What are ESG Funds for NRIs?

ESG investing has emerged as a significant approach for investors seeking to align their portfolios with their personal values while pursuing financial returns. The acronym stands for Environmental, Social, and Governance – three crucial non-financial factors used to evaluate a company's sustainability and ethical impact. At its core, ESG investing is the practice of building an investment portfolio that considers these factors alongside traditional financial metrics.

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Unlike conventional investment strategies that focus primarily on financial performance, ESG investing examines how companies manage their environmental footprint, social relationships, and internal governance. This approach has grown substantially since its unofficial roots centuries ago, when religious groups banned investments in enterprises involved in the slave trade. The modern framework gained prominence in 2004 when the term "ESG" first appeared in a report titled 'Who Cares Wins' – a joint initiative of financial institutions at the invitation of the United Nations.

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The three pillars of ESG encompass:

• Environmental factors: Evaluating a company's impact on the environment, including carbon emissions, waste management, and climate policies.
• Social factors: Examining relationships with employees, suppliers, customers, and communities, including workplace conditions and human rights.
• Governance: Assessing company leadership, executive compensation, audits, internal controls, and shareholder rights

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For Non-Resident Indians (NRIs), ESG investing offers an opportunity to contribute to sustainability goals while seeking financial returns. Research from the Morgan Stanley Institute for Sustainable Investing shows that sustainable funds had lower downside risk than traditional funds between 2004 and 2018. Additionally, India's ESG landscape is developing promisingly, with ESG funds managing assets worth approximately USD 117 million.

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Why ESG Funds Make Sense for NRI Investors

As an NRI investor, ESG funds offer you several distinct advantages:

Value alignment: You can ensure your investments reflect your personal values and contribute to causes you care about, whether that’s climate action, social justice, or corporate accountability.

Competitive returns: Research increasingly shows that companies with strong ESG practices often deliver competitive financial performance. The myth that you must sacrifice returns for values is being disproven by market data.

Risk management: Companies with robust ESG practices typically face fewer regulatory issues, lawsuits, and reputational damage. This can translate to lower investment risk over time.

Portfolio diversification: Adding ESG funds to your investment mix provides exposure to companies and sectors that may perform differently from traditional investments, potentially improving your overall portfolio balance.

Future-focused strategy: As regulations around sustainability tighten globally, companies with strong ESG practices may be better positioned for long-term success.

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What to Consider Before Investing in ESG Funds

Before you add ESG funds to your portfolio, keep these important factors in mind:

Investment horizon: ESG investments often perform best over longer time periods. You should have an investment horizon of at least 5-7 years.

Fund selection criteria: Different ESG funds use varying screening methods. Some exclude certain industries entirely (like tobacco or weapons), while others take a “best-in-class” approach across all sectors. Review the fund’s methodology to ensure it aligns with your values.

Expense ratios: ESG funds sometimes carry higher expense ratios due to the additional research required. Compare costs across similar funds to ensure you’re getting good value.

Performance metrics: Look beyond short-term returns to understand how the fund has performed through different market cycles.

Tax implications: As an NRI, understand how ESG fund returns will be taxed both in India and in your country of residence.

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How NRIs Can Start Investing in ESG Funds?

Follow these essential steps to get started with ESG fund investments as an NRI—from account setup and KYC to choosing the right investment platform.

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Your ESG investment journey as an NRI begins with setting up the right banking infrastructure. You’ll need either a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) account with an RBI-authorized bank in India. These accounts are mandatory because Indian mutual funds do not accept foreign currency directly.

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To complete your Know Your Customer (KYC) process, ensure you have the following documents ready:

• Self-attested copy of a valid passport
  
  
• Recent passport-sized photographs
  
  
• PAN card
  
  
• Overseas address proof
  
  
• Latest three-month bank statement
  
  

1. Complete the In-Person Verification (IPV) as part of the KYC process. This can be done via a recorded video for convenience.
   
   
2. IPV can be facilitated by a KYC Registration Agency (KRA), an Asset Management Company (AMC), or a mutual fund distributor.
   
