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Published on: Nov. 14, 2022, 2:37 p.m.
Is India ready for its superhero moment?
  • To reap the benefit of economic development India must commit to become a green economy

By Starlene Sharma. The author is advisor to start-ups and investors

Climate change is most often framed as a problem and, while it certainly is, it is also a significant opportunity for India. This opportunity will not only determine the fate of India’s economic development, but also the planet’s survival. This is nothing less than our superhero moment as a nation! 

India is at the inflection point for rapid economic growth. Its post-covid recovery has been a bright spot globally, bolstered by manufacturing shifts away from China. The demographic dividend is supporting growth and we have remained relatively insulated from the energy crisis causing social and political angst in other nations.

To reap the benefit of this opportunity for economic development, India must wholly embrace climate leadership and commit to developing as a green economy. If India follows the trajectory of China and other developed countries, its projected emissions would account for 70 per cent of the global budget for keeping the planet below 2 degrees of warming. 

There are those people who believe it is India’s right to use that budget. However, India is also one of the countries most impacted by climate change and the repercussions of such a plan would far outweigh the benefit. 

India loses about 20 per cent of its GDP annually to land degradation, poor waste management and air and water pollution, based on figures from both the World Bank and Niti Aayog. Climate change is a $35 trillion risk between now and 2070, based on current assets and replacement costs. And, in a rapidly growing economy, this could increase dramatically, especially since India is fifth most vulnerable country to climate impacts globally. 

Failure to act risks water security, food security and the habitability of large parts of the country, not to mention the second order impacts on health, education and livelihoods. Viewed through the lens of the projected Rs11 lakh crore economic benefit, the Indian economy can add by reaching for net zero by 2070. This can also be a huge economic opportunity that can position India as a global leader – both in terms of climate action and economic development. Even better, these benefits can increase, if the timelines for climate action are accelerated. 

But, how?

Embrace innovation to decouple economic development and climate;

 Enable financial innovation and capital efficiency to do more with less; and

Expand sectoral focus beyond energy and EVs. 

The first step is to commit to decoupling climate action and growth. India is one of the strongest innovation and start-up markets globally, but remains differentiated in its ability to deliver world class solutions with better pricing and economics. Just as we did with mobile technology and fintech, we have the ability to lean into our ability to leapfrog and embrace a spectrum of innovations that range from frugal to cutting edge. 

We already have pioneering climate start-ups like Ambee and REConnect that service and outperform competitors in the ‘global north’ or west, as well as businesses and models that have made world-class climate technologies viable for developing markets. 

Led by the government, India’s reverse-tendering model has made solar viable across developing markets, while EESL became the world’s largest ‘energy saving company’ (ESCO) under Saurabh Kumar’s leadership and propelled India to become a nation with the highest penetration of LED bulbs -- both in whole numbers and per capita. 

Indian industry increasingly sees the importance of these innovations. At EDF’s India first annual ‘climate tech convening’ (CTC), industry leaders from manufacturing, hospitality and FMCG extolled the need for climate innovation for business viability and safe communities, while also lamenting the need for more, faster and better mechanisms to identify start-ups with the capability to work at scale. Many of the start-ups selected to present to industry report new contracts or ongoing discussions for new business.

  • Climate change is a $35 trillion risk between now and 2070

From theory to practice

The idea of supporting climate innovation is easy. Across India, we have founders that have developed amazing climate technologies. But, the realities of driving adoption of climate innovation are much more difficult.

True, some people will say, price is the only thing that matters, but this is not even half of the equation. People love convenience and the internet age has made that easy. For new technologies to take hold, it is not enough to be cheap; sometimes, it’s even an advantage not to be (Tata Nano). Customers must have confidence. What is critical is that a product must deliver not an equal but a better, more convenient, or desirable experience – and what this means, isn’t always what it seems. 

This has many manifestations and implications when applied to business. Years ago, I joined a climate start-up, when meeting with a potential customer. The start-up claimed that their product would have just a six-month payback achieved through dramatically lower energy consumption. It further claimed the business could possibly sell at higher prices due to improved quality and may even be able to lower headcount. It would even improve the work conditions. IIT lab tests and validations backed its claims. Despite this, the meeting ended before it started… Why?

Within five minutes of our sitting down, it was clear to the company owner that the team did not have the ability to speak or understand the local language, the language of operations, and his team would need significant training to reap the benefits of the new technology. Beyond this, he later expressed concerns about the proposed changes in quality – while it may technically yield a better product, the owner was not confident his customers would pay for the improvement; rather, he feared they might leave for not being able to offer a product customers expected and loved. 

When Covid lockdowns brought business to a screeching halt, one information learnt was that the fast pace of business hid that the average business in India has just two months of free cashflows and, in many cases, had fully exercised the extent of credit available through banks. 

