ESG Funds

Priya from Abu Dhabi called us last week with a question I'm hearing more often: She wants to invest in India, but she also want her money to support companies doing the right thing-clean energy, fair labor, good governance. 

Is that even possible?" The answer is yes-and it's called ESG investing. 

At Belong, we've seen a 300% increase in NRIs asking about sustainable investment options over the past year. 

This isn't just a trend. ESG funds (Environmental, Social, and Governance) are reshaping how investors think about returns-and responsibility. 

Our community discusses these options daily, helping each other understand which funds actually deliver both impact and returns. 

This guide breaks down everything you need to know about ESG funds as an NRI, from what they are to whether they belong in your portfolio.

Understanding ESG: More Than Just a Buzzword

Environmental, Social, and Governance (ESG) investing represents an investment approach where funds are allocated to companies that comply with ethical practices alongside profitability. 

The ESG criteria evaluates how public companies uphold environmental responsibility, contribute positively to their communities, and maintain high standards of management and corporate governance.

Let us break down what each letter means:

Environmental (E): How a company manages its carbon footprint, waste, water usage, and climate impact. Does it invest in renewable energy? Is it reducing emissions? Are they contributing to a cleaner planet?

Social (S): How the company treats people-employees, customers, suppliers, and communities. Fair wages, workplace diversity, labor rights, data privacy, and community development all matter here.

Governance (G): Corporate leadership, board structure, executive compensation, transparency, shareholder rights, and ethical business practices. Companies with strong governance are less likely to face scandals or corruption.

Here's what matters for NRIs: ESG funds focus on companies that prioritize these principles. Their focus includes reducing carbon footprints and building diverse leadership teams. 

Research from the Morgan Stanley Institute for Sustainable Investing shows that sustainable funds had lower downside risk than traditional funds between 2004 and 2018.

👉 Tip: Before investing in ESG funds, check your residential status using our calculator to understand tax implications.

How ESG Funds Have Actually Performed

Let's get to what you really want to know: do ESG funds make money, or are you sacrificing returns for values?

The Quant ESG Integration Strategy Fund leads the pack with 32.48% 1-year returns as of early 2025. JUST Capital's studies confirm that ESG funds either match or exceed traditional investment options' performance. (source) 

Even better? Long-term sustainable returns look promising for NRI investors. 58.8% of sustainable funds performed better than their traditional counterparts over a 10-year period.

The SBI ESG Exclusionary Strategy Fund delivered 13.71% annualized returns over the last year, 8.78% average annual returns over five years (absolute five-year returns: approximately 57%), and 9.35% since launch (as of early 2025). (source 1) (source 2)

The Axis ESG Integration Strategy Fund delivered 14.11% annualized returns over the last year and 8.16% average annual returns over five years (since launch annualized: approximately 7.19%, as of early 2025). (source)

Here's the reality check: companies with strong ESG ratings show higher profitability and lower risk profiles. 

ESG-compliant companies are more resilient during market downturns because they use green practices that keep them running longer.

👉 Tip: Compare ESG fund returns against safer alternatives using our NRI FD Comparison Tool.

Types of ESG Funds You Can Invest In

Not all ESG funds are created equal. Understanding the types helps you pick what aligns with your values and goals.

Exclusionary (Negative Screening) Funds

These funds avoid companies involved in harmful industries such as tobacco, alcohol, gambling, or fossil fuels. For instance, Quantum India ESG Equity Fund follows this approach by eliminating companies that do not meet its sustainability criteria.

The SBI ESG Exclusionary Strategy Fund is one of the oldest mutual funds in the ESG funds category, launched in 2013. It primarily invests in financial services, technology, and consumer cyclical sectors.

ESG Integration Funds

These funds don't exclude entire sectors but actively integrate ESG factors into their investment analysis. Fund managers assess how ESG issues may impact a company's long-term performance and sustainability.

The Aditya Birla Sun Life ESG Integration Strategy Fund has a 29.32% weightage in financial services, followed by 26.55% in technology, and 20.07% in the consumer cyclical sector. It delivered 67.86% absolute returns over the last 3 years (22.62% annualized, as of early 2025). (Moneycontrol)

The ICICI Prudential ESG Exclusionary Strategy Fund is a popular fund in this category with its 3-year absolute returns standing at 66.6%. (icici)

ETmoney

Thematic ESG Funds

These funds focus on ESG-related themes like clean energy, water conservation, and sustainable agriculture. One example is the Avendus India ESG Fund, which invests in businesses with environmental and social causes.

