ESG Mutual Funds for NRIs in India

ESG stands for Environmental, Social, and Governance, three non-financial factors used to evaluate the ethical and sustainability impact of a company. ESG funds are ETFs and mutual funds that invest in companies based on Environmental, Social, and Governance (ESG) criteria, in line with SEBI’s disclosure and reporting norms. For NRIs, these investment options provide an opportunity while seeking financial returns, contribute to sustainability goals.

Further, as an environmentally concerned NRI, do you also want to stand beside Indian companies adopting ESG-compliant practices? However, do not know anything about these investments. This blog provides a comprehensive guide for NRIs who want to invest in ESG mutual funds and ETFs. 

What Are ESG Funds?

Environmental, Social, and Governance (ESG) investing offers an investment approach where funds are allocated to businesses and companies that, along with profitability, comply with ethical practices. The criteria of it states how public companies maintain their responsibility towards the environment, and positively contribute to society. Additionally, maintain high standards of corporate governance and management.

Further, let's break down what each letter in ESG means:

• Environmental (E): It states how a business manages its waste, carbon footprint, climate impact, and water usage. Is it working on reducing emissions? Contributing towards a cleaner planet or investing in renewable energy.
• Social (S): How the employees, suppliers, customers, and communities are treated by the company. It includes fair wages, labor rights, data privacy, workplace diversity, and community development. 
• Governance (G): It consists of board structure, corporate leadership, shareholder rights, executive compensation, ethical business practices, and transparency. Considering this, companies that have strong governance have very few chances to face corruption or scandals. 

Further, for NRIs, investing in ESG provides them the chance to contribute to the sustainability goals of India while getting returns. Additionally, research conducted by the Morgan Stanley Institute for Sustainable Investing states that compared to traditional funds between 2004 and 2018, sustainable funds have a very fewer downside risk. Apart from this, the ESG landscape of India is promisingly developing, with ESG-focused funds in India managing a growing pool of assets. Also, over 5 years, ESG funds have delivered 13 to 17% annualized returns that often exceed or match the traditional benchmarks. 

This was all about ESG funds. Moving ahead, let's know why NRIs should consider investing in ESG funds in India. 

Why NRIs Should Consider ESG Funds?

NRIs should consider investing in ESG funds because it provides them with several benefits, such as:

• Competitive Returns: Investing in environmentally sustainable business does not mean compromising with your financial goals. Considering this, research shows that businesses that have strong ESG practices often have competitive financial performance. So, the myth that for values you should sacrifice your returns is being disproved by market information.
• Value Alignment: With ESG funds, you can stay with your personal values and contribute to causes that you care about. It includes all, whether it is social justice, climate action, or corporate accountability.
• Portfolio Diversification: In the ESG structure, governance is an important factor. It includes rules, practices, and processes followed by a company in controlling its operations and management. Good governance states that a business works in a fair, responsible, and transparent manner for long-term sustainability and resilience. Considering this, investing in ESG funds assists in diversifying a portfolio risk linked with poor management practices and corporate scandals.
• Risk Management: Generally, businesses with strong ESG practices face fewer lawsuits, regulatory issues, and reputational damage. This, over time, converts to lower investment risk.
• Future-Focused Strategy: India by 2070 is focused on achieving the Net-Zero target. Considering this, for such a big country, it requires tremendous investment and policy support in sustainable energy and green infrastructure. Further, in the future, these investment sectors will be going to be popular in India. So, investing in these funds will help you effectively leverage this trend. 

These are some of the key benefits ESG funds offer to NRIs. Moving further, now let's know the different types of these funds. 

Types of ESG Funds Available

Many individuals think that all ESG funds are the same. However, it is not like that; each is created differently. Considering this, understanding the types of it helps you choose the one that matches your financial goals and values. 

Exclusionary (Negative Screening) Funds

These ESG funds avoid businesses and companies involved in making harmful products or activities. It includes alcohol, tobacco, fossil fuels, or gambling. For example, this approach is followed by Quantum India ESG mutual funds by not working with companies that do not meet its sustainability criteria. 

ESG Integration Funds

These funds do not exclude the entire sector. However, into their investment analysis actively integrate ESG factors. Fund managers determine how ESG issues may impact the sustainability and long-term performance of the company. 

Thematic ESG Funds

These investment funds focus on ESG-related themes. It includes water conservation, sustainable energy, and clean energy. One example of a thematic ESG strategy is funds focusing on clean energy and sustainability-linked businesses. It invests in companies with social and environmental causes. 