   
3. After verification, you can begin investing through one of the following channels:
   
   
   
   • Directly via AMC websites
     
     
   • Using NRI-focused investment platforms or mobile apps
     
     
   • By appointing a Power of Attorney (PoA) in India
     
     
4. Be aware that NRIs from the USA and Canada may encounter FATCA-related restrictions when investing in ESG funds.
   
   
5. Ensure your KYC status is 'Registered' or 'Validated' to continue investing after April 30, 2025.

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Key Benefits of ESG Funds for NRI Investors

1. Better Risk Management and Resilience

ESG funds invest in companies with strong governance and ethical practices, making them more stable during market volatility. For example, in 2020, 65% of ESG funds outperformed traditional funds during turbulent periods. This is especially valuable for NRIs who may not actively monitor Indian markets—ESG investments offer peace of mind with built-in resilience.

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2. Strong and Sustainable Long-Term Returns

Studies show that nearly 59% of ESG funds delivered higher returns than traditional funds over a 10-year period. Companies that focus on sustainability tend to operate more efficiently, reduce compliance costs, and retain top talent, contributing to better long-term performance. For NRIs with long investment horizons, this can translate into meaningful wealth creation over time.

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3. Deeper Risk Screening Beyond Financials

ESG funds evaluate risks that traditional methods often overlook, such as environmental compliance, labor practices, board oversight, and legal exposure. This adds a layer of protection for NRI investors who may have limited access to on-the-ground company updates. ESG metrics provide a more complete risk picture, helping investors avoid hidden vulnerabilities.

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4. Alignment With Global Regulatory Shifts

Governments and regulators worldwide are moving toward stricter ESG disclosures and carbon regulations. India, too is enhancing its ESG compliance standards. By investing in ESG funds, NRIs stay proactively aligned with global trends instead of reacting to regulatory changes after they happen. This protects both compliance and investment integrity.

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5. Exposure to High-Growth Sustainable Sectors

ESG funds provide access to fast-growing sectors such as:

• Renewable energy
  
  
• Clean technology
  
  
• Sustainable infrastructure
  
  
• Water management
  
  
• Electric mobility
  
  

These industries are projected to grow rapidly as the global economy pivots toward sustainability. For NRIs, ESG funds offer a diversified gateway into these future-forward opportunities.

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Types of ESG Investment Options Available for NRIs

Are you an NRI looking to align your investments with your values? ESG investing offers you the opportunity to generate returns while supporting companies with strong environmental, social, and governance practices. Let’s explore the various ESG investment options available to you in a structured way.

ESG Mutual Funds: Professional Management with Purpose

ESG mutual funds offer you access to professionally managed portfolios that invest in companies meeting specific environmental, social, and governance criteria. Unlike traditional funds, these focus exclusively on ESG-compliant companies across various sectors rather than simply tracking market indices.

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With an ESG mutual fund, you benefit from:

• Professional portfolio management by experienced fund managers
• Diversification across multiple ESG-compliant companies
• Regular monitoring and adjustment of holdings based on ESG performance
• Potential for both financial returns and positive impact

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ESG Exchange Traded Funds (ETFs): Flexibility with Sustainability

If you prefer more trading flexibility, ESG ETFs might be your ideal choice. These investment vehicles function similarly to stocks, allowing you to buy and sell them throughout the trading day on stock exchanges. ESG ETFs give you access to a basket of securities that meet specific sustainability criteria.

Key advantages of ESG ETFs include:

• Intraday trading capability on stock exchanges
• Generally lower expense ratios compared to mutual funds
• Transparent holdings that are disclosed daily
• Efficient tax structure for many investors

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Tax Implications for NRI ESG Investors

Understand the key tax steps before investing—this section outlines what NRIs must do to optimize tax efficiency on ESG fund investments across India and their country of residence.

1. Tax Treatments in India

ESG funds follow standard mutual fund taxation in India.

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• For equity-oriented ESG funds:
  
  
  • Short-term capital gains (STCG) on holdings under 12 months are taxed at 15%.
    
    
  • Long-term capital gains (LTCG) beyond 12 months are taxed at 12.5%, after an exemption of ₹1.25 lakhs annually.
    
    
• For debt-oriented ESG funds:
  
  
  • Gains are taxed according to your applicable income tax slab rate.
    
    

Understanding the fund type is essential for accurate tax calculation.

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2. International Tax Consideration

NRIs must also comply with tax laws in their country of residence. For example, NRIs based in the U.S. may be required to report unrealized mark-to-market gains on their Indian investments.

Tax treatment can differ widely depending on where you live, so it’s crucial to consult a tax advisor familiar with cross-border investment rules.