India's biotechnology sector is growing at a CAGR of 14%, targeting a $150 billion market by 2025. With strong government backing through initiatives like Make in India and the Biotech Start-up Policy, India is becoming a global center for vaccine development and pharmaceutical innovation.

Also Read - Thematic Mutual Funds for NRIs

Best-in-Class Funds

These funds invest in companies with top ESG ratings within their industry. They don't exclude entire sectors but pick the best-performing firms in terms of ESG compliance.

Impact Investing Funds

These funds target businesses that generate measurable positive environmental or social impact, such as renewable energy projects or microfinance initiatives.

Top ESG Funds in India for NRIs (2025)

Based on performance, AUM growth, and ESG scores, here are the leading options:

SBI ESG Exclusionary Strategy Fund

  • 5-year absolute returns: approximately 57%
  • AUM: ₹5,613 crore (March 2025)
  • Recent AUM growth: Stable with minor inflows (6 months)
  • Expense ratio: 1.94% (slightly above category average)

Source: ETmoney, Valueresearch

ICICI Prudential ESG Exclusionary Strategy Fund

  • 3-year absolute returns: 66.6%
  • Strong track record in financial services and technology

Axis ESG Integration Strategy Fund

  • 1-year returns: 14.11%;
  • Average annual returns since launch: 7.19%;
  • AUM: ₹1,189 crore (as of March 2025).

Source: Indmoney, ETmoney

Quantum ESG Best Fund

  • 5-year absolute return: 148.03%
  • Invests in consumer cyclical, financial services, and technology

Quant ESG Equity Fund

  • 3-year absolute return: 80% (21.5% annualized, as of March 2025)
  • Diversified across financial services, energy, consumer defense, technology, and basic materials

Source: Quant Mutual ETmoney

Mirae Asset Nifty 100 ESG Sector Leaders FoF

  • Minimum SIP amount: ₹500;
  • Expense ratio: 0.07% (direct plan, as of March 2025)

ETMoney, MiraeAsset

  • WhiteOak Capital ESG Best-in-Class Strategy Fund

  • Launched: October 30, 2024

  • Returns since launch (as of March 2025, ~5 months): approximately 5.88% absolute./ ;

  • Top holdings: HDFC Bank, ICICI Bank, TCS, Zomato, Bharti Airtel

Source: Valueresearch, ETmoney

👉 Tip: Diversify your portfolio beyond ESG funds. Explore GIFT City Alternative Investment Funds for tax-efficient growth options.

ESG Ratings: How to Know Which Funds Are Actually "Green"

Not every fund that calls itself ESG is truly sustainable. You need to look at ESG scores from credible rating agencies.

MSCI ESG Scores

The MSCI ESG score assesses how effectively a company manages its ESG risks compared with others in the industry. Companies attaining AA or AAA ratings are recognized as ESG risk management leaders.

CRISIL's 2022 ESG scoring ranks the leading funds with Mirae Asset Nifty 100 ESG Sector Leaders ETF scoring 67. These funds have shown strong results in environmental, social, and governance areas. The average governance score of 73 is much higher than the environmental and social scores of 58.

Morningstar ESG Scores

Morningstar's ESG score quantifies the ESG risks associated with a specific company or mutual fund on a scale from 1 to 50, where 1 represents the lowest risk while 50 is the highest.

Key ESG Indices in India

Tracking ESG performance has become easier with sustainability indices like the NIFTY 100 ESG Index and the S\&P BSE 100 ESG Index. These indices offer investors a benchmark for ESG performance in the market.

👉 Tip: Don't just trust the "ESG" label. Check the fund's actual holdings, ESG scores, and methodology before investing.

Tax Treatment for NRIs: The Details You Actually Need

ESG funds in India are classified as equity-oriented funds (if they invest more than 65% in equities), so they follow the same tax rules as regular equity mutual funds.

Capital Gains Tax

Investments in ELSS funds (Equity Linked Savings Schemes) qualify for tax benefits under Section 80C, up to INR 1,50,000.

For Short-Term Holdings (Less than 12 months):

  • Tax rate: 20% (increased from 15%)
  • TDS for NRIs: 20%

For Long-Term Holdings (12 months or more):

  • Tax rate: 12.5% on gains exceeding ₹1.25 lakh (increased from ₹1 lakh)
  • TDS for NRIs: 12.5%

The tax rates for NRIs investing in mutual funds are the same as those for resident Indians. It is important to know that AMCs will deduct TDS on redemption/dividend payout.

