Posted by: Kezia Yonzon and Prakhar Bisht
Livelihoods and Natural Resources
Climate Financing for Social Enterprises in India
India is one of the most vulnerable countries to climate change, facing a myriad of challenges, including rising sea levels, extreme weather events, and water scarcity. Social enterprises, businesses that combine social impact with profit motives, are playing a vital role in addressing these challenges and building a more sustainable future. These are businesses that offer economically sustainable solutions to social problems by using market-based strategies to achieve social and environmental goals alongside financial objectives.
However, accessing adequate climate financing remains a significant hurdle for these enterprises. As per Hong et al. (2019), climate financing is essentially making investments that support climate change mitigation and adaptation efforts. The need for climate finance arises from the significant investments required to reduce emissions and address the adverse effects of climate change. It also explores the integration of climate considerations into the financial system, such as creating ‘green’ products and incorporating climate risks into financial disclosure obligations.
This article explores the current discourse on climate financing for social enterprises in India, highlighting both challenges and emerging opportunities. It argues that by addressing these challenges, promoting transparency, and fostering innovation, India can unlock the potential of social enterprises as catalysts for sustainable development and environmental resilience.
Tailored Financial Support: Bridging the Gap
One pressing issue in the discourse on climate financing is the need for tailored financial support. Social enterprises in India often struggle with limited access to capital, absence of collateral, and intricate regulatory requirements. The numbers paint a clear picture:
- According to the World Bank, India’s SME credit gap stands at USD 397 billion, a significant portion of which comprises social enterprises.
- The BLinC Invest MSME Lending Report (2022) reveals a massive INR 25 trillion credit gap within the micro, small, and medium enterprises (MSME) sector. The traditional lenders such as banks and NBFCs only served around 15% of the credit requirements of MSMEs.
To address this gap, tailored financing mechanisms that consider the unique needs of social enterprises are crucial. Impact investors, both domestic and international, are starting to recognize the potential of these enterprises and are allocating resources accordingly. Following are a few which have examined the demonstration of tailored financing for climate action in the social enterprise space:
- Michaelowa et al. (2021) examines how UNFCCC-backed climate finance instruments engage private investment for energy-focused climate mitigation in Sub-Saharan Africa, emphasizing the importance of tailored approaches to local circumstances.
- Nair & Havemann (2017) explores the use of outcome-based financing, such as the Green Outcomes Fund (GOF), to de-risk investments in green small and growing businesses in South Africa.
- Haemekoski & Sinkko (2016) highlights the Nordic Climate Facility (NCF) as a case study for mobilizing private sector funds for climate change adaptation, showcasing how adaptation can have business linkages and leverage private sector funds through local business development.
These studies collectively demonstrate various examples of tailored financing approaches in the social enterprise space, highlighting the importance of considering local contexts and leveraging private sector investment for climate action.
Capacity Building: Empowering Social Enterprises
Capacity building is another crucial aspect of the climate financing discourse. Many social enterprises in India lack the necessary skills to manage complex financial transactions and comply with reporting requirements. These enterprises often operate in sectors requiring specialized knowledge, such as renewable energy or waste management. Here’s a numerical perspective.
- A study by Intellecap found that about 80% of early-stage enterprises (pilot and design-stage) seek grant funding.
- Dossani & Desai (2009) highlight that most of the risk capital in India is invested in late-stage initiatives by mature firms, leaving few resources for innovative startups.
- Vijayalakshmi & Priyadarshini (2021) explore crowdfunding as a potential source of funding for startups in India, emphasizing its potential to increase the financial environment for small entrepreneurs.
The findings suggest that while there are emerging funding options, early-stage enterprises still encounter difficulties in securing grant funding in India due to their limited track record. Donors and grant-making organizations typically look for enterprises with a proven impact and a track record of effectively using funds to achieve their social mission. Without a history of successful projects and measurable outcomes, it can be challenging for these enterprises to attract grant funding. The following points discuss several difficulties that SMEs commonly face globally:
- Lack of collateral: Grant funders often require grant recipients to provide collateral, such as property or equipment, to secure the funding. This can be a challenge for early-stage social enterprises, which may not have yet accumulated significant assets. A study by Attrams & Tshehla (2022) suggests that financial institutions often require landed property as collateral, while SMEs are more likely to offer personal guarantees, limited savings, and equipment. Another study by Pary & Witmeur (2018) shows that traditional bank funding is not likely possible for start-ups, and alternative sources such as crowdfunding and peer-to-peer lending can be viable options.
- Low ROI: Funders usually look to invest in projects that will generate a strong return on investment (ROI). Hazam et al. (2017) discuss in their thesis that social enterprises struggle to compete with commercial enterprises for investment capital due to investors’ focus on risk and return. Early-stage social enterprises may have difficulty demonstrating a strong ROI, as they are still in the process of developing and scaling their businesses.
