Introduction
India’s aggressive climate goals for 2030 and its Net-Zero aim for 2070 indicate the necessity of rapid decarbonization and low-carbon economic growth. The transition to low-carbon technologies will necessitate the adaptation to the new green economy of both well-established industrial actors and startups looking to carve out a position in various climate tech sectors. The ability of these new industries to draw funding will, however, be crucial to determining how quickly the climate tech ecosystem develops. To satisfy its NDCs by 2030 and reach net-zero emissions by 2070, India will need to spend about US$2.5 trillion and US$10.1 trillion, respectively. While this is happening, India’s currently monitored green finance only accounts for about 25% of the total money needed across all sectors to reach the NDCs.
Evaluating investments in the Climate Tech Venture Ecosystem
There is a thriving climate tech sector in India, where numerous entrepreneurs are attempting to capitalize on the market for eco-friendly goods and services. A number of well-known industrial players have also committed large sums to investments in climate technology.
Indian climate tech entrepreneurs raised $7 billion in 2021 from the private sector and venture capital.[4] Energy management and electric vehicles received the majority of this money, but there are now several sub-sectors that are dominating the early-stage venture arena. These include advancements in low-carbon biotech in agriculture and alternative fuels like green hydrogen and biofuels, as well as in material science, energy efficiency, recycling, carbon management, water technology, and property technology.
2022 saw a 20 percent rise in venture capital financing going to the agritech industry, a 5X increase in capital going to waste management and circularity solutions, and a total investment in climate technology of over $22.5 billion. However, the climate tech startup ecosystem in India is still relatively young when compared to other venture industries.
The demand for investments in climate technology still outpaces the supply of capital, which leads to fewer investment options and greater capital costs. For the purpose of identifying and resolving legal and policy gaps that obstruct the flow of green capital within India, it is becoming more and more crucial to link investors with entrepreneurs and industrial operators. Moreover, India’s domestic financial systems must be reconfigured to promote a sustainable and environment-friendly economy.
The ideas from the Green Investment Dialogue in Mumbai, co-hosted by the Observer Research Foundation, Theia Ventures, and MacArthur Foundation on February 3, 2023 are expanded upon in the sentences that follow. The stimulating conversation between 15 early-stage climate tech startups, 10 investors, and 5 middlemen provided food for thought on the difficulties encountered in the creation of this young ecosystem and suggestions to catalyze the right kind of funding to ventures, while shining a light on underrepresented sub-sectors within climate tech in India.
1. For this emerging ecosystem to develop successfully, cooperation amongst various stakeholders is essential.
The National Hydrogen Mission, PLI schemes for various green technologies, the Battery Swapping Policy, and the overall green growth agenda in the Union Budget of FY23 are just a few examples of the strong regulatory tailwinds currently supporting the growth of key climate sectors. The necessity now is to methodically accelerate on-the-ground innovations in tandem with industry mandates and growing risk appetite among private capital providers.
The last ten years have seen a broad definition of climate technology under the banner of clean energy, with the electric grid, discoms or utilities, panel manufacturers, utility-scale solar farms, financiers, and rooftop installers being some of the important stakeholders. The solar business has undergone numerous revisions as a whole. The high upfront capex costs are now partially offset by operational subsidies, lowering the total cost of ownership related to solar solutions. This has made adoption much quicker overall, but especially in the residential market.
Similar to how huge firms have ventured into greener fuels for power generation, independent power producers have emerged as viable alternatives to the current, coal-fired electrical grid. The creation of the Real-Time Energy Market and the Green Term Ahead Market, as well as other privatization and delicensing initiatives to promote external liquidity into the power sector, have also sparked interest in cleaner, more effective power distribution and last-mile access to clean energy. Finally, solar startups are quickly innovating on technologies like generative artificial intelligence and machine learning for the predictive maintenance of solar panel assets. Both venture capital and private equity funders see growth opportunities in solar energy infrastructure projects.
The aforementioned example shows how one area of climate technology has made significant progress in creating cooperative mechanisms for interdependent alliances and enabling an ecosystem to thrive with fewer silos. However, the trip was exhausting and not without its challenges.
Electric mobility is also going through a similar evolution, where a small number of players are starting to band together to hasten the growth of the subsector at a faster rate than in solar. For instance, the central government has mandated that commercial fleets switch to electric vehicles by 2030, and FAME II regulation and lithium-ion cell subsidies have significantly lowered total cost of ownership compared to conventional ICE (fuel-powered) vehicles. The switch to electric vehicles, particularly for two- and three-wheelers, has opened up significant market prospects for legacy manufacturers as well. Infrastructure providers like Sun Mobility and Tata Power have ambitious plans to build charging stations across the nation.
Finally, companies are developing new technologies and drawing venture capital across the entire EV range, including software analytics, ride-sharing, battery swapping, financing, and battery chemistry. What is left to do is continue to catalyze other climate technology sub-sectors, like recycling and circular economy, energy efficiency and cooling, material science, water technology, and biotechnology, through the same cooperative action between stakeholders like business, startups, academic research facilities, and the government. Many of the aforementioned climate tech sub-sectors are currently developing in a fragmented way, so more coordination is required to democratize startup access to capital, provide industries with visibility to science-led start-ups to which they can offer pilots, and raise awareness to promote technology adoption.
When on-the-ground innovation, academic lab incentives, legislative intervention, and corporate mandates are not yet operating in sync toward a shared goal, silos will eventually form. For example, long-term, broad-vision white papers could aid in this alignment and bridge such gaps.
