Capital: The missing piece of climate action in India

India’s vibrant innovation and venture capital ecosystem holds strong potential in solving some of these complex climate-related challenges in the areas of energy, water and air pollution, transportation, agriculture and waste management Illustration: Sameer Pawar

India, being the third-largest emitter of greenhouse gases in the world, remains acutely vulnerable to climate change owing to a large base of low-income population coupled with few social safety nets. Thanks to a slew of ambitious climate action commitments made by the Government of India over the last decade (including the National Action Plan for Climate Change and the Paris Agreement), the country has now made some progress in the utility-scale renewable energy sector. However, the size and scale of the climate crisis facing India today necessitate a variety of rapid, affordable and innovative approaches to drive sustained decarbonisation of the economy at various levels—from food production to consumption, manufacturing, retail, transportation etc.

India’s vibrant innovation and venture capital ecosystem holds strong potential in solving some of these complex climate-related challenges in the areas of energy, water and air pollution, transportation, agriculture and waste management. Impact Investors Council’s analysis indicates that, over the past decade, about 600 impact-driven, for-profit early-stage enterprises have positively impacted over 500 million directly.

Tech innovations for climate solutions

A recent study by Impact Investors Council (IIC), Climate Collective and Arete Advisors, ‘Early-stage Climate-tech Startups in India: An Investment Landscape Report 2021’, highlights the growing momentum of startups in India building innovative and affordable low-carbon technologies to either reduce carbon footprint or help people adapt and build resilience to climate change, also referred to as climate tech startups. According to the report, 120 such startups have attracted $1.8 billion in 284 equity transactions in the period 2016-2021 in India. Since the sector is still in a nascent stage, more than half of the deals are in the ticket size of less than $1 billion.

Sustainable Mobility and Energy sectors dominate investment landscape

Among sub-sectors, sustainable mobility, constituting electric vehicles and clean logistics, continue to be ahead on the maturity curve with the maximum investment activity ($1.1 billion in 124 deals) since 2016. With $354 million in 60 deals, the energy sector (clean energy generation, access, storage and optimisation products), which has traditionally been the mainstay of climate financing in India, is second in line. Both sectors enjoy a reasonable market understanding with a relatively favourable regulatory environment. However, the bulk of innovations are germinating in newer sectors such as climate-smart agriculture, waste management and circular economy, and environment and natural resources, and are gradually coming to the fore in the venture ecosystem. Deep-tech innovations in segments such as clean energy generation (green hydrogen), alternative proteins, energy storage, EV manufacturing, carbon capture etc. are fast ramping up.

Mainstreaming climate tech investing in the overall impact investing and venture capital space requires concerted support from multiple stakeholders.

Still a long road to mainstream and scale

Despite being a critical sector, climate tech startups constitute only 9 percent of the total investment deals among all impact-oriented sectors in India. Moreover, they struggle to raise capital—movement from seed stage to Series A is as low as 17 percent in India (compared to 29 percent internationally over a three-year horizon).

While funding remains the most pervasive challenge, there are several other roadblocks that prevent climate tech startups from scaling. These include

(a) lack of a strong climate narrative and the corresponding willingness to pay the green premium associated with climate tech products and services;
(b) patchy regulations and policy incentives;
(c) limited market access;
(d) inadequate roadmaps for success; and
(e) lack of tactical support.

The need to support climate tech innovations is more urgent now

Mainstreaming climate tech investing in the overall impact investing and venture capital space requires concerted support from multiple stakeholders.

Climate tech as a sector is innately hardware-intensive with deep-science innovations cutting across multiple sectors. Climate tech innovations, therefore, have longer gestation cycles for product development and take more time than products in other industries to reach the market.

These startups need risk-tolerant, patient capital in the form of grants, blended finance and longer fund tenors to match longer product timelines, especially in the early stages. Capital providers such as foundations, family offices, Corporate Social Responsibility and government-backed funds can play an active role in facilitating flexible pools of capital through innovative financing structures (instead of a “one-size-fits-all approach”).

Given the nascent and multi-disciplinary nature of the sector in India at present, the government particularly can play a larger role in catalysing the ecosystem and providing the right jumpstart to diverse climate-tech innovations.
◆ Startups working on science and technology innovations, specifically novel materials and new chemistries require customised support for prototyping, testing, technical validation, market linkages and commercialisation. Setting up dedicated Centers of Excellence (anchored at universities etc.) can help build the right technical capacity aligned to specific sector requirements while strengthening the pipeline of climate tech innovators.
◆ The government can enable the demand for climate tech products and services by acting as the first buyer or through policy actions that subsidise green premium or provide directed fiscal incentives to the climate tech startups.
◆ Finally, the government can help accelerate the early-stage momentum by creating suitable financing structures such as a climate tech fund of funds with technical assistance facilities. Such structures can provide focussed support to climate tech startups to meet the funding requirements across different stages of the startup lifecycle.