ESG Investing: Sustainable Path for Indian Investors

Highlights:

• Environmental, Social, and Governance (ESG) investing evaluates companies on sustainability criteria alongside financial performance for long-term value creation
• Securities and Exchange Board of India (SEBI) mandates the top 1,000 listed companies by market capitalisation to report ESG performance through standardised Business Responsibility and Sustainability Report (BRSR) frameworks from FY 2022-23
• ESG mutual-fund AUM in India rose from a few thousand crore around 2019–20 to about ₹11,000 crore by 2025, and industry commentary through 2024–25 still put the category near ₹10,000–11,000 crore.
• India’s ESG market is expected to grow significantly as investors and companies increasingly focus on sustainability, transparency, and responsible business practices
• SEBI requires ESG schemes to invest at least 80% of AUM in the scheme’s stated ESG strategy and, from 1 October 2024, at least 65% in companies with comprehensive BRSR reporting and BRSR Core assurance or assessment

Introduction

Investors increasingly seek alignment between financial goals and values. ESG investing offers a framework to evaluate companies beyond profit margins, considering environmental impact, social responsibility, and governance practices. India’s regulatory push through mandatory ESG disclosures has created transparency, making sustainable investing accessible to retail investors through mutual funds and exchange-traded funds.

What is ESG Investing and Why It Matters

ESG investing analyses companies across three pillars:

• Environmental (carbon emissions, resource management, climate risk)
• Social (labour practices, community impact, diversity)
• Governance (board independence, executive compensation, shareholder rights).

Unlike traditional screening that excludes sectors, ESG integration assesses sustainability risks within financial analysis. India’s focus intensified with climate commitments and stakeholder demands. SEBI introduced the Business Responsibility and Sustainability Report (BRSR) framework through circular SEBI/HO/CFD/CMD-2/P/CIR/2021/562 dated 10 May 2021, mandating India’s top 1,000 listed companies by market capitalisation to disclose ESG performance from FY 2022-23. This standardisation enables investors to compare corporate sustainability practices directly.

How ESG Investing Works in India

SEBI enhanced transparency by introducing BRSR Core in July 2023, with key performance indicators covering climate and social metrics. Assurance or assessment creates credibility: top 150 companies needed reasonable assurance from FY 2023-24, expanding on a glide path to the top 1,000 by FY 2026-27. From March 2025, SEBI also allowed listed entities to meet the BRSR Core verification requirement through either assurance under recognised standards or third-party assessment against Industry Standards Forum standards.

For investment vehicles, SEBI mandates ESG schemes to invest a minimum of 80% of assets in companies aligned with the scheme’s defined ESG strategy. Separately, from 1 October 2024 (with a compliance window until 30 September 2025), ESG schemes must invest at least 65% of AUM in companies that provide comprehensive BRSR disclosures and BRSR Core assurance or assessment. The balance may be invested in companies that make BRSR disclosures. SEBI-registered ESG rating providers — including units of CRISIL, ICRA and CARE — supply ESG scores that fund managers use when building portfolios.

ESG Investment Options and Performance in India

Indian investors access ESG through dedicated mutual funds, ETFs tracking ESG indices like Nifty 100 ESG, and index funds. Total Assets Under Management (AUM) of ESG funds surged from ₹2,747.36 crore as of January 31, 2020, to ₹9,753 crore by March 3, 2024, showing earlier adoption. That figure should be read as a 2020–2024 growth snapshot; subsequent industry estimates put category AUM closer to ₹11,000 crore by 2025.

Performance has varied by period and should be read with dates attached. As of April 2024, ETMutualFunds put the three-year average return of ESG theme funds at 16.52%. That is a 2024 snapshot, not current trailing performance.

Individual scheme results also vary by strategy, plan (regular vs direct), and market cycle. SBI ESG Exclusionary Strategy Fund, one of the largest ESG funds in India, reported an AUM of ₹5,469.61 crore as of July 2026 and uses an ESG exclusionary strategy with an ESG index benchmark. Around mid-to-late 2026, trailing returns for the regular plan were generally in a mid-to-high single-digit annualised range over three and five years, depending on the data provider and exact date. Investors should compare any scheme with its stated benchmark (for example Nifty 100 ESG TRI) and with broad equity categories such as large-cap or flexi-cap funds over the same period, rather than treat ESG as consistently outperforming.

Benefits and Challenges of ESG Investing in India

ESG investing can offer long-term benefits but also comes with challenges that investors should consider before making investment decisions.

Benefits

• Risk management: ESG analysis helps identify companies with better environmental, social, and governance practices, which may reduce exposure to regulatory and operational risks.
• Value-based investing: Investors can support businesses focused on sustainability, climate action, and social responsibility.
• Better transparency: ESG reporting frameworks encourage companies to disclose sustainability-related information.

Challenges

• Greenwashing risks: Some companies may exaggerate their sustainability efforts, making it important to review actual ESG practices.
• Rating differences: ESG scores can vary across agencies due to differences in evaluation methods.
• Limited track records: Many ESG funds have shorter performance histories, making long-term assessment difficult.
• Data gaps: Despite frameworks like SEBI’s BRSR, investors may need to analyse fund holdings and company disclosures carefully.
• Performance is not guaranteed: ESG funds can lag broader equity categories in some market phases, especially if excluded sectors or concentrated quality/large-cap holdings underperform.

Moving Toward Sustainable Growth

ESG investing is evolving from a niche approach into an important part of modern investment decision-making. With SEBI’s standardised disclosure frameworks and growing availability of ESG-focused funds, investors can evaluate companies based on both financial performance and sustainability practices. However, ESG factors should be considered alongside financial analysis, investment goals, and risk appetite to make informed decisions.

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