ESG & Thematic Investing: How Sustainability & Tech Trends Are Shaping Fund Flows

July 19, 2025

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Financial priorities are changing in the current economic environment. For decades, the spotlight was pretty much focused on financial returns only. Now, a new generation of investors is posing different questions- Where is my money going? What kind of future am I funding?

This change in perspective is propelling one of the most dramatic transformations in contemporary finance, directing billions of dollars into two potent tactics: ESG (Environmental, Social, and Governance) Investing and thematic investing. But what are these terms, and how are they fundamentally changing the direction of investment capital in India and around the world?

Beyond Profits: Understanding ESG Investing

At its simplest, ESG investing is all about aligning your values with your portfolio. It's a system that gauges companies not only based on their balance sheet but also on governance and how they affect the world. It’s about investing in companies that care for the planet, people, and principles. It distils down into three central pillars:

● Environmental (E): This considers how a firm is looking after the earth. Does it have an action plan to decrease its carbon footprint? How does it manage waste and mitigate pollution? Is it investing in renewable energy? A firm that leads in sustainable practices is a top performer on the 'E' side.

● Social (S): This is the pillar that looks at how an organisation conducts itself in terms of treating individuals, such as its workers, customers, and broader society. It questions labour rights, safety, diversity and inclusion, customer data protection, and ethical supply chains.

● Governance (G): This analyses the way a company is governed. It seeks transparency in its accounting, a dominant and independent board of directors, equitable shareholder rights, and a strong anti-corruption policy. Good governance is a direct measure of a well-managed, lower-risk business.

For many years, ESG was regarded as a niche "feel-good" approach. All that has shifted. Investors today realise that well-performing companies with high ESG standards are regularly more robust, better-governed, and better suited to long-term sustainable growth.

The Power of Thematic Investing

While ESG is concerned with how a firm works, Thematic Investing is concerned with what it does. The approach goes beyond the usual sector-based investment (such as banking, IT, or pharma) and instead finds and invests in significant, long-term trends or "big ideas" that will define the future.

Consider the gigantic changes that are sweeping across the world. Thematic investing enables you to invest your money behind these waves of change directly. Some of the major themes of today are:

● Digital Tech & AI: Investing in those at the forefront of artificial intelligence, cloud technology, cybersecurity, and fintech.

● Clean Energy Transition: Investing in businesses within the solar, wind, and electric vehicle (EV) environments.

● Healthcare Innovation: Emphasising innovation in biotechnology, personalised medicine, and telemedicine.

● The Indian Consumer: Leveraging the growth of India's emerging middle class and their changing consumption habits.

Unlike sector-base investing, thematic investing is forward-looking, future-ready, and ideal for investors who want to be part of global disruption. It's about finding tomorrow's growth stories and getting in at the ground floor.

The Sweet Spot: Where Values Meet Vision

The actual magic occurs at the overlap of ESG and thematic investing. These two approaches are not mutually exclusive; in fact, they complement one another well, making a compelling investment thesis.

For Example:

● A thematic fund investing in "Renewable Energy" is, by nature, a good ESG investment since it is specifically targeting the 'Environmental' pillar of ESG.

● A theme such as "Sustainable Agriculture" is an ideal combination of economic trends (helping to feed a burgeoning population) and key ESG principles. This combination of purpose driven growth potential is a magnet for capital.

This intersection is one of the key motivators of current fund flows. A younger generation of millennials and Gen Z investors and institutional investors are looking for portfolios that create wealth but also create a better world. They are putting their capital into businesses and funds that are addressing global problems, ranging from climate change to access to healthcare.

Why It Matters in India

India is uniquely positioned to benefit from this shift. Government initiatives like Digital India, EV incentives, and the PLI scheme for solar and green hydrogen are accelerating ESG-aligned themes.

Indian investors, especially younger ones, are increasingly opting for funds that reflect their values without compromising on returns. Domestic asset management companies are now launching dedicated ESG funds and thematic offerings that target emerging sectors like green energy, tech innovation, and inclusive finance.

Final Thought: Invest with Purpose, Grow with Confidence

For the investor today, the decision is no longer between purpose and profit. ESG and thematic investing prove that it is possible to have both.

By integrating these strategies into your portfolio, you’re not just investing in stocks or sectors, you’re investing in a better, more sustainable future. And by investing in them, you can construct a resilient portfolio that is poised for the world of tomorrow.

Is Thematic Investing Suitable to Your Risk Absorbing Capacity?

Thematic investing can be exciting, offering exposure to emerging trends and fast-evolving sectors. However, it also carries a higher level of risk. One key limitation is its restricted diversification, these funds concentrate on specific themes or sectors, meaning the risks associated with the theme specific sectors are not spread out or neutralized.

This strategy is best suited for investors with a high-risk appetite and a long-term investment horizon. The potential for short-term volatility is significant, and returns can fluctuate based on sector-specific developments.

Before committing to thematic or ESG-aligned funds, it's essential to evaluate your risk profile, investment objective investment objectives, and long-term financial goals. Consider whether such investments align with your personal situation. If you’re uncertain, consulting a financial advisor can help ensure you make informed and suitable investment choices.

Need Help Getting Started?

To learn how to bring ESG principles and themes into your investment plan, get in touch with our professional financial advisor today. Our financial experts can help you build a portfolio that’s value-aligned and future-ready. Reach out today to learn how ESG and thematic investing can work for your goals.

-Suman Dan & Akshit Bajaj

-Dayco India

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ESG & Thematic Investing: How Sustainability & Tech Trends Are Shaping Fund Flows

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