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3. DTAA Benefits and Required Documents

India has signed Double Taxation Avoidance Agreements (DTAAs) with over 90 countries. These treaties help NRIs avoid being taxed twice on the same income. To claim DTAA benefits, NRIs must submit:

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• A valid Tax Residency Certificate (TRC) from their current country of residence
  
  
• Form 10F with a digital signature
  
  
• A DTAA declaration form (usually available via your bank)
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4. Special Tax Advantages for UAE- Based NRIs

Under the India-UAE DTAA, capital gains on mutual fund investments are tax-free in India if:

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• You are a UAE tax resident, and
  
  
• You stay in India for less than 182 days in a financial year.
  
  

Each country has unique DTAA terms, so always verify benefits relevant to your location before investing.

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ESG Fund Performance and Risk Considerations

ESG funds have consistently delivered competitive performance in global markets. In 2023, the median return for ESG funds was 12.6%, outperforming traditional funds, which averaged 8.6%. This trend held true across both equity and fixed-income categories—sustainable equity funds returned 16.7%, compared to 14.4% for traditional equity funds.

1. Long-Term Performance Insights

Over time, ESG investments have proven their strength. For instance, a $100 investment in ESG funds in December 2018 would have grown to $135 by June 2024. This growth is largely driven by companies committed to sustainable operations, responsible governance, and long-term value creation.

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2. Stronger Risk Management Profiles

ESG funds also exhibit lower downside risk compared to traditional investments. Sustainable equity funds, for example, show a median drawdown of -9.9%, versus -10.6% for traditional equity. This resilience stems from:

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• Enhanced operational efficiency through ESG-aligned practices
  
  
• Improved access to capital due to lower perceived borrowing risk
  
  
• Stronger buffers against regulatory and compliance changes
  
  

Conclusion

ESG funds have emerged as an attractive investment avenue for NRI investors, offering a balance of financial returns and sustainable impact. With consistent outperformance over traditional funds and better downside protection, ESG investments are proving to be both resilient and forward-looking. Starting your ESG investment journey involves setting up an NRE or NRO account and completing a standard KYC process.

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 While this may require a few additional steps, the long-term advantages, such as diversified exposure, improved risk management, and alignment with global sustainability goals, make it a worthwhile effort. India’s tax structure is relatively clear for ESG fund investments, and NRIs can further benefit from Double Taxation Avoidance Agreements (DTAs), which help minimize tax liability.

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 For example, UAE-based NRIs enjoy tax-free capital gains under specific residency conditions. With global ESG assets expected to reach USD 40 trillion by 2030, investing in ESG funds allows NRIs to align their financial strategies with ethical, environmental, and governance values, while securing competitive, long-term growth.

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Frequently Asked Questions: ESG Funds for NRIs

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Q1. What are ESG funds and how do they differ from traditional investments? 

ESG funds are investment vehicles that focus on companies committed to environmental, social, and governance principles. They evaluate companies based on factors like carbon emissions, workplace conditions, and board diversity, offering a more holistic approach to investing compared to traditional funds.

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Q2. How can NRIs start investing in ESG funds in India?

NRIs can start investing in ESG funds by setting up a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account. They need to complete the KYC process, which includes submitting documents like a valid passport, PAN card, and address proof. Investments can be made through AMC portals, mobile apps, or by appointing a Power of Attorney in India.

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Q3. What are the potential benefits of investing in ESG funds for NRIs?

ESG funds offer NRIs benefits such as portfolio diversification, potential for long-term sustainable returns, and enhanced risk mitigation. Companies with strong ESG ratings often demonstrate higher profitability and lower risk profiles, making these funds attractive for investors seeking both financial returns and sustainable impact.

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Q4. How do ESG funds perform compared to traditional funds? 

Recent analysis shows that ESG funds have outperformed traditional funds in many cases. For instance, In 2023, sustainable funds achieved median returns of 12.6%, outperforming traditional funds, which returned 8.6%.ESG funds have also demonstrated lower downside risk, offering better protection during market downturns.

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Q5. What tax implications should NRI investors consider when investing in ESG funds?

NRI investors need to consider both Indian and international tax implications. In India, equity-oriented ESG funds held for less than 12 months attract a 15% short-term capital gains tax, while long-term gains above Rs 1.25 lakhs are taxed at 12.5%. NRIs may also benefit from Double Taxation Avoidance Agreements (DTAAs) between India and their country of residence, potentially reducing their tax burden.

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