Best-in-Class Funds

These funds invest in companies that, within their industry, have top ESG ratings. They do not exclude the entire sector. However, in terms of ESG compliance, choose the best-performing companies.

Impact Investing Funds

The target of these funds is businesses that generate measurable positive social or environmental impact. For instance, microfinance initiatives or energy projects. 

These are different types of ESG funds available for NRIs for investments. Moving ahead, let's know the performance, benefits, and risks of these funds. 

Performance, Benefits, and Risks of ESG Funds

In recent years, in the global markets, competitive performance has been delivered by ESG funds. In 2023, ESG funds in several global markets recorded higher median returns than some traditional funds, depending on the asset class and region. Across both equity and fixed-income categories, compared to traditional equity, 14.4% sustainable equity funds provide 16.7%. 

Long-Term Performance Insights

Over time, ESG investments have proven their investment strength. For example, in December 2018, a $100 investment in ESG funds by June 2024 grew to $135. This investment growth increased because of the commitment of companies to responsible governance, sustainable operations, and long-term value creation. 

Stronger Risk Management Profiles

Compared to some traditional investments, ESG funds have demonstrated relatively lower downside risk during certain market periods. For instance, sustainable equity funds compared to traditional equity funds (-10.6%) showed a median drawdown of -9.9%. This resilience stems from:

• Through ESG-aligned practices, improved operational efficiency.
• Against compliance and regulatory changes, stronger buffers.
• With lower perceived borrowing risk, improved capital access.

This was all about performance, benefits, and risk of ESG funds. Moving further, let's know how NRIs can invest in these funds. 

How NRIs Can Invest in ESG Funds?

NRIs can invest in ESG mutual funds and ETFs in India using their NRE or NRO accounts, subject to AMC and country-specific restrictions. Here is how they can do so:

• Step 1: Check the asset management companies (AMCs) that accept NRI investments.
• Step 2: From the ESG funds offered by AMC, select the best-performing funds.
• Step 3: Complete your KYC process by submitting the following documents:
  • Self-attested photocopy of a valid passport
  • PAN card
  • Overseas address proof
  • Recent passport-sized photographs
  • The latest three-month bank statement
• Step 4: Through AMCs, you can invest in regular ESG funds. Additionally, you can also opt for online platforms for buying mutual funds. Also, for ESG Exchange Traded Funds (ETFs), through online brokers, you should buy them on the stock exchange.

So, this is how NRIs can invest in ESG funds. However, there are some country-specific variations, such as in Canada and the USA. They want their residents to report investments obtained from foreign assets. It is commonly known as FATCA or the Foreign Account Tax Compliance Act. Considering this, India signed intergovernmental agreements with Canada and the US.

Moving ahead, let's know the tax treatments of ESG funds for NRIs. 

Tax Treatment of ESG Funds for NRIs

The taxation of ESG equity mutual funds for NRIs follows the same capital gains rules as other equity mutual funds in India: 

• Short-Term Capital Gains (STCG): If the holding period is less than 12 months, capital gains are taxed at 20%.
• Long-Term Capital Gains (LTCG): If the holding period is more than 12 months, for gains more than INR 1,25,000, 12.5% tax is imposed.

Further, the latest TDS rates applicable are as follows:

Additionally, NRIs should also follow the tax laws of their resident country. For instance, NRIs living in the US may need to report capital gains on their Indian investments. 

This was all about the tax treatment of ESG funds for NRIs in India. Moving further, let's know about the future outlook of ESG funds in India. 

Future Outlook of ESG Funds in India

Government policies are moving forward with ESG adoption. To increase renewable energy investments and certify ethical corporate behavior, India has introduced several schemes. Additionally, under the BRSR norms, SEBI has mandated ESG disclosures for the top 1,000 listed companies. It further assists in boosting accountability and transparency.

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

Further, domestically, major players like Quantum Asset Management have launched ESG-focused funds. In 2019, the first open-ended ESG fund was launched by Quantum. Apart from this, the net-zero commitment and renewable energy targets of the Indian government by 2070 for ESG companies create a favorable environment to thrive. 

Final Thoughts

Lastly, ESG funds for NRIs have emerged as an attractive investment avenue, providing a balance of sustainable impact and financial returns. With continuous outperformance over traditional mutual funds and good downside protection, these investments are both forward-looking and resilient. 

Further, if you are facing issues in investing in India, connect with Savetaxs. We have a team of financial experts who assist you in resolving your queries and choosing the right investment option based on your financial goals, risk profile, and investment horizon as per your financial goals, risk horizon, and preferences.