Also Read -DTAA and Capital Gains Tax: The Confusing Bits Explained

TDS Rates

NRIs are subject to TDS on mutual fund redemptions, with rates varying based on fund type and holding period:

  • Short-term equity funds: 20% TDS
  • Long-term equity funds: 12.5% TDS

It's important to note that TDS is deducted at these rates regardless of the individual's income tax slab. However, NRIs can claim a refund of the excess tax deducted by filing their income tax returns in India.

Also Read - Taxation on Mutual Funds

DTAA Benefits

NRIs can reduce their tax liability through the Double Taxation Avoidance Agreement (DTAA). India has DTAA treaties with multiple countries, ensuring that NRIs do not pay tax twice on the same income.

If you face taxation on mutual fund gains in your resident country as well as India, check whether your country has signed a DTAA with India. The UAE-India DTAA can help you claim Foreign Tax Credits in the UAE.

👉 Tip: Keep detailed records of all investments, TDS certificates (Form 16A), and transaction statements for ITR filing.

How NRIs Can Invest in ESG Funds

Step 1: Understand Your Eligibility

NRIs can invest in various mutual fund categories, each with distinct tax implications: Equity funds, Debt funds, Hybrid funds, and ESG funds.

Important: Most ESG funds accept NRI investments, but residents of the USA and Canada face restrictions due to FATCA compliance requirements.

Step 2: Open the Right Bank Account

You must use either an NRE (Non-Resident External) account or an NRO (Non-Resident Ordinary) account.

NRE Account: Fully repatriable-you can transfer both principal and returns abroad without limits.

NRO Account: Repatriable up to USD 1 million per financial year after completing certain procedures.

Check out the best banks for NRI accounts to get started.

Step 3: Complete KYC

Your KYC status must remain 'Registered' or 'Validated' to continue investing after April 30, 2025. You'll need:

  • PAN card
  • Passport
  • Visa/OCI card
  • Overseas address proof

Link your Aadhaar with PAN if you haven't already.

Step 4: Choose Your Investment Platform

NRI investors can choose from several platforms:

  • Direct online investments through AMC portals
  • Mobile apps designed for NRIs
  • Appointing a Power of Attorney (PoA) in India

Step 5: Start Investing

You can invest via lump sum or SIP (Systematic Investment Plan). The low SIP amount of just INR 99 makes funds like Mirae Asset ESG Sector Leaders Fund accessible.

👉 Tip: Our Compliance Compass helps you stay on top of all financial compliance requirements across banking, investments, and taxation.

The Real Benefits of ESG Funds (Beyond Feeling Good)

Lower Risk Profile

NRI investors can better manage their risks by diversifying their portfolio through ESG funds. Companies with strong ESG ratings show higher profitability and lower risk profiles.

Climate change is providing new rules, penalties, and risks to those businesses that do not work according to regulations. Investments in ESG funds India 2025 will minimize the risk of exposure by backing sustainable companies.

Better Long-Term Returns

Companies that follow strong Environmental, Social, and Governance (ESG) principles tend to manage risks better, operate more efficiently, and foster long-term investor trust.

Sustainable ESG funds (including active) manage approximately USD 3.56 trillion globally (as of mid-2024, with stable growth into 2025). giving NRIs plenty of options to invest sustainably.

Source: Morning Stanley Morning Star

Portfolio Diversification

ESG funds offer diversification benefits across asset classes such as equities, debt, and hybrids spreading risk across sectors, companies, and maturities. This helps reduce portfolio volatility and cushions against market-specific downturns.

Values Alignment

For the growing number of millennials and Gen Z investors, ESG investing isn't optional-it's essential. These investors are not just looking for returns, they are prioritizing ESG-focused investments, green bonds, and socially responsible investing strategies that align with their values.

👉 Tip: Balance ESG funds with stable investments like GIFT City Fixed Deposits that offer tax-free returns.

The Challenges Nobody Talks About

Recent Outflows and Performance Concerns

ESG funds in India now hold a growing AUM of nearly ₹10,946 crore. However, there have been recent challenges. In 2023, ESG funds saw outflows of ₹891.53 crore, largely due to a global rally in defence stocks and renewed interest in fossil fuel companies. These sectors are typically excluded from ESG portfolios, which might have caused the outflow.

Yet, the belief in ESG investing remains strong. Beyond ethical considerations, it aligns portfolios with the future growth of ESG investing trends. Short-term fluctuations may challenge ESG funds, but their long-term potential remains promising.

Inconsistent Standards

Sustainability is not equally ensured in every country. Different rating agencies use different methodologies, making it hard to compare funds objectively.

