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Climate Finance

Published on: Dec. 18, 2023, 2:40 p.m.
Moving the needle
  • Beyond finance, the key to taking climate innovations to market lies in synergies with two major stakeholders: the government and corporates; Image courtesy: Freepik

By Maya Chandrasekaran and Maanya Rao

The India Climate Finance Report by the Climate Capital Network (CCN) is an annual landscaping of the opportunities and white spaces in Climate Finance in India, specifically focussed on the most critical trends and insights in climate finance in India, gathered through surveys, interviews, and in-depth articles from members of the Climate Capital Network. 

The Climate Capital Network, India’s first network of capital allocators across capital instruments (grant, equity, debt), has been created for capital allocators across the climate ecosystem in India to connect, exchange ideas, discover areas of mandate alignment, share pipeline, and build the continuum of capital. 

The focus of the 2023 report, ‘The Age of Adoption’, is on what it will take to accelerate the adoption of critical climate technologies in India, and the vital role played by climate finance in this process. Released in the last week of November 2023, the report is summarised below, to highlight some of the key insights.

From the age of innovation to the age of adoption 

There are many ways to describe what must happen – mainstreaming, institutionalisation, normalisation of innovation, scaling and, of course, adoption. As we hurtle towards 2030 and experience all varieties of climate impact and volatility, one thing is crystal clear to everyone – we must move from ‘the age of innovation’ to ‘the age of adoption’. While many disparate pieces need to be aligned, climate finance and the capital allocators can play a particularly pivotal role in facilitating this adoption – through the capital deployed, as well as the capital instruments deployed to make this capital accessible, available, and affordable.

 Where and how funding will flow in 2024

The year 2022 was a clear indicator that climate was a rising focal point for investors in India, with one-third of all equity impact deals involved a climate-tech start-up, while one-fifth of the entire impact capital invested was in climate. This year it was found that 47 per cent of investors identify climate as an important and existing part of their funding mandate, as against 33 per cent last year. Climate is presenting front and centre of investor mandates. However, equity capital continues to dominate the climate finance stack at 94 per cent of those surveyed. Debt at 18 per cent and philanthropic investors at 14 per cent remain a comparatively small constituent. The need for more sources of non-dilutive funding is loud and clear. (see chart)

The majority of funders – irrespective of debt, equity, or philanthropy – are concentrated around the Pre-Seed to Series A stage of funding. While there is a gradual move towards bigger check sizes within this early stage, there still is a dearth of funding for Series A/B onwards. In other words, no significant shifts from last year, and still a clear continuum of capital gap.

What gets and doesn’t get funded

Hardware-based, infrastructure and commodities-based innovations are experiencing a jump in investor interest. Similarly, the heavy industry sectors of metal and mining, point-of-source capture, alternate industrial materials, and waste management have seen a significant uptake in investor interest. These are reflective of several market factors – the maturation of domestic manufacturing capabilities, geopolitical instabilities, and a need to be resource self-sufficient, India emerging as the manufacturing base of choice for many countries, a maturing deep-tech ecosystem, and evolving business models that enable organisational scale. At the same time, funders identified a few common areas/sub sectors with increasing investor interest, but an inflection point still has to be reached.

A repeated theme with the underfunded sectors is the fact they are generally IP-led, asset-heavy technologies, and often creating/integrating with core infrastructure. Integral to these businesses are plant and equipment, machinery, hardware, infrastructure and capex. Their growth trajectories, timelines, funding needs, and return profiles are quite distinct from software-led business models, and the opportunity will be unlocked when more funders have the ability to unpack the business models, levers for growth, build new risk-reward frameworks, and align funding.

Capital instruments/innovations needed. Conversations with funders highlighted several interesting and emerging approaches, currently being deployed in other markets or geographies, but all relevant to India.

Public capital

Green debt swaps/debt-for-nature swaps enable developing countries with high levels of debt to reprioritise investments in climate and significantly cut countries’ debt in exchange for commitments towards climate action. 

Match funding facility – as a collaborative public-private funding instrument de-risks investment in nascent technologies; these are not only attractive to start-ups, which gain multiple types of investors but also to funding parties by diversifying the risks. 

