ESG principles—Environmental, Social, and Governance—are a framework for assessing the sustainability and ethical impact of business practices. Sustainable finance refers to the integration of ESG factors into financial decision-making to promote long-term growth while addressing environmental and societal challenges. In the BFSI sector (Banking, Financial Services, and Insurance), ESG is pivotal globally and in India as it drives responsible lending, investment, and risk management. It fosters resilience to climate risks, enhances regulatory compliance, and aligns with stakeholder expectations, enabling financial institutions to build trust, attract green investments, and contribute to a more sustainable economy. ESG impact on banking and insurance India’s ESG investing landscape has seen remarkable growth, with increasing investor interest in funds aligned with sustainability and favourable regulatory support driving the trend. Key sectors such as renewable energy, green infrastructure, and clean technology lead the charge, attracting significant investments and delivering competitive fund performance. In the banking sector, ESG integration has spurred the adoption of green banking practices, including paperless processes and green bonds, while banks actively finance renewable energy projects and sustainable infrastructure. Prominent Indian banks are setting examples through impactful ESG initiatives, showcasing their commitment to responsible growth. Similarly, the insurance industry leverages ESG principles by incorporating climate risk modelling into underwriting processes and introducing green insurance products that address environmental challenges. Reinsurance strategies are also evolving, emphasizing resilience against long-term climate risks and aligning with global sustainability goals to mitigate future uncertainties. Together, these efforts highlight the growing influence of ESG across India’s financial ecosystem India's ESG Investment Landscape

Amid global challenges such as climate change, inflation, COVID-19 recovery measures, trade conflicts, and supply chain disruptions, India has demonstrated significant economic resilience. Between 2012 and 2020, India launched six ESG funds, and as of the latest data, the country now hosts 11 sustainable investment funds. These include eight actively managed funds, one passive fund (ETF/ Funds of funds), and two global feeder funds. Actively managed funds account for 96% of the total Assets Under Management (AUM) in this space, with the top five funds representing 93% of the assets. Notably, the largest fund alone contributes to 56% of the total AUM.

AUM of ESG Funds in India

Recent guidelines from the Securities and Exchange Board of India (SEBI) allow ESG funds to be established based on six strategies:

• Exclusion

• Inclusion

• Best in Class & Positive Screening

• Impact Investing

• Sustainable Objectives

• Transition-Related Investments

  Asset management companies are required to allocate at least 80% of the AUM in equity or equity-related instruments within these categories. Moreover, ESG schemes must invest a minimum of 65% of their AUM in companies that follow comprehensive Business Responsibility and Sustainability Reporting (BRSR) and provide assurance on BRSR Core disclosures. Mutual funds must ensure these schemes differ in strategy and asset allocation.
  The total AUM of ESG funds, which was US$ 331.4 million (Rs. 2,747.36 crore) as of January 31, 2020, has seen significant growth over the past four years, reaching US$ 1,176.6 million (Rs. 9,753 crore) by March 3, 2024. The SBI Magnum Equity ESG Fund leads this growth with US$ 660.2 million (Rs. 5,472 crore) in AUM As the demand for ESG-compliant Indian companies grows, stock exchanges have introduced dedicated indices to track this trend, including the S&P BSE 100 ESG Index, Nifty 100 ESG Index, Nifty 100 Enhanced ESG Index, and Nifty 100 ESG Sector Leaders Index

  Opportunities

  India’s BFSI sector stands at the forefront of ESG-driven opportunities, with vast untapped potential in green financing, particularly in supporting clean tech startups, renewable energy projects, and sustainable infrastructure. The sector has the chance to pioneer innovative ESG-aligned financial products, such as green bonds, sustainability-linked loans, and climate-resilient insurance solutions, catering to the growing demand for responsible investing. Collaborative efforts between banks, fintechs, and regulatory bodies can further accelerate the adoption of ESG principles, fostering innovation and ensuring regulatory alignment. Such partnerships can also drive financial inclusion by integrating ESG into microfinance and rural lending. By embracing these opportunities, the BFSI sector can play a transformative role in advancing India’s sustainability agenda and establishing its leadership in global sustainable finance Challenges
  
  Despite the growing emphasis on ESG adoption, several challenges remain. Data collection and ESG reporting continue to pose difficulties, with many organizations struggling to gather reliable and consistent data across different sectors. The absence of standardized ESG metrics further complicates the comparison of companies’ sustainability efforts. Additionally, balancing profitability with sustainability goals in BFSI operations remains a delicate task, as financial institutions must navigate the pressures of short-term financial performance while committing to long-term sustainable practices. These challenges highlight the need for better frameworks, clearer guidelines, and more robust data infrastructure. Future trends
  
  The future of ESG and sustainable finance is marked by the rapid rise of sustainable and impact investing, driven by growing investor awareness and the need for responsible capital allocation. Transparent ESG disclosures are becoming increasingly critical, with stakeholders demanding greater accountability and measurable outcomes. Advances in AI and technology are transforming ESG analysis, enabling more accurate risk assessments, real-time monitoring, and data-driven decision-making. These trends are reshaping the financial landscape, fostering innovation, and ensuring that sustainability remains a central pillar of investment strategies globally