This reality has two significant implications for climate innovations. When a business has limited capital cushion, it is far less likely to take risks. And, new innovations, even when tested, are a risk. Implementation time, impact on other capital equipment, uncertainty on breakage or availability of parts can all destroy cash cushions and, therefore, entire companies.

Such risk induces anxiety, not confidence, no matter the cost or promised savings. Models for corporate and government demonstration (distinctly different from incubation, acceleration or piloting) are common in developed markets and are necessary, if India wants to reach its potential. 

A second factor inhibiting adoption of climate technologies is financing. Even when a product is fully proven and users buy into the economic benefits of converting, if neither party has access to capital to finance the purchase, the sale will never be closed.. 

Mainstreaming of climate technologies at scale will require new or modified business, as well as the capital required for deployment. Credit, as a service opex models, pay as you save (PayS), ESCO and other models requiring credit, either for the innovator or the customer will be necessary to address market realities. The capital to drive these models is scarce; even more rare is the capital to prove the models.

  • Mainstreaming of climate technologies at scale will require new or modified business, as well as the capital required for deployment

Climate finance... 

Financial innovation is critical to accelerating the rate of innovation adoption. The broader economy has so many financial tools to support economic development, yet climate, which touches every piece of the economy and is increasingly shaping how the future economy will function, has a comparatively tiny toolbox. 

... and capital efficiency 

Developing fit for the purpose financing tools has relevance beyond just as a driving adoption. It also increases capital efficiency. Based on current financing, a multitude of studies project the fact that, up to $275 trillion will be needed to attain net zero by 2050, of which $90 trillion will be required by 2030. In India, Climate Policy Initiative estimates that $170 billion per year is required to achieve the Nationally Determined Contributions (NDCs).

However, only about $44 billion in green finance was recorded during 2019-20 -- a fourth of India’s needs. These numbers do not include adaptation and resilience funding. These are really big numbers, especially when held against the failure of developed nations to provide $100 billion per year, a commitment made in the 2015 Paris Agreement that has not been met a single time.

The COP, which was cancelled in 2020 due to the pandemic, was expected to be the first to meet the commitment. There was great hope for 2021. It was expected to be a primary topic this year at COP27; however, discussion and expectations have been blunted by ongoing fiscal challenges and political upheavals. 

Given these enormous constraints, the capital available must be used in efficient and innovative ways to yield both the greatest environmental and financial returns. Banks, even with significant funding and guarantees from multilateral benefactors, have not lived up to commitments to support adoption of climate technologies for rooftop solar, agriculture and SMEs. While one part of the problem is that the technical understanding needed to both evaluate business model and technical risk is found wanting, the remainder, however, is that the risk appetite to prove these models is also not there. 

Climate innovations in infrastructure, green chemicals, manufacturing, and heavy industry need better capital models. Venture capital generally does not support such businesses, private equity is focussed on mature companies with more significant deal size and appropriate debt instruments either come with outsized collateral requirements or are too risk averse. 

Venture capital, as commonly practised, will also require shifts in operating and investing models, if it hopes to benefit from the most significant investment opportunities – both from a financial and climate perspective. A revision back to supporting hardware development – the roots of venture capital – will also be necessary. Software can support incremental emission reductions, but software can’t eat carbon. 

Blended finance and structured finance models have an ability to combine capital types and/or risk profiles to match investor requirements, as well as to manage risk on capital deployed. Models for blended finance and structured finance need to be expanded and targeted to incentivise accelerated adoption of climate technologies and to drive meaningful capital to models that have high climate impact. 

  • Under Saurabh Kumar’s leadership EESL became the world’s largest ‘energy saving company’

    Under Saurabh Kumar’s leadership EESL became the world’s largest ‘energy saving company’

Subsidies, provided by the government or otherwise, act as de facto blended finance structures. If the government wishes to reap the benefits of the green economy, it must rapidly work to align tax benefits and subsidies with climate and economic goals. If we see climate technology as our future, investing in its competition doesn’t make sense. 

Programmes like requiring phased-in increases of green fuels are a powerful example of how this can be done. Reducing subsidy is highly unpopular for the beneficiaries, but similar models are needed. Pairing reductions with replacements or other incentives can ‘kill two birds with one stone’.

For example, a cut to fertiliser subsidy is highly unpopular with large vote banks, not the least because more fertiliser is needed to achieve the same yield due to soil quality deterioration. If the government simultaneously phased down highly polluting chemical fertiliser subsidy and simultaneously supported its burgeoning green biotech sector, it could end up in a win-win situation. Biotech companies like FIB-SOL offer organic solutions that can increase yield up to 20 per cent, boost produce quality and nutrition content, improve soil quality and reduce fertiliser consumption by more than 50 per cent. 