2. Because of the intimate ties between hardware and climate technologies, deep tech venture funding is necessary.
Startups need active support to bring R&D innovation and hardware lab-scale startups to the market quickly in order to build climate technologies that will fundamentally contribute to decarbonization and replace existing products in the value chain with bio-based or climate-positive products. Even when using a revolutionary technology, a hardware Proof of Concept (PoC) requires a significant amount of resources. To demonstrate that these technologies are mature enough to be used at scale, a startup needs access to large-scale and long-term finance. In order to fund and actively nurture these innovations to a growth scale, access to sizable pools of philanthropy funds or large-ticket government grants is required, as non-deep tech venture capitalists sometimes refrain from underwriting early hardware technology risk.
Additionally, early collaboration between startups and pertinent manufacturing sectors is required in order for the latter stakeholder group to be open to integrating newer, cutting-edge technologies developed in Indian labs rather than foreign technological incursions. While there are many labs excitedly nurturing startups throughout Indian colleges, the quality of these labs varies, making it difficult for businesses to determine which firms would make the ideal technological partners.
In order to facilitate prototyping, government support mechanisms must be streamlined and implemented across university labs. Academics must also be encouraged to turn their research projects into businesses, and startups must avoid failing prematurely at the lab stage.
The field of material science, specifically for batteries, alternative hydrogen fuel cells, urban mining, industrial biotechnology, and synthetic biology, is one example of a sector that would gain from streamlined financing support at the lab scale. For India to achieve its target of installing 500 GW of sustainable energy by 2030, at least 100 GW of that electricity must come from weather-resistant battery storage systems that last as long as solar and wind technologies.
Agriculture is another example of a sector that could profit from lab ramp-up, particularly when it comes to using natural methods to control soil carbon at the farm level. When forestry and livestock are included, the sector’s contribution to world emissions rises to nearly 24 percent, or 14% of total emissions. With 18 million hectares of cultivable land, India holds a unique position as the second-largest country in the world after the United States. Increased soil organic carbon has the potential to turn agricultural land into a carbon sink and considerably reduce carbon emissions through sequestration if the correct technical techniques are applied.
Science-based investigations, which should preferably be carried out in labs to produce sufficient data sets for reliable modeling (via the collection of soil sample), dictate the fundamentals of this technology. This may potentially result in high-quality carbon offsets for purchasers as well as the capacity for farmers to completely switch to regenerative agricultural methods.
Diverse forms of funding, including but not limited to blended finance, advanced carbon mechanisms, and development bonds, are required to enable this widespread support.
3. Although there is venture finance available for early-stage climate technology, difficulties still exist in accessing late-stage capital, allocating it to the right parties, and enhancing access to alternate asset classes.
The climate finance gap in India must be closed at three levels in order to have the desired impact: i) venture equity funding for early-stage startups, which helps with operational costs but is difficult to access after the first few rounds; ii) asset financing for these climate tech businesses, which are heavily reliant on hardware and other assets; and iii) blended finance through philanthropic capital and multilateral development banks.
There is a lack of funding in India for firms in the climate tech sector after Series A or B, in particular, within the venture equity category. Traditional venture capitalists are used to investing in asset-light situations where scale-up occurs quickly across software platforms or marketplace B2C models. The nature of business models in the climate technology sector are primarily B2B, where scale-up may take longer and industrial customers have lengthy sales cycles. Additionally, venture capitalists frequently lack the necessary skill sets to comprehend these deep tech advances. A “roadshow of Indian technology” is required to exhibit advances to the world and attract additional foreign investment into Indian entrepreneurs in order to effectively evangelize these technologies.
Beyond venture capital, there are other mechanisms in the larger economy that can be used to fund climate change, such as distributed renewable asset securitization pools and the use of crop insurance in agriculture. For better access and discovery, the procedure for applying for government funds (including through “Startup India”) might be streamlined. The procedure, eligibility, and requirements for startups to get corporate CSR financing and other industry support might also be streamlined.
Microfinance is an example of a sector that, in the middle of the 2000s in India, mainstreamed vast capital access to startups working in the field and established itself as an asset class. There are numerous ways that climate financing can be mainstreamed as an asset class by using this example: In order to further democratize access to capital for startups, it is important to: (i) include this asset class in Indian public sector banks’ priority sector lending (PSL) allocations; (ii) attract sizable grants from foreign foundations to be directed at Indian startups; and (iii) catalyze instruments like SDG impact bonds and other blended finance tools that can be listed on exchanges.
4. Establishing the taxonomy and international standards for investing in climate technology in India is a crucial step in creating the ecosystem.
Since the technologies are various and will entail a variety of financial infusions, both domestically and internationally, it is essential to set the proper criteria for the rapidly developing climate tech venture space in India. The path to international climate finance will therefore be sped up by having the proper kinds of disclosures for transparency, both at the individual startup level and at the national level. Therefore, the government can work to invest in a taxonomy that is standardized, suited to the needs of particular industries, and beneficial to the environment.
IoT is a common instrument for data collection, and generative AI creates datasets that do not yet exist and incorporates pattern recognition to assist guide industry best practices.
The Taskforce on Nature-related Financial Disclosures (TNFD), a recent global project aiming to provide financial institutions and enterprises with a comprehensive picture of their environmental risks, is a successful example of a particular sort of climate framework. Delivering a framework for nature-related dependencies, impacts, risks, and opportunities—including climate—across their operations and value chains is the main goal. This includes taking into account the upstream (supply) and downstream (distribution and sale) value chains.
Conclusion
These are exciting times for India’s early-stage climate technology ecosystem, where much of the success depends on successful cooperation between key stakeholders; a higher risk tolerance and knowledge base for venture investors to bet on R&D and lab-based hardware tech (with academic experts helping in the process); and a normalization of climate finance taxonomy and disclosures to build it over the long term as a credible asset class for the future. The next major change will eventually come from consumers, who will require extra incentives to fully commercialize and push the nation into mass-scale use of climate technology once industry has seen widespread adoption.
