ESG Mutual Funds: A Guide to Ethical Investing in 2025

ESG (Environmental, Social and Governance) funds are mutual funds that invest money in companies that meet sustainability standards and thus support sustainable, long-term growth. They are focused on particular industries or themes in line with progressive values, e.g. clean energy, healthcare, innovation or sustainable technology. 

ESG funds are usually invested in organisations that are committed to environmental conservation, social practice, and governance framework transparency. The meaning of ESG funds is they aim to produce normal financial returns, but also normal positive impact. To this, investors can easily make their portfolios consistent with the sustainable development goals without jeopardising the growth rates. Here is more information on ESG. 

Table of Content

• What is ESG?
• Different Types of ESG Mutual Funds
• Advantages of Investing in ESG Mutual Funds
• Investment Approach and Key Focus Areas
• Is it Worth Investing in an ESG Fund?

What is ESG?

ESG investing is quite identical to sustainable investing wherein you are investing in organisations that have a holistic as well as sustainable approach to business. Let’s understand what does ESG stand for

Environmental (E): As the name suggests these factors affect the environment and also consider the company’s carbon emission policies a good waste management system and a high degree of energy and water management. This means a lot of emphasis on a greener environment.

Social (S): This factor is about the company’s employees’ well-being and society. An S-compliant company will also take concerns like employee welfare, gender equality and pay parity and will also make regular contributions towards other relevant social causes.

Governance (G): This factor has corporate governance as its core because it focuses on regulatory compliance, grievance redressals, effective whistleblower policies, ethical conduct, and strong internal controls against wrongdoings.

The returns you get are from the different companies that the mutual fund has invested in. Before the ESG cause became popular, the evaluations were based on financial metrics only, but a company’s sustainability practices can also impact its performance and therefore cannot be ignored. For instance, a company that is accused of fraud will likely see its share price decline. This could have been prevented with better corporate governance. Hence, ESG-compliant companies deliver performances, but not at the expense of environmental, social, or governance risks. 

Different Types of ESG Mutual Funds

ESG mutual funds offer diverse approaches to align investments with ethical priorities. Below listed are the key categories of ESG funds: 

Exclusionary Funds:These portfolios systematically omit industries or products deemed harmful, such as fossil fuels, firearms, or tobacco.

Best-in-Class Funds: By selecting companies with the strongest ESG performance relative to sector peers, these funds prioritise leaders in ethical practices across industries.

Thematic Funds: Focused on targeted sustainability initiatives, they channel capital into areas like renewable energy infrastructure, equitable workplace policies, or resource conservation technologies.

Impact Funds: Designed to generate tangible societal benefits alongside financial returns, these invest in enterprises driving measurable progress in areas like affordable housing, education access, or climate resilience.

Remember, each strategy enables investors to tailor their portfolios to both ethical convictions and financial objectives.

Advantages of Investing in ESG Mutual Funds

There are several benefits of investing in ESG mutual funds to the inventors. Listed below are some of them:

Driving Positive Change: ESG funds support businesses that align with environmental, social, and governance (ESG) standards, leading to sustainable and ethical growth in the economy

Enhanced Portfolio Diversification: ESG-based companies are picked to mitigate traditional investment risks and form a well-balanced portfolio through such funds.

Potential for Long-Term Growth: Many ESG-focused companies have strong growth potential and often perform well. Research indicates that companies with good ESG investing practices meaning they have long-term financial performance, which is good for the bottom line.

Investment Approach and Key Focus Areas

By now you may be familiar with ESG and the importance of ESG principles. But how does this work? How do these principles affect ESG Mutual Funds in India? Let’s explore how these funds incorporate the ESG theme into their investment strategies.

ESG Mutual Funds are categorised as thematic funds, which direct your investments towards companies that have strong environmental, social and governance (ESG) standards. These funds focus on companies that support sustainable growth with ESG principles. The selected companies have strong business resilience and meet sustainability criteria to offer long-term wealth creation potential for investors. Based on the strategy of the fund, investments can be all across the market capitalization and, in some cases, extend to global stocks that meet ESG standards.

Is it Worth Investing in an ESG Fund?

This is a question many investors ask. ESG investing is different from traditional investment themes in that it is forward-looking, and if businesses are to focus on sustainability, it is a strategy for long-term growth. Further, companies with high EESG ratings have a lower cost of capital over four years than companies with low ratings. This has financial benefits that can result in higher profitability and possibly higher returns for investors over the long term.