While Covid has disrupted the economy worldwide, fund flows in green businesses have been resilient. As per the latest market report of Climate Bonds Initiative (CBI), the quantum of green, social and sustainability instruments in 2020 has steadily risen to $700 billion, which is almost double the amount issued in 2019.

The Indian climate driven start-up ecosystem too could not have seen a better time for fund-raising. In the past two years, eight clean-tech start-ups (not including electric vehicle start-ups) received funding of at least $1 million. These companies encompassed a range of sectors — such as plastics, tech-enabled recycling, energy efficiency and biofuel, among others.

Among the VC firms that participated in these rounds, four of them — Circulate Capital, Blue Ashwa Capital, ADB Ventures and Amazon Climate Pledge Fund — invested in this space for the first time in India. While the quantum of capital is miniscule when compared to funding received by Indian tech start-ups, it is still a significant jump for a sector that only had a few incubators until recently.

In addition to equity, there are some early pointers to increasing availability of debt capital at the retail/SME level as well. The World Bank in collaboration with SBI has proposed a $648 million financing and technical assistance programme for the SMEs in solar rooftop installation sector and Swiss investment house ResponsAbility Investments recently launched a social bond that is looking to invest in WASH (Water, Sanitation and Hygiene) assets in emerging markets including India.

The funding landscape of climate-driven companies is changing for the better, due to a change in the investment narrative around climate change solutions, a favourable regulatory landscape and availability of scalable climate ventures.

Climate urgency

The business world is under increasing pressure to act on climate change. Early this year, two large oil majors lost their battle against climate change activism. A Dutch court ordered Shell to expedite the reduction in its greenhouse gas emissions to 2030 as against 2050 and ExxonMobil faced protest from climate activist shareholders over its failure to set a strategy for a low-carbon future.

BlackRock, the world’s biggest asset manager and a shareholder in Exxon is reported to have supported the activist shareholders. Closer home, State Bank of India’s decision to invest its green bonds’ proceeds in the Carmichael thermal coal mine in Australia has attracted a lot of flak from its international investors.

Environmental Social Governance (ESG) is increasingly influencing decisions of institutional investors in the face of pressure from regulators and demands from the public. This is resulting in higher flow of capital towards green assets in general, which is also translating into investments in Indian green companies as follows:

Large international conglomerates in sectors such as FMCG (which uses plastic packaging) and fossil fuels, are setting aside capital for investing in start-ups either directly or through VCs. For example, Nestle runs a number of sustainability related programmes including Creating Shared Value (CSV) challenge, and an accelerator for sustainable food companies.

Procter & Gamble is one of the limited partners in Circulate Capital, a climate-driven VC fund. Shell Ventures and Shell Foundation are supporting companies in clean transport and sustainable food. Oil majors have set up Oil and Gas Climate Initiative (OGCI) to invest in clean technologies.

In addition , funds from developed countries are also directly flowing to Indian start-ups through financial intermediaries. A case in point is Neev Fund that was able to raise €100 million from European Investment Bank.

While the flow of the capital is expected to continue as more and more developed countries commit to climate goals, strong climate change policy support from the government in key sectors such as power, transport, buildings, industry, agriculture and forest would further accelerate the funding.

Regulatory space is evolving

Regulations to curtail greenhouse gases are having a two-pronged impact on green businesses: first by directly creating new markets for green products and services, and second by incentivising users of traditional/mainstream products to opt for green products.

For example, Extended Producer Responsibility (EPR) guidelines are forcing bulk waste generators such as FMCG companies to report and collect plastics, thus leading to growth in plastic recyclers such as Srichakra Polyplast, Ricron Panels, both of which have been able to raise VC funds. Regulations and incentives around responsible disposal of waste under Swachh Bharat, especially in the southern States such as Kerala and Karnataka, have helped in scaling up of companies such as Saahas Waste and Green Worms.

Similarly, regulation around usage of biomass by thermal power plants has created demand for biomass aggregators such as Punjab Renewable Energy Systems Pvt. Ltd (PRESPL), which has been able to attract funds from a variety of investors including Shell Ventures and Neev Fund. National Biofuel Policy that requires mandatory blending of biofuels with diesel allows bio-refiners such as Greenjoules to scale up their operations.

Another set of nascent regulations are around the disclosures regarding ESG compliance, covering aspects such as resource usage (energy and water), waste management practices and bio-diversity. SEBI recently revised its Business Responsibility and Sustainability Reporting (BRSR) framework, requiring the top thousand listed entities by market capitalisation to provide environment-related disclosures. These can boost demand for a set of green companies that provide energy and water efficiency solutions.

Climate driven solutions in demand

Rising prices of fossil fuel and regulatory incentives have already created a level-playing field for the solar industry, where India now has several success stories such as Renew Power, Greenko that have scaled up and raised billions of dollars from the green bond market.

High fuel costs have also improved the attractiveness of biomass-driven solutions, which compete with furnace oil for industrial heating applications. A similar story is playing out in the electric vehicle market in some segments such as e-rickshaw and e-scooters, where fuel cost savings are driving the sales of such products. Improving demand is attracting capital and helping such companies in expanding their reach.

Demand for sustainable products that are used by industries has been increasing from large corporate customers who have made commitments to reduce their carbon footprints. These companies are increasingly demanding their vendors to provide resource-efficient solutions thus driving the demand for green office spaces, energy efficient fans and other cooling solutions.

Clearly, the funding ecosystem for green start-ups has started growing manifold. Hopefully, the current crop of companies that have received investments can scale up and provide meaningful exits to their investors, and catalyse the investments even further.

Bharti is Founder of FineTrain, and Sandeep is India Project Manager at Climate Bonds Initiative

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