Aim for big, sustainable returns? ESG Funds deserve a spot in your portfolio!

ESG investing has steadily moved from the periphery to the mainstream of global capital markets. In a landmark development, global ESG assets have crossed the USD 3.5 trillion mark for the first time, even as the segment grapples with slowing fund inflows and increasing regulatory scrutiny. Europe remains at the forefront, with proactive investors and regulators driving momentum in sustainable finance.

The critical question, however, is: where does India stand in this global sustainability shift? While ESG may not seem like a top priority today, it is poised to become a strategic imperative in the years ahead. The time to act is now, before the window of opportunity closes.

Understanding ESG Investing

ESG stands for Environmental, Social, and Governance, the three core pillars used to evaluate a company’s non-financial performance. Environmental factors look at how a company manages issues like carbon emissions, resource usage, pollution, and climate impact. Social criteria assess labour practices, employee welfare, human rights, customer satisfaction, and community development. Governance covers aspects such as board composition, transparency, business ethics, and shareholder rights.

ESG investing involves selecting companies that demonstrate strong performance or improvement across these pillars. The idea is not only to avoid companies with poor practices but also to invest in those that are future-ready, responsible, and better positioned to withstand environmental and societal disruptions.

What Are ESG Funds?

ESG funds are mutual funds or exchange-traded funds (ETFs) that apply ESG screening criteria to build their portfolios. These funds either exclude companies involved in controversial sectors or positively screen for companies with sustainable practices.

In India, ESG investing is still in its early stages but steadily gaining traction. Several mutual fund houses have launched ESG-focused schemes in recent years. Prominent examples include SBI Magnum Equity ESG Fund, Axis ESG Equity Fund, ICICI Prudential ESG Fund, Kotak ESG Opportunities Fund etc.

Why ESG Funds Make Sense for Long-Term Mutual Fund Investors

From a long-term investor’s perspective, ESG investing offers a compelling proposition. First, companies that score well on ESG parameters are often more resilient. They tend to manage operational, reputational, and regulatory risks better, which can result in more stable cash flows and profitability over time.

Second, global capital is increasingly gravitating toward ESG-compliant businesses. Institutional investors, sovereign wealth funds, and even pension funds are allocating higher weights to sustainable investments. This can result in better valuations and liquidity for ESG-compliant firms, benefiting early investors.

Third, ESG investing is increasingly seen not just as a moral imperative but as a smart financial decision. Studies globally have shown that ESG-integrated portfolios can perform on par with or even better than conventional ones over the long run. In India, while the ESG fund universe is still limited, some funds have delivered competitive returns, particularly during periods of heightened volatility.

Moreover, regulatory developments such as the Business Responsibility and Sustainability Reporting (BRSR) mandated by SEBI for the top 1,000 listed companies, are expected to improve corporate disclosures and make ESG evaluation more robust.

The Road Ahead

India has the opportunity to shape its ESG narrative uniquely. As a country that is rapidly industrialising while grappling with environmental and social challenges, adopting ESG practices can create long-term value not just for investors but for the broader economy. With increasing awareness, better data transparency, and regulatory support, ESG investing is likely to move beyond a niche theme to a mainstream strategy.

For investors aiming to align wealth creation with ethical responsibility, ESG funds offer the dual benefit of financial returns and positive impact. The journey may be gradual, but the destination holds transformative potential.

Disclaimer: The mutual funds mentioned above are for informational purposes only and do not constitute investment advice or recommendations.