With the climate crisis taking more space in corporate boardrooms, investors are increasingly joining India’s race to achieve its net-zero targets by 2070. A recent reportby the consulting group FSG paints a hopeful picture of the climate-tech sector which has bounced remarkably after a temporary setback during the pandemic period. The report titled India’s Green Revolution 2.0 – Trends Shaping India’s Climate-Tech Sector, noted that the sector registered a positive growth of 29 per cent between 2019-2022.
However, even as interest in climate-tech grows, most investors have restricted themselves to investing in Energy, which accounts for nearly 38 per cent of the total investments in climate-tech. Rishi Agarwal, Managing Director and Head-Asia, FSG, believes that unlike in the energy sector, the general public may lack a clear understanding of how climate change affects other sectors like food and agriculture.
In this interview with TheCSRUniverse, Rishi Agarwal further discusses the current investment scenario in climate-tech and how policy changes can go a long way in swaying investor interest towards this sector.
Scroll down to read the full interview:
Q. In FSG’s recent report on climate-tech funding, you suggested that it would help to prioritise climate-tech solutions in India’s political agenda. Could you share some main points that you would like to see in the election manifestoes?
A. Political parties should declare their standpoint on critical subjects like addressing air pollution and ground water depletion in our cities. Their election manifestos should address the urgent need for climate adaptation and resilience by integrating climate considerations into urban planning, infrastructure development, and disaster management. They could outline amelioration measures for our climate-displaced poor, thermal comfort solutions in informal urban housing, medical care for heat-related health hazards, structural changes to climate-proof agriculture, and clean air and water. This would tackle the large majority of Indian voters’ current concerns.
Parties could commit to significant investment in research, development, and deployment of climate-friendly technologies, such as renewable energy, energy-efficient systems, and sustainable transportation. They could pledge to establish clear regulatory frameworks that incentivize the adoption of climate-tech solutions and penalize unsustainable practices, fostering a conducive environment for green innovation. The manifesto could also be a great platform to outline plans to create green jobs and foster economic growth through the expansion of the green economy,ensuring a just transition for workers in carbon-intensive industries.
Q. Investments in climate tech saw a major slump during the pandemic years. Is the sector showing signs of recovery now?
A. After facing a temporary setback in 2020 due to the pandemic, the climate-tech sector showed a strong recovery in 2021, attracting record investments totalling over US$5 billion in 2022. While there was a slight deceleration in 2023, driven by a decline in late-stage investments and a heightened investor emphasis on profitability, we expect the sector to carry forward its momentum. The future investment trajectory will also be impacted by the policy stance of the new government.
Q. How did the pandemic change the way we looked at climate tech investments?
A. The COVID-19 pandemichighlighted the interconnectedness of human health, economic well-being, and environmental health. This realisation led to greater recognition of the need for climate-tech investments as a means to build back better and create a more resilient future.
The pandemic accelerated cloud adoption, driving investments in SaaS technologies and data infrastructure. What’s more, vulnerabilities in global supply chains were exposed, highlighting the risks associated with an over-reliance on fossil fuels. This has increased the urgency to accelerate the transition to renewables and invest in sustainable technologies that enhance supply chain resilience.
The pandemic also underscored the importance of innovation and collaboration in tackling complex global challenges. This has created an environment where there is a greater appetite for bold, forward-thinking climate-tech investments that have the potential to drive transformative change.
Q. As per FSG’s report, a major chunk of climate-tech funding went towards the energy sector, while food and related sectors reflected poorly on the investment graph. Could you throw some light on this disparity in interest?
A. The energy sector has traditionally been a focus for climate-tech investments due to its significant contribution to GHG emissions. In contrast, there may be a lack of understanding of the potential impact of climate-tech solutions in the food sector. Unlike the energy sector, where the link between emissions and climate change is well-established, the connection between food production and climate change may not be as widely recognised.
Investments in renewable energy, energy efficiency, and grid management technologies offer tangible and scalable solutions for reducing emissions and combating climate change.
The energy sector presents more immediate and measurable returns on investment compared to the food and allied sectors. Renewable energy projects, for example, often have clear financial benefits in terms of cost savings and revenue generation, making them attractive investment opportunities. Investments in food and agriculture-related climate-tech solutions may require longer timeframes and face greater uncertainties. The agriculture sector is complex, with various factors such as weather conditions, market dynamics, and regulator frameworks influencing outcomes. This complexity can make investors hesitant to commit significant funds.