Relatively New in India

ESG funds in India are relatively new and may not have a long-term track record. Between 2012 and 2020, India introduced six ESG funds. According to the latest data, the country hosts 11 sustainable investment funds, comprising eight actively managed funds, one passive fund (ETF/Funds of funds), and two global funds.

Greenwashing Risk

Some funds label themselves "ESG" without meaningful screening or impact. Always verify the fund's methodology and actual holdings.

👉 Tip: Join our WhatsApp Community where experienced NRI investors share insights on which ESG funds actually deliver on their promises.

GIFT City: A Tax-Efficient Alternative to ESG Funds

Here's something most advisors won't tell you: you don't need ESG funds to invest responsibly in India's growth.

GIFT City investments offer:

  • Tax-free returns: No TDS, no capital gains tax
  • USD denomination: Protection against rupee depreciation
  • Full repatriation: Transfer money back without limits
  • Regulatory oversight: IFSC (International Financial Services Centre) framework
  • Sustainable options: Many GIFT City funds focus on growth sectors like renewable energy, technology, and healthcare

The amount of ESG funds India 2025 that are compatible with it has increasingly grown. The SEBI makes the requirement of ESG disclosures mandatory under the BRSR norms. This growth is ensuring that retail investors find it convenient to have credible and sustainable investment options.

For NRIs looking to combine values with tax efficiency, exploring GIFT City's benefits makes sense before committing entirely to traditional ESG funds.

Who Should (and Shouldn't) Invest in ESG Funds?

You're a Good Fit for ESG Funds If:

  • You have a 7-10 year investment horizon
  • You want to align your values with your investments
  • You understand equity market volatility
  • You've already secured your financial basics (emergency fund, insurance, stable investments)
  • You're comfortable with the tax and compliance requirements
  • You want diversification in your equity portfolio

Skip ESG Funds If:

  • You need guaranteed returns
  • You're risk-averse and can't handle 15-20% volatility
  • You're close to retirement and need stability
  • You don't want to deal with TDS and ITR filing complexity
  • You're based in the US or Canada (FATCA restrictions apply)
  • You prefer simpler, tax-free options

For most NRIs we work with at Belong, a balanced portfolio includes best NRI Fixed Deposits, some equity exposure through best mutual funds, and potentially a small ESG allocation if values alignment matters to them.

What's Driving ESG Growth in India?

Government policies are further driving ESG adoption. India has introduced reforms to boost renewable energy investments and ensure ethical corporate behavior. SEBI has also mandated ESG disclosures for the top 1,000 listed companies under the BRSR norms, increasing transparency and accountability.

Global Sustainable Investment Alliance (GSIA) reports that 41 international ESG funds have allocated an average of 25% of their investments to Indian equities. This indicates growing confidence in India's sustainable business landscape.

Domestically, major players like Quantum Asset Management have launched ESG-focused funds. In 2019, Quantum introduced India's first open-ended ESG fund, and Avendus followed with another ESG-based fund.

The government's net zero by 2070 commitment and renewable energy targets create a favorable environment for ESG companies to thrive.

👉 Tip: Track India's growth story through our GIFT Nifty Live Tracker to understand broader market trends.

The Bottom Line for NRIs

ESG funds offer NRIs a way to invest in India while supporting companies that prioritize sustainability, ethics, and good governance. With 58.8% of sustainable funds outperforming traditional funds over 10 years, the financial case is getting stronger.

But here's what we tell our clients at Belong: ESG funds should complement your portfolio, not define it. Get your foundation right first-safe, tax-efficient products that give you peace of mind. Then add ESG exposure if it aligns with your values and risk tolerance.

The revised TDS rates require careful record keeping and tax planning for NRIs to ensure compliance with the new Indian tax regulations. With the changes in tax rates and structure, NRIs are encouraged to reassess their investment strategies to align with the new tax regime and optimize tax savings.

At Belong, we've built a platform to help NRIs cut through the noise and make smart decisions. From USD fixed deposits to alternative investment funds, we focus on what actually works for global Indians.

Ready to invest smarter? Join our WhatsApp community of 5,000+ NRIs who share insights, ask questions, and learn together: Join Here.

Download the Belong App to explore GIFT City investments, compare FD rates, and access tools built specifically for NRIs: Download Now.

Sources:

Disclaimer: This article is for informational purposes only and should not be considered as investment advice. ESG mutual fund investments are subject to market risks. NRIs should consult with SEBI-registered investment advisors and tax professionals before making investment decisions. Tax laws are subject to change, and individual circumstances may vary.