Mr. Prabaljit Sarkar, Investment Director (Infrastructure) and Mr. Dhruv Malhotra, Senior Investment Officer (Private Debt) at BlueOrchard Impact Investment Managers share their investment thesis across climate impact sectors, the imperative to focus on SME finance and BlueOrchard’s investing approach towards Climate Adaptation Initiatives.

Q1: Blue Orchard’s investment strategy in climate action has been focused on both mitigation and adaptation.

Could you shed some light on your investment thesis in climate enterprises and some of the key takeaways you have observed from your investment portfolio?

BlueOrchard is a leading global impact investment manager. As a pioneering impact investor, we are dedicated to generating lasting positive impact for communities and the environment, while aiming to provide attractive returns to investors. BlueOrchard was founded in 2001 by initiative of the UN as a private initiative to mobilize capital for microfinance institutions globally. Today, BlueOrchard is not only the manager of the first and largest commercial microfinance fund in the world, but has also expanded its impact investment solutions, offering private debt, private equity, listed debt, and sustainable infrastructure investments, as well as its impact themes, ranging from financial inclusion to climate change adaptation and mitigation.

As of December 2022, we invested over USD 10bn across more than 90 countries. We have a strong 20+ year track record and a global outreach of over 280 million people. BlueOrchard has been a member of the Schroders Group since 2019.

As we have seen in recent years, climate change increases the frequency of weather-related loss events including droughts, floods, heavy rain or tropical cyclones. ^[1]In India we have seen most recently the impact of cyclone Biparjoy which has displaced ~ 170,000 people. It is typically the lower income population that is most vulnerable to these risks. Weather risk insurance is a very effective means to support people in coping with this exposure. Insurance helps people affected to quickly recover and regain their ability to support themselves. The availability and affordability of insurance products is a major hurdle to the success of weather insurance in developing markets such as India. Our InsuResilience Investment strategy invests both debt and equity with a mission to build the insurance value chain in emerging markets.

The strategy involves investments in companies along the entire insurance value chain – from insurers, brokers or data and software providers, including agritech or fintech companies that offer climate insurance products or related services. Only companies that have (or aim to have) low-income and vulnerable households and small businesses as part of their customer base are eligible for investment.

One of the companies we have invested in is for example a company that provides weather and crop-yield related information services to the insurance sector in India with over 6,000 automatic weather stations (AWS) across the country. Our investment helps expand its AWS network and secure new contracts in both weather data and crop yield measurement. Through its activities, the company is reaching more than 2,000,000 Indian farmers.

Q2: BlueOrchard’s InsuResilience Investment strategy has focused on protecting vulnerable communities through climate insurance, demonstrating the convergence between climate action and microfinance.

Could you share some details about this strategy and its next areas of focus?

Given your focus on both climate action and microfinance, are there any such converging areas which you see holding potential for investment and impact?

Through this strategy we lend to companies in return for participation in the development and distribution of climate insurance. The latter is defined as insurance solutions against weather events and natural catastrophes (excessive rainfall, draught, hurricanes, earthquakes, etc) for low-income, poor and vulnerable households as well as MSMEs.

The overall objective of our strategy is to contribute to the adaptation to climate change by improving access to and the use of insurance in developing countries. The specific objective is to reduce the vulnerability of MSMEs and low-income households to extreme weather events. Development Goals.

We provide funding in USD or local currency in the form of senior or subordinated debt. We also have a Technical Assistance Facility (TAF) that supports our investees, for example through feasibility studies, data sourcing, insurance product design, education of investee and end clients, marketing and distribution support, operations support and insurance platform.

We are looking to invest in companies that provide or are willing to provide climate insurance products either directly tied to their credit offering or as a stand-alone product. This may include agriculture insurance (crop insurance / livestock insurance), home insurance, or other insurance products that cover the insurance against weather events and/or natural catastrophes.