Private equity/venture capital

SAFER Notes enable investors to buy equity and startups to have the option to repurchase a part of that equity based on a percentage of future revenues; investors are able to access early-stage companies, get compensated for taking larger risks, participate in the upside while having clear exit opportunities. 

Distressed venture capital acquires a majority stake and takes startups out of the venture lane into a private equity path. While restructuring and cost-cutting remain the focus, they still aim for growth and profitability at a steady scale. 

Private debt capital

Servitisation, which enabled widespread adaptation of solar, is now being adopted across various climate sub-sectors with high set-up costs and performance risks amongst others, including the cooling sector. Royalty-linked financing, employed widely in other industries like music and mining, is becoming a common instrument for the climate sector and can offer significant opportunities to support the longer gestation periods and development cycles of deep tech innovations.

Project-based debt – Pooling and securitisation are well-accepted tools in mainstream finance that can have contextual and positive applications for climate tech.

Philanthropic & catalytic capital: First-of-a-Kind (FoaK) Funding – Philanthropic funding for first-of-a-kind funding innovations and products is untapped at this point but offers tremendous potential. 

 Repayable/recoverable grants: These grants are ideal for climate tech startups with unforeseen expenses or to build up their manufacturing capacity in the early days. The structuring and regulations for this form of financing remain to be developed though.

Milestone-based grants: Offering grant investments in a milestone-based structure can be beneficial to startups as they graduate through various stages of growth. 

Risk backstop: Philanthropic support in the form of a risk backstop can provide a safety net, as startups begin or advance their nascent innovations that typically cannot be supported by other capital providers. 

It is clear that climate innovation will need a variety of ‘different dollars’ to scale and thrive. Several of the solutions described straddle different capital instruments and pools of funding, requiring funders to have a more creative and constructive approach to climate finance. 

The role of blended finance and philanthropy: Some of the more commonly called out use cases of catalytic funding for later-stage innovations are: access to low-rate wholesale financing, with guarantee mechanisms/backing from philanthropy; technical assistance and handholding, supported by philanthropic funding; and high-risk, philanthropic funding to support climate innovations progressing through the TRLs. Blended Finance in particular, has emerged as potentially powerful instrument for climate innovation funding, with two clear use cases emerging.

Commercialisation and technology adoption: Providing different types of capital to narrow the Valley of Death for startups, including hardware risk underwriting, commercialisation and achieving product market fit, providing a risk absorption layer and financing for longer gestation tech development and GTM iterations.

Catalysing impact: Filling the funding gap where the monetary value to impact has yet not been assigned or is currently accounted as cost. An example would be Viability Gap Funding (VGF) for trash collected and provided to industrial plants, or mobilising finance towards smallholder farms in India and other developing regions.

At the same time, some funders recommended important course corrections in how Blended Finance is deployed. There was an expressed need to direct equal amounts of funding to ‘risky and hard technologies’ or ‘innovations not projects’.

There were also some concerns about the likelihood of success of this model, given the fact that funding organisations and capital instruments generally work independently and in silos. There are significant complexities and nuances in aligning multiple instruments (and organisations) in a cohesive manner, but blended finance remains a powerful tool of innovation support.

  • This year it was found that 47 per cent of investors identify climate as an important and existing part of their funding mandate, as against 33 per cent last year

Key levers beyond finance

Beyond finance, the key to taking climate innovations to market lies in synergies with two major stakeholders: the government and corporates. 

Government supports in the form of policy pushes such as mandates and standards, emission reduction targets, subsidies, tax incentives, etc. to incentivise stakeholders like the general public, and corporates to adopt new innovations faster. Beyond policy, government support could include establishing R&D facilities, growing a talent pool and providing access to low-cost capital by mandating banks to issue low-interest loans in the sector.

Corporates can play a multitude of roles in engaging climate innovations, including providing them with paid pilot opportunities, corporate sandboxes for techno-commercial testing, decarbonising their own processes and supply chains through startups, providing strategic corporate capital without additional obligations, and partnering with IP-led solutions to give them distribution heft. If developed thoughtfully, these Industry-Innovation partnerships have tremendous power to move the needle.

In short, there are large gaping holes in the climate capital stack, but also several fit-for-purpose financial innovations possible. Many of these climate finance innovations straddle multiple stakeholders and capital instruments, often combining grant, equity, and debt; ultimately specialised climate finance is what is needed to get climate innovations to the market.

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