ESG Funds for NRIs: How to Invest Sustainably in India for Long-Term Returns

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.

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.

The Three Pillars of ESG:

• 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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Why ESG Funds Make Sense for NRI Investors

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

• Value alignment: Ensure your investments reflect your values—climate action, social justice, or corporate ethics.
• Competitive returns: ESG-compliant companies often deliver strong financial results.
• Risk management: Firms with solid ESG frameworks face fewer legal and regulatory issues.
• Portfolio diversification: ESG funds bring exposure to newer sectors and different performance cycles.
• Future-focused strategy: Companies with ESG readiness may be better positioned as global standards tighten.

What to Consider Before Investing in ESG Funds

Before you add ESG funds to your portfolio, consider:

• Investment horizon: ESG funds are best for long-term investors (5–7 years or more).
• Fund methodology: Understand the screening process—exclusion-based or best-in-class.
• Expense ratios: ESG funds may cost more due to research. Compare wisely.
• Performance history: Evaluate performance across various market cycles.
• Taxation: Learn about tax liability in India and your country of residence.

How NRIs Can Start Investing in ESG Funds

To invest in ESG funds in India as an NRI, follow these steps:

1. Open an NRE or NRO Account: Required for investments since foreign currency isn’t accepted by Indian mutual funds.
2. Complete KYC: Submit self-attested copies of your passport, PAN card, address proof, photos, and recent bank statements.
3. In-Person Verification (IPV): Can be completed via video call. Managed by KYC agencies, AMCs, or distributors.
4. Choose an Investment Channel:
   • Directly through AMC websites
   • NRI-focused apps and platforms
   • By appointing a Power of Attorney in India

Note: NRIs from the USA and Canada may face FATCA-related restrictions. Ensure your KYC status is ‘Registered’ or ‘Validated’ to continue investing post-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 well-governed companies, which helps during market volatility. In 2020, 65% of ESG funds outperformed traditional funds.

2. Strong and Sustainable Long-Term Returns

Studies show 59% of ESG funds outperformed traditional funds over 10 years. Efficient operations and strong governance lead to better returns.

3. Deeper Risk Screening Beyond Financials

ESG metrics account for labor practices, environmental compliance, and legal risks, offering broader risk insight.

4. Alignment With Global Regulatory Shifts

As global ESG standards tighten, early adoption protects NRI investments from regulatory shocks.

5. Exposure to High-Growth Sustainable Sectors

ESG funds target growth industries such as:

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

Types of ESG Investment Options Available for NRIs

ESG Mutual Funds

Professionally managed portfolios that focus on ESG-compliant companies. Benefits include expert management, diversification, and regular rebalancing.

ESG Exchange-Traded Funds (ETFs)

For those who prefer flexibility, ESG ETFs trade like stocks and offer:

• Lower fees
• Daily liquidity
• Transparent holdings
• Tax efficiency

Tax Implications for NRI ESG Investors

1. Tax Treatments in India

• Equity-oriented ESG Funds:
  • STCG (<12 months): 15%
  • LTCG (>12 months): 12.5% after ₹1.25 lakh exemption
• Debt-oriented ESG Funds:
  • Taxed as per your income tax slab

2. International Tax Considerations

Tax obligations exist in your country of residence. For example, U.S.-based NRIs may need to declare unrealized gains. Consult a cross-border tax advisor.

3. DTAA Benefits

To avoid double taxation, submit:

• Valid Tax Residency Certificate (TRC)
• Form 10F
• DTAA declaration

4. UAE NRI Advantage

Under the India-UAE DTAA:

• Capital gains are tax-free in India
• Must be a UAE tax resident and spend <182 days in India per financial year

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ESG Fund Performance and Risk Considerations

1. Long-Term Performance

Between Dec 2018 and June 2024, a $100 ESG investment grew to $135. ESG companies focus on sustainability and responsible governance.

2. Stronger Risk Management

Sustainable equity funds saw lower drawdowns (-9.9%) than traditional equity (-10.6%). Advantages include:

• Operational efficiency
• Better capital access
• Regulatory preparedness

ESG funds offer NRIs a powerful blend of financial return and ethical investing. With growing global assets projected to reach USD 40 trillion by 2030, ESG investments provide resilience, long-term growth, and global alignment. Setting up an NRE/NRO account and completing the KYC process are small steps compared to the long-term benefits—especially with tax clarity and DTAA advantages.

Frequently Asked Questions: ESG Funds for NRIs

Q1. What are ESG funds and how do they differ from traditional investments?
ESG funds prioritize environmental, social, and governance factors alongside financial metrics. They assess companies on sustainability practices beyond standard financials.

Q2. How can NRIs start investing in ESG funds in India?
Open an NRE/NRO bank account, complete KYC with the required documents, and invest via AMC portals, apps, or PoA authorization.

Q3. What are the potential benefits of investing in ESG funds for NRIs?
Benefits include portfolio diversification, long-term returns, lower regulatory risk, and alignment with global sustainability goals.