EVs lead climate tech funding but more needed for niche solutions: Experts

Even as investments in the Indian climate technology (tech) sector have grown a staggering fourfold this year, most of the financing has been limited to the mobility and transport sector, primarily electric vehicles (EVs). There are currently 2,053 climate tech start-ups in India.

According to the data from Tracxn, a market intelligence platform, climate tech start-ups have raised $2.02 billion in equity funding from 122 deals (between January 1 and November 10) in 2022, compared with $589 million from 147 deals in the same period last year (2021).

The whole of 2021 saw $844 million in funding from 171 deals, up from $384 million from 149 deals in 2020.

Of the $2.02 billion raised thus far this calendar year, the green transport sector has led investments, raising $1.5 billion from 77 rounds. The renewable energy tech sector takes second place, trailing behind with $427.3 million raised during the same period from 12 rounds.

The circular economy segment lands in third place, with $73.3 million raised from 16 rounds. With climate change becoming an increasingly pressing global concern, experts say the pace of investments needs to be hurried across the entire value chain of climate tech, and the sector needs greater funding for niche climate solutions.

Need for niche investments

Shyam Menon, co-founder of Bharat Innovation Fund, says electric mobility (e-mobility) and the connected infrastructure have been a leader in this wave of climate tech investing, whereas renewable energy — primarily wind and solar — was the leader in the last wave over a decade ago. “There is dearth of investment in areas like carbon capture and sequestration/storage, direct air capture, etc. This is also primarily a result of a lack of a clear carbon price, raising doubts on the long-term commercial viability,” he adds.

Menon had previously co-founded Infuse Ventures, a sustainability-focused seed fund launched in 2012, and is working on incubating a new climate-focused venture capital (VC) fund called Bharat Climate Fund.

He says in the West, personal mobility has been the primary driver of adoption within e-mobility, whereas in India, the adoption has been led by two- and three-wheeler logistics, especially last-mile delivery. Globally, he says, there are multiple climate tech areas where innovation is at full throttle. “In India, there is some innovation happening in these areas, albeit on a smaller scale,” says Menon, adding, “We need more financing across the entire value chain to support early-stage tech development, scale up financing, debt, etc.”

While EVs reduce the carbon footprint, researchers have pointed out time and again that manufacturing of EV batteries (lithium-based) has its own environmental impact. Lithium mining can have a significant adverse impact on the environment, but not as much as fossil fuels, if research studies are anything to go by.

According to Anjali Bansal, founder of Avaana Capital, a climate tech-focused VC fund, tech-led climate investments are required across the entire spectrum of mitigation — from reducing emissions and arresting global warming to adaptation — to respond and adjust to climate impacts, as well as resilience for climate-proofing economic and social systems.

“As Indian and global climate-tech ecosystems mature, investments are flowing into more niche climate solutions as well, with increasing activity in waste management, circularity, climate-smart agriculture, carbon and energy efficiency,” says Bansal. 

He adds that continued support for start-ups in these areas across policy, capital, and industry can help unlock a sustainable, green future.

Cashify, a re-commerce company for smartphones and other devices, is one such start-up that operates through a circular economy model.

A circular economy is a model of production and consumption that involves sharing, leasing, reusing, repairing, refurbishing, and recycling existing materials and products as long as possible.

Using the Cashify platform, consumers can sell their old devices and/or purchase refurbished ones.

“There is no doubt that a circular economy is the way forward. With more than 50 million metric tonnes of electronic waste being generated globally every year, it is crucial for us to regulate how and when we discard our devices. As consumers, we need to transition from a ‘buy, use, and throw’ model to a more sustainable one that prioritises ‘reuse, reduce, and recycle’,” says Nakul Kumar, co-founder and chief marketing officer, Cashify.

The company currently has an online consumer base of 14 million and a widespread offline presence with over 170 stores across more than 77 cities.

Challenges: Patient funding

Climate tech start-ups traditionally require longer gestation periods due to which the sector has not generated strong commercial returns recently.

Unlike pure-play digital start-ups that can scale using the internet infrastructure, Menon says most disruptive innovations in the climate tech areas have a physical/hardware component.

“These innovations call for meaningful capital expenditure investments and time to develop the tech, integrate them into solutions, manufacture, and transport them,” he says.

He further states that the adoption of new tech in industries where there are multiple incumbents and where the end products may be commodities like power, water, etc are much harder, compared to Blue Ocean digital spaces.

Bansal says a lot of the solutions required for global climate challenges require deep, cutting-edge tech and new innovation, which typically need a patient capital approach.

Aside from longer gestation periods, Bansal says, “There are non-capital challenges that start-ups must navigate to scale their innovative solutions, such as market complexities, complicated supply chains, acquisition and retention of talent, and establishing scalable systems and processes.”

Due to these hurdles, climate tech has not been seen as a very lucrative sector. However, perceptions are shifting as the sector witnesses a funding influx.

“Since the space has not delivered strong commercial returns in the past few waves, it has fallen out of favour with investors. This time around, there seems to be a lot more regulatory support for the sector, more corporate interest in reducing waste and energy/water footprint, and growing consumer interest in supporting sustainability-focused products,” underscores Menon.

Climate and sustainability are increasingly becoming business drivers in India as well as globally, on the back of favourable macro trends, stakeholder alignment, and supportive policy.

“Eighty per cent consumers are now willing to change their consumption preferences based on sustainability. Moreover, sustainability in consumption and production is becoming a key pillar of innovation as India’s largest companies, including Reliance Industries, HDFC, Tata Consultancy Services, Wipro, Infosys, Mahindra & Mahindra, and JSW Steel, have committed to reaching net-zero carbon status by 2035. These strong tailwinds are generating investor interest as entrepreneurs increasingly build for climate,” says Menon.

Vishesh Rajaram, managing partner at Speciale Invest (a seed-stage VC firm that has made investments in climate tech start-ups), says, “In our view, the world at large and India in particular are actively building Climate 2.0, which includes sustainable water (with companies like Uravu Labs), energy storage (with companies like e-TRNL Energy and NewTrace), and decarbonisation, low-carbon food/ agriculture, and low-carbon materials (with companies like Metastable Materials).”

“We believe the next few years will help India play a pivotal role in building a climate stack for the world,” he adds.

Bansal says globally, climate tech investments account for 14 per cent of VC funding, against only 1.5 per cent in India.

“Streamlining taxonomy and impact measurement for investments can help investors understand the climate impact of their investments better. For example, investments in supply-chain digitisation can help decarbonise them by reducing waste and the miles travelled,” she observes.