ESG mutual funds in India: the rules and the label test

An ESG mutual fund promises to pick stocks using environmental, social and governance criteria. For an investor, the key question is simple: does the fund actually do something different from a normal fund, and does it do what its name says?

SEBI tightened the rules in July 2023. Before that, each fund house could run only one ESG scheme, inside the thematic category, and the label meant different things at different funds. The new rules require each ESG scheme to follow one of six named strategies, to put most of its money in companies with assured ESG data, and to report on its votes and engagement.

The rules make the label more meaningful, but they do not make every ESG fund strong. Investors still need to look at the portfolio.

SEBI's rules (circular of 20 July 2023)

Strategies. Each ESG scheme must follow one of six strategies, and the strategy must appear in the scheme's name:

1. Exclusion
2. Integration
3. Best-in-class and positive screening
4. Impact investing
5. Sustainable objectives
6. Transition or transition-related investments

A fund house may now launch several ESG schemes, one for each distinct strategy.

Portfolio rules

• At least 80% of assets must be in equity and equity-related instruments that follow the stated strategy. The rest must not contradict it.
• The scheme may invest only in companies that publish BRSR disclosures.
• At least 65% of assets must be in companies that publish a full BRSR and have assurance on their BRSR Core.
• Schemes that did not meet these tests on 1 October 2024 had until 30 September 2025 to comply, and could not make fresh investments in companies without BRSR Core assurance in the meantime.

Disclosure and governance

• Monthly portfolio statements must show the BRSR-based ESG scores of holdings, from SEBI-registered ESG rating providers.
• The fund house must vote on resolutions of investee companies, disclose its voting rationale, and say when it voted for or against a resolution for ESG reasons.
• An independent assurance each year must confirm that the portfolio follows the strategy.
• The fund manager's yearly commentary must cover engagements, examples of the strategy at work and changes in ESG ratings.
• The fund house's board must certify compliance, based on an internal audit.

Flows into Indian ESG funds

According to Morningstar data analysed by Forbes India:

• ESG fund assets rose from about ₹2,703 crore in 2019 to a peak of about ₹12,369 crore in 2021.
• Six new ESG schemes were launched in 2020, one in 2021 and none in the following two years.
• The category had its largest recorded net outflow in 2022 (about ₹942 crore), and assets were about ₹10,635 crore in mid-2023.
• Reasons included the rally in energy and defence stocks, which ESG funds tend to hold less of, and a narrow investable universe concentrated in large banks, IT and consumer companies.

The biggest scheme in 2023, formerly the SBI Magnum Equity ESG Fund, is now the SBI ESG Exclusionary Strategy Fund. It had assets of about ₹4,984 crore on 16 October 2026 and uses the Nifty100 ESG TRI as its benchmark.

The label test: seven checks

1. Strategy fit. Does the portfolio match the strategy in the name? An exclusion fund should hold none of the excluded sectors.
2. Difference from the benchmark. Compare holdings with the Nifty 100 or Nifty 50. A fund with very high overlap is close to a normal large-cap fund with an ESG label.
3. Sector tilts. Check weights in banks, IT, energy, metals and utilities against the benchmark. They usually explain most of the return gap.
4. ESG data quality. What share of holdings has BRSR Core assurance? Which rating provider is used?
5. Voting record. How often did the fund vote against management, and on what?
6. Engagement evidence. Look for specific cases in the fund manager's commentary, not general statements.
7. Costs. Compare the expense ratio with similar non-ESG funds. A higher fee should buy real research.