ESG‘s Emerging Role in Capital Markets

Global ESG investing has gained strong momentum over the past decade and is now beginning to take root in Indian capital markets, with early inflows into ESG-focused equity funds and growing relevance in bond markets. Globally, ESG AUM has grown significantly faster than overall AUM, with Europe and North America leading and APAC poised for the fastest future growth. This shift is being driven by the push toward net-zero targets, unlocking large investment opportunities in areas like renewable energy, electric vehicles, carbon capture, and sustainable materials. Investors are increasingly adopting structured ESG strategies such as screening, integration, stewardship, and impact investing, supported by rising stakeholder pressure and global frameworks like PRI. Notably, ESG-focused companies have outperformed peers, benefiting from lower fundraising costs and higher margins, reinforcing ESG as both a financial and strategic imperative.

While ESG adoption has accelerated globally, China has lagged behind due to weaker ESG scores, limited reporting coverage across key sectors (consumer, industrials, and tech), and low integration of ESG factors in investment analysis beyond basic risk management. Structural issues such as inadequate disclosures, labour concerns, and broader socio-economic factors have further weighed on its ESG performance. This creates a meaningful opportunity for India, which ranks relatively higher on ESG metrics, to attract incremental global capital, especially as investors and companies look to diversify away from China. The shift is likely to drive ESG-focused flows into India and other emerging Asian markets, reinforcing a broader “China+1” investment strategy.

ESG-linked investing in India is gaining traction, driven by multiple structural and regulatory triggers. Significant capital requirements for green capex, estimated at USD 8–10 trillion to meet the 2070 net-zero target, along with rising issuance of green bonds, are catalyzing investments. Regulatory initiatives such as SEBI’s BRSR mandates, growing alignment with sustainability development goals (SDGs), and increasing supply chain considerations are further accelerating adoption. Domestic institutional investors are also launching ESG-focused funds, while governance is emerging as a key pillar, with stronger corporate governance linked to better financial performance and lower volatility. Backed by a proactive regulatory environment, ESG is steadily becoming an integral part of investment decision-making in India.

India’s transition to clean energy presents a significant economic opportunity and is expected to drive the reclassification of many companies as ESG assets over time. Key segments such as renewable batteries, green hydrogen, and low-carbon technologies could together create a market of up to USD 80 billion by 2030, with India well positioned as a global leader, supported by policies like 100% FDI in renewable energy and green hydrogen. While ESG adoption has been led by sectors like BFSI, IT, and healthcare, industrials and power companies are increasingly accelerating their transition. Overall, growth in India’s ESG landscape is being driven by areas such as renewable energy, electric vehicles, climate tech, green hydrogen, and core sectors like healthcare and financial services.

ESG is set to become a core decision-making lens in Indian capital markets, with ESG assets projected to account for ~34% of total domestic AUM by 2051. This growth will be driven by a combination of new ESG investments expected to expand rapidly in line with broader APAC trends over the next decade and the reclassification of existing assets as companies increasingly integrate ESG practices into their operations. Sectors such as BFSI and healthcare are expected to play a key role in this transition, supporting the mainstreaming of ESG in India’s investment landscape.