What are ESG Funds for NRIs?

ESG fund investments continue to prove their worth. The JPMorgan Active Growth ETF leads the pack with returns of 38.46% in January 2025. JUST Capital's studies confirm that ESG funds either match or exceed traditional investment options' performance.

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These funds focus on companies that prioritize environmental, social, and governance (ESG) 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.

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This complete guide explains everything NRI investors should know about ESG funds. You'll learn how these funds work, their benefits, tax implications and investment strategies that fit your financial goals.

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Understanding ESG Funds and Their Growing Importance

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Sustainable investing has evolved substantially since its birth in the 1960s. It has moved beyond simple exclusion strategies to a complete assessment framework. ESG funds evaluate companies based on their environmental stewardship, social responsibility, and governance practices.

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These funds screen investments through specific criteria. They look at environmental factors like carbon emissions and waste management. Social aspects include workplace conditions and community relations. The governance elements cover board diversity and corporate transparency.

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The global ESG market shows remarkable growth. Sustainable funds manage USD 3 trillion in assets as of 2023. Projections suggest global ESG assets could reach USD 40 trillion by 2030. European investors have put €120 billion into sustainable investment options since 2019. This growth comes from increased regulatory support and investor interest.

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India's ESG landscape shows promising development. The country's ESG funds manage assets worth Rs. 9,753 crore (approximately USD 117 million). This marks substantial growth from Rs. 2,747.36 crore in January 2020. India has strengthened its regulatory framework through SEBI's Business Responsibility and Sustainability Reporting (BRSR) guidelines.

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These guidelines make sustainability reporting mandatory for the top 1000 listed companies. ESG-oriented assets under management in India should match the Asia-Pacific region's growth rate of around 30% over the next 5-10 years.

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How NRIs Can Start Investing in ESG Funds?

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Your ESG investment experience as an NRI starts with proper account setup and documentation. You'll need either a Non-Resident External (NRE) or Non-Resident Ordinary (NRO) bank account with an RBI-approved bank. These accounts are the foundations for your ESG fund investments because Indian mutual funds don't accept foreign currency directly.

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The KYC process requires you to submit:

• Valid passport (self-attested copies)
• Recent passport-sized photographs
• PAN card
• Overseas address proof
• Bank statement for the latest three months

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The verification process includes an In-Person Verification(IPV) that you can complete by recording a video. KYC registration agencies, asset management companies, or mutual fund distributors can conduct this verification.

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NRI investors can choose from several platforms, such as direct online investments through AMC portals, mobile apps designed for NRIs, or appointing a Power of Attorney (PoA) in India. Important: Most ESG funds accept NRI investments, but residents of the USA and Canada face restrictions due to FATCA compliance requirements.

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Your KYC status must also remain 'Registered' or 'Validated' to continue investing after April 30, 2025.

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Key Benefits of ESG Funds for NRI Investors

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

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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. Companies that embrace ESG principles often see boosted operational efficiency, reduced costs, and lower employee turnover. These elements lead to stronger financial performance, which explains why 58% of corporations show positive relationships between ESG and financial outcomes.

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Risk mitigation benefits from ESG screening are significant. ESG funds protect investors from companies that might face serious challenges due to questionable practices. Traditional financial analysis might miss potential risks that this screening process can identify. ESG indices have shown better protection against downside risks than traditional equity indices over time.

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Leading institutions' research shows that companies with strong ESG performance have:

• Boosted operational efficiency and reduced costs
• Lower borrowing costs and easier access to capital
• Better resilience against regulatory changes and market movements

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NRI investors looking for both financial returns and sustainable impact in their investment portfolios will find ESG funds attractive.

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Types of ESG Investment Options Available

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NRIs looking to invest in ESG have two main choices: mutual funds and Exchange Traded Funds (ETFs). Mutual funds come with professional management and invest in ESG-compliant companies of all types, instead of following specific indices. ETFs work like stocks but give investors access to a basket of securities that they can trade on stock exchanges.

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Active ESG funds have dedicated managers who pick companies based on ESG criteria. These managers work directly with company leadership to shape corporate policies. Passive ESG funds have become more popular, and sustainable passive funds pulled in USD 52.60 billion in 2023. These funds track ESG indices and cost less because they need less trading and research.

