Financing the clean energy transition in India
Encourage Capital is a thematic and research-driven impact investment firm. Encourage Solar Finance is a private equity fund that invests in specialized financial institutions in India that can develop and scale commercial rooftop solar finance solutions for micro, small and medium-sized enterprises.
How does Encourage Capital, by providing new financing models for clean energy for MSMEs in India, contribute to global climate change mitigation goals and to India’s NDC commitments? How do you assess this impact?
We believe that an inclusive and efficient financial sector can drive many of the UN Sustainable Development Goals, particularly those involving sustainability and climate change mitigation. To that end, we have raised a private equity fund (called “Encourage Solar Finance, LP”) which aims to invest in financial institutions in India and provide operational and strategic support to help scale the deployment of rooftop solar solutions for micro, small and medium-sized enterprises in India. We believe that financing can unlock this +15 GW market. We are focused on delivering both direct and systemic impact. Our direct impact is measured based on the aggregate MW of rooftop solar financed and the number of small business customers reached, while aligning our incentives with these targets. Our systemic impact is measured by our ability to help catalyze the +15 GW rooftop solar market and accelerate green lending.
Why did you decide to focus on rooftop solar financing for MSMEs in particular?
We decided to focus on this segment because MSMEs, which typically face challenges in accessing finance, were also overlooked in the clean energy transition. MSMEs are critical to India’s industrialization, accounting for 45 per cent of industrial output. They are also large, and often inefficient, consumers of energy for electricity and industrial processing – MSMEs account for 48 percent of the total energy consumed in India’s industrial sector. We believe that finance can unlock the MSME solar market and help drive India’s clean energy ambitions.
In addition to the climate impact, are many of the MSMEs that are benefitting inclusive businesses (IBs) that have a social impact on people living at the base of the pyramid?
MSMEs help drive several important social benefits, including economic democracy, social fairness, innovation, job creation and economic growth, thereby contributing to a more stable economy. Our first portfolio company in this new fund, Electronic Finance, has a +30-year track record of providing equipment finance to such entrepreneurs in India across a range of industries (machine tools, textiles, food processing / packaging, plastics, printing, woodworking, etc.).
Why is it important to identify and finance new solutions to environmental and social problems? How do you identify gaps where investments can provide high levels of impact?
In our view, there are many aspects of the clean energy transition that are both technologically and commercially viable today. However, financing solutions have typically lagged given a lack of focus and lack of comfort with these technologies amongst lenders. In order to prioritize our work in this recent fund, we started by surveying MSMEs around the country to understand their energy needs, financing needs and concerns to determine where we can be most impactful. We also focused on commercially viable solutions (like rooftop solar) which are best positioned to scale and now seek to partner with market leading financial institutions that can address the financing demand.
What are the main challenges you have identified for inclusive businesses working at the intersection between social impact and climate change mitigation, and how do you support these businesses?
The main challenges are typically around comfort with technology – both for end users and financiers. Thus, we manage a capacity building program which supports market development, product development, training and other operational support to help drive our initiatives. For example, this program has enabled us to develop technical capacity through staff training programs and processes for equipment/installer accreditation. In addition, we have also developed digital tools to improve the interaction between installers and lenders to drive efficiency and productivity, which we hope will ultimately improve the customer experience/adoption. We have also structured a risk mitigation facility, in partnership with US Development Finance Corporation, to help accelerate lending in this market.