Sustainable Investing: Field To Foray
Climate technology as an attractive asset class for pure-play venture capital (VC) investors, rather than impact funding or environmental, social and governance (ESG) investment targets, has only recently begun to gain traction. To meet its carbon-emissions targets, India will need funding and investment, much of it upfront. According to the McKinsey report, as much as 3.5-6 per cent of GDP will be required. Under the current Line of Sight scenario, $7.2 trillion in green investments are required in the years leading up to 2050. An additional $4.9 trillion would be required in an accelerated scenario. In comparison, Indian climate tech companies received only $1 billion in venture capital funding between 2016 (when the Paris Agreement was signed) and 2021, according to a report by London & Partners and Dealroom.co. Ad hoc investments by impact funds, global foundations, and generalist VC firms account for the majority of climate tech investments in India.
The growing concern about climate change and its impact on society has spurred a new investment discourse. In the past, firms have done little or nothing to maintain the environment and promote social cohesion and diversity, but with increased demand from regulatory agencies and other public watchers, investors have started incorporating concerns about these issues.
Almost every investor has heard of ESG. It is a powerful rating that all businesses strive for because poor performance can result in the loss of funding and other opportunities. ESG, which stands for environmental, social, and governance, is a framework used to assess how well businesses have performed in terms of enhancing sustainable development.
Commenting on investors’ checklist for investing in climate tech and ESG, Ankit Kedia, Founder and Lead Investor, Capital A, mentioned, "One of the things that we clearly see before investing is whether the founder has adequate experience and what is their vision behind the startup. Those who have spent time in the climate tech sector are usually better positioned to make the right impact. We also look at whether the solution is commercially scalable or not.
He added that this kind of investment is long-term. Therefore, the founders also must be invested accordingly. If they are not, then they have started out without a long-term vision or mission and that can be a challenge.
A sustainable investment is one that addresses current problems or challenges without jeopardising future needs. It all comes down to finding better ways to do business that will benefit corporations and citizens now and in the future.
Investors want to invest in environmentally friendly companies to protect their long-term returns. Simultaneously, the definition of sustainability broadens to include broader economic activities, creating new opportunities for investors to contribute to change. "I believe that waste is the way to wealth in a country of 1.40 billion people with the fastest-growing middle class on the globe. In 2016, we generated an incredible 62 million tonnes of waste, of which 31 million tonnes got dumped at landfill sites. These numbers are even more staggering today. Some innovative entrepreneurs are utilising this waste to create new products and significantly reduce the impact this waste has on our environment and health," Anirudh A Damani, Founder, Artha Group, said.
Apart from sustainable mobility, venture capitalists are increasingly interested in supporting Indian tech startups that are innovating in areas such as climate-smart agriculture and food solutions, clean energy, environmental and natural resource preservation, and waste management.
Policy development is a separate issue from money. The Indian government will need to constantly enhance the frameworks that control green energy, the adoption of electric vehicles,
and new technology. India now lacks sector-specific targets in numerous areas and these will be needed to measure success and design policies that will improve investment and carbon emission reductions.
Kedia, while explaining the right sizing of businesses to satisfy all the stakeholders, stated, "Despite being a high-interest space, climate or green space is slow moving and has some grey areas. Thus, while right sizing of business models is great way to calibrate the entire mentality of both the investors as well as founders, there has to be a meaningful business, which should be investible. However, not many investors understand the space well since it is very vast and there is a need to develop a meaningful investment thesis for investing."
Every action we take, as individuals or as businesses, has an environmental impact. It may not be obvious right now, but the repercussions will be felt in a few years. Famine, heatwaves, and sea-level rise have all been caused by climate change. Although climate deniers like to downplay this event, we cannot dismiss the fact that it exists. Profit must take precedence over social and environmental responsibility in sustainable investment.