Most funding for climate technologies in India is so far domestic. India should continue to press for its share of the $100 billion and more of the funding promised by developed nations. Both domestically and internationally, however, the market will best be served by presenting implementation of viable climate solutions as an investment. 

With existing financing models, on an average, an investment of $1 yields $4 in benefits. If we increase capital efficiency, build more responsive financial instruments and accelerate adoption of climate technology, the return on investment would increase even further. 

Green industries

To meet and leverage this superhero moment, investment must focus on those sectors that can have both significant economic and ecologic impact. 

Green built-environment and infrastructure: Built-environment, through a combination of construction and operations, accounts for over 40 per cent of emissions in India. Also, 70 per cent of the buildings that will exist in 2030 did not exist in 2020. The construction boom can increase the scale of building related emissions to 70 per cent by 2050, with common materials and construction practices. Existing and new green building materials and building practices can cut this by over 50 per cent. 

The domestic nature of these businesses also adds to job creation, upskilling of the labour force, financial and economic benefit and the ability to export to both developing and developed nations.

Industrial decarbonisation: A significant factor in the green building and green infrastructure agendas is the use of cement and steel. These and other heavy industries account for significant emissions and are generally clubbed into the heading ‘hard to abate’ due to their reliance on extreme heat and energy – reliance on fossil fuels for production. The cement industry has already become a global leader for its efforts to reduce energy consumption, recycle waste heat and incorporate waste. Some companies are exploring materials science to further reduce footprint, while the steel industry has looked at recycling steel to cut the emissions related to converting iron ore.

  • Green hydrogen is considered the silver bullet that will further support green ambitions

Green hydrogen is considered the silver bullet that will further support this and many other green ambitions. Due to energy density, space requirements and conversion costs, green hydrogen will likely have far more limited adoption than widely anticipated but will have market in industrial situations, especially when a captive production plant is located onsite. 

SME decarbonisation has many characteristics similar to large industry – requirements for heat, steam and energy intensive processes. Often overlooked as a sector because of the lack of standardisation, increased focus on Scope III emissions by brands will drive progress in this area. The Institute for Sustainable Communities (ISC) and UN Industrial Development Organisation (UNIDO) have worked with SME clusters and build foundations to facilitate the transition, including assessments of emissions and evaluation of technologies and retrofits that can be adopted across many businesses.

Green chemicals and biotech: Chemicals are used to produce nearly every good we consume. With a thriving pharma sector and robust manufacturing for domestic goods, India already has a toehold in the chemicals and biotech sectors. Leadership in green chemicals and biotech can have a transformative impact on the larger economy. 

Green chemicals and biotech have the ability to act as replacements for existing goods, but also have the ability to create wholly new markets. String Bio is an example of a company that is doing exactly this. String Bio uses methane (a greenhouse gas more powerful than carbon) to replace or enhance existing biologic and chemical compounds. AP Chemicals leverages advanced chemistry to turn hard to recycle waste products into the equivalent of green petrol – their purified output can be processed into medical grade plastics and even jet fuel. 

A lot of attention has been paid to Carbon Capture and Storage (CCS) and Direct Air Capture (DAC). These technologies receive far better funding for R&D and investment in western markets. With its knack for frugal innovation and borrowing from the west, India is likely to be the first country to develop this technology at market viable, non-subsidised pricing.

Circular economy: India excels at circular economy-related ventures in part due to a retained culture of not wasting, technical capabilities and, good or not, a large waste picking sector. Developed markets love to extol the virtue of circular economy but have largely failed to develop economic models that work. 

  • Green chemicals and biotech have the ability to act as replacements for existing goods, but also have the ability to create wholly new markets

Many businesses in this space are still nascent but are growing superior products with superior economics in India. Waste products have been reconstituted into green building materials, quality textiles, green fuels, green chemicals, packaging and a variety of FMCG products. Increased regulation to prevent burning of agri-waste, require consumption of green fuels or brands being responsible for plastics through EPR credits support circular economy. Scarcity is another factor driving circular economy businesses with companies like Lohum and ACE, recycling battery components to curb reliance on scarce and expensive resources. 

This is India’s moment. It is uniquely poised to change the trajectory of whether humanity succeeds or fails in confronting climate change. It does not matter what all other countries do, if India fails in addressing climate, the results will be devastating. To fail at climate will be to fail at economic development. It will also mean it will be impossible to keep the planet below 2 degrees. 

As developed nations consider where and how to address climate change, investing in India is the answer. As India thinks about how to embrace climate as an opportunity, innovation across start-ups, mature business and governance is the answer. 

It’s time for India to embrace its role as superhero.

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