Early-stage investment fund, Avaana Capital, has recently announced the launch of a $150 million climate change and sustainability fund in which all the investments would be made through the climate and sustainability change lens. Avaana's first fund was focused on driving high impact outcomes through the lens of technology and innovation, wherein it invested in sectors such as food, supply chain-logistics, financial inclusion, health and education. It invested in insurance tech company Cover Fox, bicycle start-up AlphaVector, FarMart a SaS-led B2B food supply platform and in Eggoz which claims to be the country's first UV sanitised egg brand. "Digitisation was also creating out-sized returns, so we decided to do it responsibly," says Anjali Bansal, Founder, Avaana Capital.
With climate change being the biggest concern world over, Bansal in the second fund has decided to sharpen her focus. "70% of our current portfolio is sustainability related and has performed extremely well. In the new fund, we are going to continue investing in food-agri and consumption, mobility and supply chain digitization, financial and digital enablers. We will add to this energy transition and resources management in air, water etc. This makes our focus sharper on climate and sustainability. These three sectors are responsible for 90% of India's emissions and we have picked sectors where we have expertise. These are also core for India to achieve the Panchamrit goals laid out at COP 26," Bansal further explains. Avaana has already made two investments through this fund – Viki Foods (a hydroponic vegetable grower which promises to increase the yield of vegetables such as onions, brinjal, tomatoes and leafy vegetables by 300%, using 80% less water) and air-purification start-up, Praan, which is into filter-less air purification.
"Globally a lot of capital is available for late-stage funding, and in the Northern US and Europe there are funds coming together for early-stage funding. However, there is a white space opportunity in India for tech led early stage investments in climate and sustainability. We at Avaana are seeing some outstanding entrepreneurs moving to do start ups in climate and sustainability and we will partner them through investment and full stack business building support, to generate outsized returns," says Bansal. Avaana Capital, however, is not the first fund in India to make investment through the climate change and sustainability lens. Though a relatively new concept, the likes of Everstone Group and GEF Capital Partners have made considerable headway. Funds such as Lumis Partners are getting ready to launch their climate change fund. Sustainability broadly refers to the ESG (Environment Social Governance) framework and increasingly there is a lot of drive for global asset allocators as well as managers to look for companies which are ESG compliant.
"People are discovering that long-term sustainability of businesses itself depends on whether you are adopting ESG principles. So, it is not just about ticking a box but doing things which are good for a business over a long period of time," explains Sridhar Narayan, GEF Capital Partners. GEF has invested in a host of businesses such as 3SC (a supply chain/transportation solutions company that focuses on delivering superior decarbonisation solutions in the logistics sector), ESDS (a managed data centre and cloud hosting solutions provider) and Prince Pipes (a manufacturer and distributor of water pipes and fittings, which is working on institutional initiatives such as piped water supply, sewage, rain-water harvesting etc).
In fact, investing in ESG complaint companies is a given today for investors. "We are not saying we are creating a sustainability fund. We are saying we would be investing only in ESG compliant areas. Therefore, in everything that we do sustainability becomes a part," explains Rohit Bhayana, managing partner, Lumis Partners. The focus area is actually climate change where investors are setting up dedicated climate change funds. While the Lumis climate change fund is on its way, the Everstone Group in 2018 set up a $750 million climate change fund, EverSource Capital, which is investing largely in energy transition and circular economy.
"India has been one of the signatories of the climate change programme which was initiated at Paris and has been a founding member of the International Solar Alliance. In 2017 the Indian government partnered with the UK government to catalyse investments into the Indian market specifically focused on climate change. That's when we realised there is an opportunity for us wherein we as fund managers can take responsibility, raise a fund focused on climate change and actually invest in a way that we can drive positive climate outcomes while generating commercial returns for investors," says Dhanpal Jhaveri, vice-chairman, Everstone Group and CEO, EverSource Capital.
EverSource is largely investing in start-ups which are into renewable energy generation, electric mobility, businesses supporting electric mobility like OEMs, component manufacturers and also in waste recycling services. One of its first investments was renewable energy company, Ayana, which has 3.5 gigawatts of solar-based hybrid projects under development. The fund has also invested in Radiance, an industrial decarbonisation company helping industry and commercial enterprises to reduce their carbon footprint by selling renewable energy and GreenCell Mobility, which is into electric vehicles to provide mass mobility.
EverSource is also partnering with the Kolkata municipality to treat 180 million litres of sewage water released by urban consumers in Kolkata and recycle it back as clean water.
Scale and Profitability
Profitability is one of the key tenets for a business to be successful. And, most of these businesses focused on sustainability and climate are in their infancy. So, how do they make business sense for investors? Sustainability always makes better business sense, says Bhayana of Lumis. "When you are sustainable you are encircling communities, encircling a wider consumer base and thereby you do business more cost-effectively."
Narayan of GEF Capital Partner says an investment through the climate or environment lens fetches a better valuation multiple from the point of view of an investor. "If you are a process company and you put in place strong procedures for keeping effluent systems you can be sure that no action is initiated against your business, because you are compliant in terms of how you manage your effluent streams, how you treat the water etc. You don't run the risk of business disruption. For the business itself, it's a risk management tool and the risk you are trying to manage is any disruption in the business," Sridhar further explains.
Jhaveri says the idea is to rapidly scale up each of the businesses the fund has invested in within 4-6 years. "We are bringing in capital at scale," he says. In terms of profitability, since these are relatively shorter duration projects (6-12 months) compared to the regular infrastructure projects which have a 3-7 year gestation, one can have a better control over the risk factors. "We have a higher degree of confidence of converting something on paper into reality," says Jhaveri.
Five years ago, the capital allocated to ESG was around $5-6 trillion, in 2022 it has multiplied to $30 trillion. The fear of massive global warming that causes serious challenges to life and livelihood is pushing countries, companies, citizens and capitalists to re-engineer what they are doing. "There is strong interest in climate and sustainability due to 3Cs - capital, consumers and community. Large global institutional capital is moving to the space as are consumer preferences and younger talent," says Avaana's Bansal.