ESG Funds – Meaning, How It Works and Types

As sustainability becomes central to global investing, ESG mutual funds are gaining traction in India, offering a framework that evaluates companies beyond financials. This guide breaks down how ESG funds work, what they invest in, and what investors should know before considering them.

Top ESG Mutual Funds

Here is a list of the top ESG mutual funds based on AUM:

Disclaimer: Please note that the above list of ESG Mutual funds is for educational purposes only, and is not recommendatory. Please do your own research or consult your financial advisor before investing. The data is derived from Tickertape Mutual Fund Screener and is subject to real-time updates.

Note: The data on the list of ESG mutual funds is from 24th February 2026. This data is derived from the Tickertape Mutual Funds Screener.

• Plan: Growth
• Category: Equity – Thematic Fund
• AUM: Sorted from highest to lowest

Pro Tip: You can use Tickertape’s Mutual Fund Screener to research and evaluate funds with over 50+ pre-loaded filters and parameters.

What Are ESG Mutual Funds?

ESG mutual funds invest in companies based on financial performance and non-financial factors such as environmental impact, social practices, and governance standards. The ESG meaning refers to Environmental, Social, and Governance criteria used to assess corporate responsibility and risk management. Fund managers evaluate climate risk, labour policies, board structure, and ethical conduct alongside earnings and profitability. In India, SEBI introduced a formal ESG framework in 2023. SEBI requires funds marketed as ESG to invest at least 65% of their assets in companies that meet ESG-related criteria.

Overview of Top ESG Mutual Funds

SBI ESG Exclusionary Strategy Fund

SBI ESG Exclusionary Strategy Fund follows an exclusionary strategy. The fund screens out companies involved in activities such as tobacco, weapons, and gambling. It invests in equity and equity related instruments of companies that meet its defined ESG criteria under this framework.

ICICI Pru ESG Exclusionary Strategy Fund

ICICI Prudential ESG Exclusionary Strategy Fund excludes companies that fail to meet predefined environmental, social, and governance standards. The fund focuses on equity investments in businesses that follow responsible practices across ESG parameters. It avoids sectors that do not align with its exclusionary criteria.

Axis ESG Integration Strategy Fund

Axis ESG Integration Strategy Fund combines environmental, social, and governance factors with traditional financial analysis while selecting companies. The fund does not exclude entire sectors. Instead, it evaluates each company’s ESG performance as part of its overall assessment across equity and equity related instruments.

Kotak ESG Exclusionary Strategy Fund

Kotak ESG Exclusionary Strategy Fund builds its equity portfolio by excluding companies engaged in businesses that conflict with its defined ESG standards. The fund applies a structured screening process to select companies that align with responsible environmental, social, and governance practices.

Aditya Birla SL ESG Integration Strategy Fund

Aditya Birla Sun Life ESG Integration Strategy Fund integrates ESG analysis into its core investment process. The fund evaluates companies based on environmental responsibility, social conduct, and governance quality. It does not rely only on exclusions and instead includes ESG scoring as a key factor in portfolio construction.

Invesco India ESG Integration Strategy Fund

Invesco India ESG Integration Strategy Fund reviews companies based on financial fundamentals and ESG performance. The fund integrates ESG factors into its investment process to build an equity portfolio of companies that show sound governance, environmental awareness, and responsible social conduct.

Quant ESG Integration Strategy Fund

Quant ESG Integration Strategy Fund uses the fund house’s quantitative framework along with ESG integration to construct its equity portfolio. The fund includes environmental, social, and governance metrics in its analytical model. This approach supports its data driven investment philosophy.

Quantum ESG Best In Class Strategy Fund

Quantum ESG Best In Class Strategy Fund selects companies that rank among the top ESG performers within their sectors. The fund does not exclude entire industries. Instead, it invests in companies that demonstrate stronger responsible business practices compared to sector peers.

WOC ESG Best-In-Class Strategy Fund

WOC ESG Best In Class Strategy Fund follows a best in class approach. The fund identifies companies within each sector that show stronger ESG performance relative to peers. It constructs its equity portfolio by prioritising sector leaders on environmental, social, and governance metrics rather than applying broad sector exclusions.

How to Invest in ESG Mutual Funds?

You can easily start to invest in ESG funds by following these steps:

• To invest in the best ESG mutual funds, you can visit a mutual fund investment platform such as smallcase.
• The next step is to research and identify the ESG mutual funds that match your financial goals. Tools like the Tickertape Mutual Fund Screener can help you filter and compare funds based on parameters such as returns, expense ratio, and fund size.
• Once you shortlist the funds, visit smallcase, log in, and search for the fund by name. You can then choose the investment mode, either a one-time lump sum or an ESG mutual fund SIP, and complete the process.