Q. ESG has become a buzzword in the finance world in recent times. Do you think this buzz reflects in actual investments?
A. What we can see is that over the past few years, there has been a noticeable increase in investments that prioritize ESG factors. This is driven by a growing recognition of the importance of sustainability and responsible business practices. Investors are more aware of the risks associated with environmental degradation, social inequality, and poor governance. Climate change, in particular, has emerged as a key concern, leading investors to seek out companies and projects that are actively addressing these issues.Moreover, there’s increasing evidence that companies with strong ESG performance tend to outperform their peers over the long term. This has prompted investors to view ESG not just as a moral imperative but also as a way to mitigate risk and enhance returns.
There is, of course, much room for improvement. Many investors are still in the early stages of integrating ESG factors into their investment decision-making processes, and there is a need for greater standardization and transparency in ESG reporting.
Q. A major focus of ESG investment reporting and utilisation continues to be on the Environment while the Social factors still feature the least, especially, in India. How do you see this changing going forward?
A. We can expect to see a shift towards greater integration of the `S’ in ESG investment reporting and decision-making. That’s because there is a growing demand from investors, particularly younger generations and institutional investors, for investments that align with their values and have a positive social impact. Moreover, regulators in India and around the world are increasingly focusing on social issues, such as labour standards and human rights, and are mandating greater transparency and disclosure in these areas. Companies are also facing increasing pressure from a wide range of stakeholders, including customers, employees, and communities, to demonstrate their commitment to social responsibility.
But perhaps what matters the most is that companies are realizing that addressing social issues can have tangible business benefits, such as improved employee morale, enhanced brand reputation, and reduced regulatory risks. This business case is likely to drive a greater focus on social factors in ESG investing.
Q. While organisations globally are taking more interest in DEI, are we at a point where it can be considered a decision-making aspect of ESG investing? What measures do you think should be taken to orient investments towards such social factors?
A. While DEI has traditionally been viewed as a standalone initiative, there is a growing recognition that it should be integrated into broader ESG frameworks. However, we’re not yet at a stage where companies are actively evaluating DEI performance in their investment decision-making.
To get there, what’s needed is a standardised reporting framework that requires companies to disclose their DEI initiatives and outcomes. This would enable investors to compare DEI performance across companies and make more informed investment decisions. ESG rating agencies should integrate DEI metrics into their assessment criteria. This would incentivize companies to prioritize DEI and provide investors with a clearer picture of a company’s overall ESG performance. Additionally, investors should engage with companies on DEI issues, encouraging them to adopt best practices and improve their performance. Investors can also incentivize DEI performance through financial mechanisms, such as offering preferential terms to companies with strong DEI track records. This would create a financial incentive for companies to prioritize DEI.
Q. Could you elaborate on the role of government policies when it comes to driving ESG investments?
A. Government policies are essential for creating an enabling environment for ESG investments to thrive. The government plays a crucial role in driving ESG investments by creating a regulatory environment that incentivises and supports sustainable practices.
One of the key roles of government policies is to set clear ESG standards and reporting requirements for companies. By mandating ESG disclosures, governments can increase transparency and accountability, enabling investors to make more informed decisions.
Additionally, governments can use a range of policy instruments to incentivize ESG investments. This can include tax incentives for sustainable investments, subsidies for renewable energy projects, and preferential procurement policies that prioritize ESG-friendly companies.
Government policies can also help build the necessary infrastructure and framework for sustainable development. This can include investing in green infrastructure, promoting sustainable agriculture practices, and supporting research and development in clean technologies.
Q. There continues to be some apprehension in the market that an ESG-focused agenda may require a company to compromise on profits. How true is this?
A. The apprehension is directly related to the mindset of the leadership of the companies. In companies, where ESG is seen as a compliance risk, there is indeed a trade-off mindset. However, for companies which see ESG as a potential source of competitive advantage (such as Patagonia, Discovery Vitality) it can be a major source of (revenue and profit) growth and a competitive moat in otherwise crowded markets.
Q. What role do consulting firms like FSG play in driving climate-tech investments?
A. FSG and similar firms are helping build field awareness for climate tech investment and directly advising legacy firms who are trying to innovate/ fund climate technologies.
