often demonstrate resilience and long-term growth.