Taxation on ESG Funds (2026 Rules)

The taxation of ESG mutual funds follows the same structure as conventional mutual funds. The applicable tax treatment is determined by the fund’s underlying asset composition, specifically whether its equity exposure is 65% or more, and the investor’s holding period. ESG-specific labelling does not create any separate tax category. The table below summarises applicable tax rules per Finance Act provisions effective in the 2025-26 assessment year:

Note: Each SIP instalment into an ESG fund is treated as a separate investment for capital gains purposes, with its own holding period from the purchase date. FIFO (First In, First Out) applies to redemption.

How Does ESG Investing Work?

• ESG Data Collection: Fund managers source ESG scores and sustainability data from specialised rating agencies such as MSCI ESG Ratings, Sustainalytics, and S&P Global ESG Ratings, as well as domestic providers such as Care Analytics. These agencies assess thousands of data points from company disclosures, regulatory filings, satellite data, and third-party audits.
• Screening and Universe Construction: The investable universe is filtered using one or more approaches: negative screening (excluding tobacco, fossil fuels, weapons), positive screening (actively selecting above-average ESG performers), and best-in-class selection (choosing top ESG performers within each industry, even in high-emission sectors).
• Integration with Financial Analysis: Fund managers overlay ESG scores onto traditional financial metrics, valuations, earnings quality, and balance sheet strength, to arrive at a holistic view of risk-adjusted return potential.
• Portfolio Construction and Weighting: Once the screened universe is established, portfolio weights are assigned based on ESG scores, financial quality, and benchmark alignment.
• Ongoing Monitoring and Re-scoring: Companies are re-evaluated periodically as new disclosures, controversies, or governance changes emerge. A company involved in a major environmental violation or governance scandal may be removed from the portfolio between regular rebalancing cycles.

Types of ESG Funds

• ESG Equity Funds: Invest predominantly in listed equities that meet the fund’s ESG criteria. These are the most common ESG fund types in India, further classified by market cap, large-cap ESG, multi-cap ESG, or thematic ESG funds focused on areas like clean energy or sustainable consumption.
• ESG Debt/Fixed Income Funds: Invest in bonds and other fixed-income instruments issued by ESG-compliant companies, or in green bonds whose proceeds are earmarked for environmental or social projects. Green bond issuances in India have grown following SEBI’s green bond disclosure framework.
• ESG Hybrid Funds: Combine ESG-screened equity and debt instruments in a single fund. These follow a balanced or conservative allocation approach while maintaining ESG criteria across both asset classes.
• ESG Index Funds / ETFs: Passively track ESG-specific indices such as the Nifty 100 ESG TRI or the S&P BSE 100 ESG TRI. These carry lower expense ratios than actively managed ESG funds and offer transparent, rules-based ESG exposure.
• ESG Thematic Funds: Focus on specific ESG sub-themes such as clean energy, water management, sustainable agriculture, or social impact. These carry a higher risk of concentration but offer targeted exposure to structural global trends, such as the energy transition.
• ESG Fund of Funds (FoF): Invest in units of other ESG-focused mutual funds, including international ESG funds. These provide geographic diversification but are taxed as non-equity funds regardless of the underlying equity exposure.

How Are ESG Scores Calculated?

ESG scores are composite numerical ratings assigned by ESG research providers to companies, reflecting their relative performance across environmental, social, and governance dimensions. The exact methodology varies by provider, but follows a weighted multi-pillar structure. Each pillar, E, S, and G, is broken down into key performance indicators (KPIs) relevant to the company’s industry.

A simplified representation of how an ESG score is calculated:

ESG Score = (E Score x E Weight) + (S Score x S Weight) + (G Score x G Weight)

How and Where Do ESG Funds Invest?

• Large-Cap Financials with Strong Governance: Private-sector banks and insurance companies with high board independence, clean audit records, and low related-party transaction exposure consistently score well on the governance pillar and make up a significant part of most Indian ESG equity portfolios.
• Information Technology and Technology Services: India’s IT sector, with relatively low carbon intensity, high employee welfare spending, and well-governed corporate structures, tends to score favourably across all three ESG pillars and is frequently overweighted in ESG portfolios.
• Renewable Energy and Clean Infrastructure: Power generation companies focused on solar, wind, and hydro energy score highly on the environmental pillar. Green bond guidelines also enable bond-based ESG fund exposure to this segment through infrastructure bonds and green debentures.
• Consumer Staples with Responsible Supply Chains: FMCG companies that disclose supply chain labour practices, sustainable packaging initiatives, and water stewardship programmes tend to score well on the social and environmental pillars.
• Exclusion of High-ESG-Risk Sectors: Most Indian ESG funds structurally exclude or heavily underweight sectors such as thermal coal mining, tobacco manufacturing, conventional oil and gas, and companies with significant pending environmental litigation or poor labour safety records.
• Green Bonds and Sustainability-Linked Bonds (SLBs): ESG debt and hybrid funds may invest in green bonds and SLBs, where the coupon rate is tied to the issuer achieving specific ESG targets. SEBI introduced India’s green bond framework in 2023, enabling regulated issuance of these instruments.

