February 16, 2021
Small Businesses and Indian Climate Action

Small and medium-sized enterprises, according to the World Bank, represent about 90% of businesses globally, and more than half of all employment. According to its estimates, 600 million jobs will be needed globally from now until 2030, making SME development a high priority for governments around the world. This is particularly true for India, given that by 2027 it is expected to become the world’s most populous country.

The Aspen Network of Development Entrepreneurs (ANDE) focuses on supporting the enabling ecosystems for small, growing businesses (SGBs) in developing economies to thrive, to maximize their job creation and climate, environmental and social benefit contribution.

In India, where ANDE has been working for the last nine years with a diverse member network of local business support intermediaries, the energy transition presents a vast range of opportunities for SGBs. While the energy sector comprises the bulk of Indian emissions, other sectors with significant emissions include industrial processes, land-use changes, forestry, and waste, all of which intersect with the small business sector in India.

Climate Action’s Paths and Opportunities

As outlined in ANDE’s recent climate brief, adopting a circular economy path in the food and agriculture sector in India presents the possibility of creating annual benefits of: US$ 61 billion, 31% fewer GHG emissions, 71% less synthetic fertilizer and pesticide usage, and a 49% reduction in water consumed by 2050.

Similarly, the Indian textile industry is a major contributor to waste and pollution with nearly 5% of all landfill space being taken up by textile waste and 20% of all freshwater pollution being made by textile treatment and dyeing plants. Globally, the textile industry emits 1.2 billion tons of CO2 equivalent annually, nearly as much as the auto industry, so adopting a circular economy path could have significant benefits for the industry.

Opportunities range from the continued growth of renewable energy, both at a large scale and also through mini-grids for those without grid access, to development of the technologies necessary for the integration of renewables into the grid for scheduling, forecasting, demand-side management, and integration of smart meters. Development of energy storage is critical to enable a move to lower-carbon energy sources, as well as new or scaled waste-to-energy and energy efficiency measures. A transition to green transportation, including electric vehicles (EVs), such as has already taken place with electric rickshaws. These solutions promise not only to lower carbon emissions but also help address one cause of chronic urban pollution.

A 2019 survey by Power for All and the Council on Energy, Environment and Water (CEEW) reported that 95,000 direct formal jobs and around 210,000 informal jobs were created in the distributed renewable energy sector in India in 2017–18. However, women’s participation in the sector remains low. Indian women constitute only about 11% of those working for — let alone leading — rooftop solar companies, compared to 32% globally. There is a clear opportunity to align the current government’s focus on entrepreneurship and innovation, including via the Atal Innovation Mission. What is needed is stronger targeted support for women’s engagement in the green economy as entrepreneurs, helping to address the particular ingrained challenges that they face in building their businesses.

But climate action cannot be construed as only a government responsibility. Private investment into the sector is largely deployed, either in late-stage proven technologies such as wind, solar, and increasingly EVs, or in very early-stage companies via grants and incubation or acceleration support. There remains insufficient funding directed towards businesses that need the capital to de-risk and become scalable and commercially viable. There is also a need to better understand the needs of social enterprises in the sector, and to align investment with what small and growing businesses (SGBs) that can provide immense value to local communities in building resilience truly need.

Early-Stage risk capital needs to be more accessible

Early-stage risk capital continues to be inaccessible to innovators and entrepreneurs in the climate arena. Venture capital models, as widely practised, are not the ideal solution for many climate innovations due to their different development cycle, market structure, and risk-reward profile. On a positive note, debt funding is increasingly available in the sector, with a range of financial instruments provided by organizations such as Caspian, Yunus Social Business, Tata Cleantech, Ckers, Samunnati, Shell Foundation, GreenFunder, NABARD, and programs via the State Bank of India and Punjab National Bank. They provide a full range of products from venture debt and working capital to asset finance, invoice discounting, and project finance. However, a challenge noted by debt providers is that equity is generally required to cover a percentage of the proposed use. Certain lenders have identified the dearth of equity funding in the market as a significant business challenge. ANDE’s own global research has also shown that women entrepreneurs in particular struggle to access equity to grow their businesses across many sectors, not only in the climate arena.

ANDE members have identified some potential approaches to addressing capital issues. First, help climate entrepreneurs build more partnerships with larger corporates (as buyers) — through “reverse pitches.” Some corporates have deep research and development budgets, but often do not have strong linkages with the startup/SGB community in emerging and frontier markets. Second, make more patient capital available to support early-stage or high-risk innovations, ideally via a blended finance mechanism that already has the follow-up capital lined up.

Initiatives to drive more money into the sector remain extremely important. The recent launch of Climate Angels by GoMassive Earth Network, an early-stage investment syndication platform for pollution reduction and climate tech, is one such approach.

Despite the challenges still facing the sector, there are some good examples of promising approaches. For instance, the Circular Apparel Innovation Factory in India’s stated mission is to “build the ecosystem and capabilities to accelerate the transition of the apparel & textile industry towards circularity”. More such ecosystem approaches are needed, alongside targeted earlier stage and patient capital that helps to address the needs of SGBs to help them scale. This can also support women entrepreneurship and create the green jobs that can help propel India into a thriving low carbon economy of the future.

This piece originally appeared in the Climate Finance Initiative’s newsletter, which offers quick digests and insights around what is happening in climate finance.