- Market uncertainty: Funders may also be hesitant to invest in early-stage social enterprises due to the uncertainty of the market in which they operate. In his paper, Litterscheidt (2021) focuses on economic policy uncertainty and its impact on start-up financing and success, highlighting the hesitancy of venture capital investors and the potential role of governmental venture capital in bridging the financing gap. Kulothungan et al. (2019) highlights the complexities and uncertainties faced by small and micro social enterprises, emphasizing the need for innovative approaches to manage uncertainties.
Social enterprises often work in complex and challenging environments, which can make it difficult to predict their success. Providing training and mentorship to these enterprises can significantly enhance their financial management capabilities, making them more attractive to potential investors. For example, the India Climate Collaborative (ICC) provides capacity-building support to social enterprises working on climate change mitigation and adaptation projects.
Local Stakeholders: Collaborating for Impact
The role of local stakeholders, including governments, NGOs, and community organizations, cannot be overstated. Collaboration with these entities ensures that climate projects align with local priorities and needs.
The numbers tell us the following:
- According to the Global Impact Investing Network (GIIN), 85% of impact investors believe collaboration with local stakeholders can significantly enhance social and environmental outcomes.
- Kumar et al. (2023) discuss impact investing as a framework for sustainability and suggest that it can help address India’s sustainability challenges by achieving social and financial goals through multidisciplinary collaboration and attention to risk, value addition, impact, and investor expectations.
- Bamberger (1991) highlights the importance of community participation in development projects, emphasizing benefits such as project efficiency, social acceptability, and sustainability.
- Kavanagh et al. (2022) argue for a shift in funding practices towards a systems-thinking approach, recognizing the role of resources, relationships, and community dynamics in community health promotion.
- Rajan et al. (2014) focus on social venture investments in India, indicating that financial inclusion and consumption-focused ventures have received significant funding.
Collectively, these papers suggest that strong community engagement in social projects can ensure the success of a project, enhance the likelihood of attracting additional funding, and underscore the importance of engaging with local communities and institutions in climate financing efforts.
Transparency and Accountability: Building Trust
Transparency and accountability are fundamental to building trust in climate financing. Social enterprises should be held accountable for their progress and impact. Data is vital in this regard:
- A recent report from the Global Impact Investing Network (GIIIN) highlights the pressing need for the establishment of consistent metrics to assess social and environmental performance. These standardized metrics should be universally defined within a coordinated metrics framework. The adoption of such standardized performance measures serves multiple essential purposes.
- Firstly, it empowers mission-driven investors to consolidate and compare data across their various investments, enabling a more comprehensive analysis of their portfolio’s impact.
- Secondly, it plays a crucial role in ensuring the responsible utilization of impact capital, guiding investments towards organizations that make a substantial difference in specific geographic regions and programs of significance to these investors.
- Regular audits and impact assessments provide transparency and ensure that resources are used effectively and ethically.
Emerging Solutions: Blended Finance, Impact Measurement, and Innovation
In addition to the core aspects of the discourse, these emerging solutions are reshaping climate financing for social enterprises:
- Blended finance is revolutionizing high-impact projects by seamlessly merging public and private capital. This innovative approach has boosted financial inclusion through microfinance, facilitated affordable housing development, and empowered impact investment funds. Sierra-Escalante & Lauridsen (2018) highlights the role of blended finance in creating scalable, sustainable, and resilient markets with strong development impact.
- In the climate financing discourse, impact measurement is gaining prominence. Developing robust frameworks is essential to monitor social enterprises’ progress and ensure they meet their social and environmental objectives, enhancing accountability and effectiveness. Macinante (2020) emphasizes the need for accurate and reliable metrics to assess how climate finance investments contribute to the goals of the Paris Agreement.
- The support for social enterprises scaling innovative climate solutions is evident across various sectors as combining traditional knowledge systems with innovative technologies can enhance community coping capacity and vulnerability reduction in the face of climate impacts (Rao & Patil, 2021). Clean energy startups, waste management initiatives, sustainable housing projects, agricultural technology innovations, and more receive assistance. This backing accelerates the adoption of climate-friendly solutions, contributing to India’s sustainable development and environmental resilience.
Addressing Challenges: A Growing Interest
Despite the challenges, there is a growing interest in supporting social enterprises through climate financing in India. As climate change escalates, investments in social enterprises offering innovative climate solutions are likely to increase, paving the way for a more sustainable future.
In conclusion, the discourse on climate financing for social enterprises in India is evolving, with opportunities emerging to support these enterprises in their crucial mission to mitigate climate change. By addressing challenges, promoting transparency, and fostering innovation, India can unlock the potential of social enterprises as catalysts for sustainable development and environmental resilience.
Kezia Yonzon – Assistant Vice President, Sambodhi
Prakhar Bisht – Manager, Sambodhi