ESG and Sustainable Investing in Indian Mutual Funds
ESG investing in Indian mutual funds refers to the integration of environmental, social, and governance (ESG) criteria into the investment process of SEBI-regulated mutual fund schemes. India’s ESG fund landscape is nascent relative to developed markets but has grown significantly since the first dedicated ESG mutual fund schemes were launched in 2018-19. By 2025, approximately 12-15 AMCs offered dedicated ESG or ESG-integrated schemes, though AUM in dedicated ESG schemes remained a small fraction of total equity mutual fund assets.
Definitions: ESG in the mutual fund context
Environmental (E): Companies’ carbon footprint, energy efficiency, water usage, waste management, and exposure to climate transition risk.
Social (S): Labour practices, supply chain standards, data privacy, community relations, and human capital development.
Governance (G): Board composition, independent director quality, related-party transaction policies, executive compensation disclosure, and shareholder rights.
In the Indian context, governance has historically been the most heavily weighted factor, given India’s track record of corporate governance scandals, related-party transactions, and promoter concentration. Environmental and social factors are gaining weight as SEBI’s disclosure requirements mature.
Regulatory framework
SEBI’s Business Responsibility and Sustainability Report (BRSR)
SEBI made the Business Responsibility and Sustainability Report (BRSR) mandatory for the top 1,000 listed companies by market capitalisation from FY2022-23, requiring standardised disclosure on environmental metrics (energy, water, waste, emissions), social metrics (employee welfare, CSR), and governance metrics (board diversity, audit committee composition).
The BRSR Core, introduced in FY2023-24, mandates a subset of high-priority ESG disclosures with third-party verification for the top 150 companies. The BRSR Core provides the foundational ESG data that AMCs use for ESG fund portfolio construction.
SEBI’s circular on ESG schemes (2023)
In February 2023, SEBI issued a circular specifically regulating ESG mutual fund schemes:
- AMCs launching ESG schemes must follow one of six defined ESG strategies: exclusion, integration, best-in-class/positive screening, impact investing, sustainable objectives, and transition-related investments.
- ESG schemes must invest at least 65% of assets in companies with BRSR reporting.
- ESG schemes must engage a third-party ESG rating provider to validate their ESG assessment.
- AMCs must disclose the ESG score and strategy at the scheme level in a standardised format.
First-generation ESG funds (2018-2022)
India’s first ESG-labelled mutual fund was SBI Magnum Equity ESG Fund, launched as a thematic equity fund in 2018. Mirae Asset ESG Sector Leaders ETF, Axis ESG Equity Fund, ICICI Prudential ESG Fund, and Quantum India ESG Equity Fund followed between 2019 and 2021.
First-generation ESG funds faced immediate challenges:
ESG data scarcity: Before the BRSR framework, ESG data from Indian companies was sparse, inconsistent, and not independently verified. AMCs relied on external rating agencies (MSCI, Sustainalytics, CRISIL ESG) whose Indian coverage was incomplete for mid-cap and small-cap stocks.
Greenwashing risk: Some funds applied ESG labels to portfolios that were not materially different from conventional large-cap equity funds, drawing regulatory scrutiny.
Return differentiation: ESG funds’ performance was largely indistinguishable from the Nifty 100 or Nifty 50 during 2019-2022, raising questions about whether ESG screening added value or merely limited the investable universe without return benefit.
AUM trajectory
| Year | Dedicated ESG fund AUM (approx.) | Number of ESG schemes |
|---|---|---|
| March 2020 | Rs 500 crore | 3 |
| March 2021 | Rs 2,500 crore | 7 |
| March 2022 | Rs 11,000 crore | 12 |
| March 2023 | Rs 9,500 crore (correction year) | 14 |
| March 2024 | Rs 13,000 crore | 15 |
| March 2025 | Rs 15,000-18,000 crore (est.) | 15-18 |
Source: AMFI and industry estimates.
The AUM peak and correction between 2022 and 2023 reflected general equity market weakness and some AMC-level reclassifications following SEBI’s 2023 framework.
ESG index products
Following the broad passive investing trend, several ESG index funds and ETFs were launched:
- Nifty 100 ESG Index Fund: Tracks the Nifty 100 ESG Index, which applies negative screening (excluding tobacco, weapons, gambling) and positive ESG scoring to the Nifty 100 universe.
- MSCI India ESG Leaders Index ETF: Tracks an MSCI index with ESG tilt.
- Nifty 100 ESG Sector Leaders Index: A more concentrated ESG tilt on the large-cap universe.
These products benefit from the credibility of external index methodology but are limited by the narrow ESG data coverage of Indian companies relative to global markets.
Challenges specific to India
Promoter-held companies: A large proportion of Indian listed companies have concentrated promoter ownership. Governance assessment in this context is complex – promoter alignment can be a strength (skin in the game) or a risk (related-party self-dealing).
Informal economy linkages: Large sections of Indian supply chains operate in the informal economy, making supply chain ESG audits practically difficult.
Carbon intensity and transition risk: India’s economy remains heavily coal-dependent. ESG funds that exclude coal-adjacent companies may exclude significant segments of the Nifty 50 (power, cement, metals).
Sovereign exclusions: Some global ESG frameworks apply country-level exclusions to markets with poor rule-of-law or human rights records. India generally passes these screens but remains subject to governance-related scrutiny.
Investor demand and product outlook
Demand for ESG funds in India is primarily institutional and from foreign investor-linked mandates. Domestic retail investors show limited spontaneous demand for ESG-specific products; survey data suggests that return and risk metrics are more influential than ESG criteria in fund selection for Indian retail investors.
The BRSR Core framework’s phased rollout is expected to improve ESG data quality progressively, enabling more rigorous and differentiated ESG fund strategies by 2026-27.