Difference Between ESG Funds and Traditional Funds

ESG funds and traditional mutual funds share the same structural mechanics, both pool investor capital and invest across securities, but differ significantly in how investment decisions are made, what risks they incorporate, and what they choose to exclude. The table below captures the key distinctions:

Benefits of Investing in ESG Funds

• Reduced Exposure to Stranded Asset Risk: Companies heavily dependent on fossil fuels, high-emission manufacturing, or exploitative supply chains face growing regulatory risk as global climate commitments tighten. ESG funds structurally reduce exposure to assets and companies whose core business models may become economically unviable under stricter environmental regulations.
• Governance as a Proxy for Financial Quality: Strong governance, independent boards, transparent disclosures, low promoter pledge, and clean audit history have historically been leading indicators of financial reliability. ESG funds that score governance heavily tend to avoid companies that later face accounting fraud or governance failures.
• Alignment with Global Capital Flows: Global institutional capital, sovereign wealth funds, pension funds, and asset managers in Europe and North America are increasingly mandated to allocate toward ESG-compliant investments. Indian companies with high ESG ratings attract a larger share of foreign institutional investment (FII), which can positively influence market valuations over time.
• Mandatory Transparency and Accountability: SEBI’s 2023 ESG disclosure norms require Indian ESG funds to publish their scoring methodology, engagement reports, and ESG outcome metrics annually.
• Participation in India’s Sustainability Transition: India has committed to achieving net-zero carbon emissions by 2070 and 500 GW of non-fossil fuel energy capacity by 2030. ESG portfolios naturally align with companies participating in this structural multi-decade transition, renewable energy, electric vehicles, green infrastructure, and sustainable materials.

Risks Associated with Investing in ESG Funds

• Concentration Risk from Sector Exclusions: By excluding high-emission sectors, energy, utilities, and materials, ESG funds may become heavily concentrated in financials, technology, and consumer sectors. During periods when excluded sectors outperform (e.g., a commodity supercycle), ESG funds can lag significantly behind broader market indices.
• ESG Rating Downgrade Risk: A company held by an ESG fund can have its ESG rating downgraded due to a new environmental controversy or governance failure. This can trigger forced selling by the fund at potentially unfavourable market prices, disrupting the portfolio.
• Regulatory and Definitional Flux: Global and domestic ESG regulations are still evolving rapidly. A fund’s existing holdings may no longer meet revised ESG standards, requiring a portfolio restructuring. India’s BRSR Core framework continues to expand its disclosure requirements, changing what counts as ESG-compliant year on year.
• Performance Divergence from Benchmarks: ESG funds may underperform traditional benchmarks in years when excluded sectors rally strongly. Investors tracking performance against the Nifty 50 may perceive underperformance without accounting for structural differences in sector composition.
• Data Quality and Disclosure Gaps: ESG scoring depends heavily on the quality and completeness of company disclosures. In India, many companies, especially smaller ones, do not yet provide audited sustainability data. Gaps force rating agencies to make estimates, introducing data error risk into ESG scores.
• Currency and Geopolitical Risk (International ESG FoFs): ESG Fund of Funds investing in international ESG ETFs carry additional currency and geopolitical risks, particularly as global ESG regulations diverge across the US, EU, and Asia. Shifts in US ESG regulation can impact funds with US equity ESG exposure.

Factors to Consider Before Investing in ESG Mutual Funds

• ESG Scores Are Not Standardised: A company can receive a high ESG score from MSCI and a medium score from Sustainalytics for the same period, because agencies weigh different metrics and use different data sources. Two funds, both marketed as ESG, can hold materially different portfolios.
• ESG Does Not Mean Risk-Free: ESG funds are still equity or debt market investments subject to full market risk. An ESG equity fund will decline during a broad market correction regardless of its portfolio’s sustainability credentials.
• Greenwashing Risk: Not all funds marketed with ESG terminology adhere to rigorous standards. Some funds may apply a superficial ESG screen while their core portfolio remains nearly identical to a conventional fund. SEBI’s disclosure norms aim to curb this, but investors should verify the actual ESG tilt before investing.
• Relatively Short Track Record in India: Most dedicated ESG funds in India were launched between 2018 and 2022. There is limited performance data spanning a full market cycle, making long-term return evaluation more difficult compared to categories with 15-20-year histories.
• Higher Expense Ratio than Passive Alternatives: Actively managed ESG funds typically carry higher expense ratios than passive index funds in the same category. Investors should assess whether active ESG management justifies the additional cost relative to a lower-cost ESG index fund or ETF.

Conclusion

ESG mutual funds expand traditional risk assessment by integrating environmental, social, and governance factors into investment decisions. In India, ESG investing is growing amid stronger SEBI regulations and improved BRSR disclosures, which are increasing transparency and data availability. However, the space is still evolving. Standardisation gaps, limited performance history, and greenwashing risks remain. Evaluating ESG funds requires carefully reviewing holdings, methodology, engagement practices, and costs. ESG serves as a risk framework, not a guarantee of ethical alignment or superior returns.

Frequently Asked Questions About ESG Mutual Funds