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NRI investors can pick from several top-rated options in India's ESG fund market. CRISIL's 2022 ESG scoring ranks the leading funds:

• Mirae Asset Nifty 100 ESG Sector Leaders ETF (Score: 67)
• Quantum India ESG Equity Fund (Score: 66)
• Invesco India ESG Equity Fund (Score: 64)
• Axis ESG Equity Fund (Score: 64)

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. Active ESG funds manage USD 1.87 trillion globally, giving NRIs plenty of options to invest sustainably.

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Tax Implications for NRI ESG Investors

Tax implications play a vital part when NRIs invest in ESG funds. The tax structure covers both domestic and international aspects that need careful attention to maximize returns.

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Tax treatment in India

Standard mutual fund tax rules apply to ESG funds. Equity-oriented ESG funds face a 15% tax rate on short-term capital gains when held under 12 months. Long-term gains (above Rs 1.25 lakhs) beyond 12 months get taxed at 12.5%. Debt-oriented ESG investments are taxed at your income tax slab rate.

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International tax considerations

NRIs must handle tax obligations both in India and their resident country. To name just one example, see how US-based NRIs need to report unrealized mark-to-market gains on their Indian investments. Tax treatment varies depending on your country of residence and applicable tax treaties.

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DTAA benefits and implications

India has Double Taxation Avoidance Agreements with more than 90 countries. You'll need these documents to claim DTAA benefits:

• Tax Residency Certificate (TRC) from your resident country
• Form 10F with digital signature
• DTAA request form from your bank

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Important: UAE residents get special advantages - their capital gains from mutual fund investments stay tax-free in India under the India-UAE DTAA. This applies when they maintain UAE tax residency and spend less than 182 days yearly in India. Each country's DTAA benefits differ based on specific treaty terms.

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ESG Fund Performance and Risk Considerations

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ESG funds have shown impressive performance metrics in the global market. The median returns reached 12.6% in 2023, which exceeded traditional funds at 8.6%. Both equity and fixed-income categories saw this trend, with sustainable equity funds reaching 16.7% returns compared to traditional equity's 14.4%.

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Historical performance analysis

ESG investments continue to show their strength over time. A $100 investment made in December 2018 would have grown to $135 by June 2024 in sustainable funds. This growth comes from companies that follow eco-friendly practices and have strong governance frameworks.

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Risk assessment frameworks

ESG funds show better risk-mitigation through detailed screening processes. The numbers tell a clear story - sustainable equity funds have a -9.9% median deviation compared to -10.6% for traditional equity funds. These funds provide:

• Increased efficiency through ESG compliance
• Better capital access with lower borrowing costs
• Better protection against regulatory changes

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Comparing ESG vs traditional funds

‍Sector exposure is a vital factor in performance differences. ESG funds do better by having less exposure to volatile sectors like Energy and Financials. This smart positioning has given them a competitive advantage, shown by their 0.6 percentage point lead over traditional options in early 2024. Companies that follow eco-friendly practices have proven to excel in long-term performance, backed by multiple studies.

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Conclusion

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NRI investors find ESG funds an attractive investment choice that consistently outperforms and offers strong risk management features. The numbers tell the story - sustainable funds achieved median returns of 12.6% compared to 8.6% for traditional funds in 2023. These funds also showed lower downside risk.

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To start investing in ESG funds, you’ll need to set up an NRE or NRO account and provide specific documentation.The process might seem detailed, but you'll find the long-term benefits worth your time. Your portfolio becomes more diverse, risk management gets stronger, and you gain exposure to companies that follow eco-friendly methods.

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India's tax framework is straightforward, and NRIs can benefit from Double Taxation Avoidance Agreements (DTAAs), which help reduce tax liability.UAE residents can enjoy tax-free capital gains when they meet the residency requirements.

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Global ESG assets should reach USD 40 trillion by 2030, making the future bright for these investments. Markets now recognize the value of eco-friendly methods more than ever. ESG funds give you a chance to arrange your financial goals with responsible investing principles while earning competitive returns.

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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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