Livestock loans are the most popular microfinance product in rural India and we have successfully tied up with some of the microfinance companies that have tied their own credit offering to livestock insurance products. Our goal is to unlock the expertise and innovation of insurers, brokers, microfinance institutions, and other providers along the insurance value chain. We will therefore continue to look for opportunities where we can work with third parties to promote greater access to insurance against climate change.

Q3: Investing in renewable energy projects, specifically solar-powered, has been one of the key areas for Blue Orchard, with your recent investment in a company that offers solar rooftop solutions.

Could you share some insights from your investments in the rooftop solar energy segment about where this sector stands in terms of investment potential?

What would be some of the key enablers that can scale up commercial and industrial rooftop solar solutions across India?

Through our sustainable assets practice we provide debt funding to mid-sized sustainable infrastructure projects and corporates.

In India, the rooftop solar segment installations have been driven primarily by the commercial and industrial (“C&I”) segment. Most of these rooftop solar installations are concentrated in large industrial states in India, including Karnataka, Tamil Nadu and Maharashtra. These states have high grid tariffs that increase electricity bills for corporates. Switching to rooftop solar helps these companies cut back on these high electricity costs, optimizing their expenses. Over the past few years, there has been a growing consensus among businesses in India to lower their carbon footprint.

Rooftop solar certainly supports the businesses to establish their own climate pledges. Rooftop solar does not face issues related to land acquisition and resettlement, and permitting process is much simpler compared to large scale ground mounted solar or other renewable such as wind or hydro power projects. Installation of rooftop C&I solar typically takes less than 6 months depending on project size and condition of the roof.

An interesting trend of the C&I segment is that the majority of investments have come from foreign entities, and the investments have been limited to only a few major players who have a sizeable Megawatt(MW) portfolio in the C&I space.

On the other hand, small and medium sized C&I players in India do not have sufficient scale and face challenges to attract financing from commercial banks and development finance institutions (DFIs). These companies need initial growth capital to aggregate and build a large portfolio to ensure affordable financing by virtue of larger volumes.

We focused on financing such small and medium sized players. Our investment in India’s C&I segment is highly ‘additional’ as it serves the small and medium sized C&I players to scale up in the initial growth stage, and build further pipeline to a stage that will enable them to attract further financing from commercial banks and DFIs.

Other than financing small and mid-sized C&I players, an overarching issue in general for all C&I solar projects in India is constraints in the domestic supply chain. However, it is encouraging to see that Government of India’s Production Like Incentive (PLI) scheme is acting as a catalyst to scale up India solar module production capacity, which has been growing very fast lately.

Direct purchase of energy or the ‘Corporate PPA’ or ‘Open Access’ (“OA”) model for C&I customers could be the next big attractive market for India provided the constraints in open access to transmission systems are addressed. There is a need for rationalization of transmission and wheeling charge, ‘additional charge’, and ‘cross subsidy charge’ that vary across states to make the landed costs for third party OA C&I projects competitive.

Q4: Another area of focus for you, has been investing in the charging infrastructure for electric vehicles in India. Could you share your investment thesis and experience in this segment?

In your opinion, beyond financing vehicle original equipment manufacturers (OEMs), what are the investment opportunities within the clean mobility segment that you believe should receive investor attention in the near term?

The transport sector is one of the biggest contributors to total greenhouse gas emissions (GHG) globally, accounting for around 20% of all greenhouse gas produced every year. Decarbonising transport is vital if net-zero targets are to be met.

The four key decarbonisation themes driving opportunities are: (i) Increase energy efficiency of transports, (ii) Use low-carbon fuels e.g biofuels and fuels based on blue and green hydrogen, (iii) Transport Demand Management (TDM) such as getting people out of single-occupancy vehicles and moving into more efficient modes of commuting such as public transport, and (iv) electrification of vehicles. Of the four key decarbonisation drivers, electrification appears to us as the richest source of investment opportunities today.

According to an article published by the Times of India in December 2022, the Indian automotive industry is the fifth largest in the world, and projected to be the third largest by 2030. Catering to a vast domestic market, reliance on the conventional modes of fuel intensive mobility will not be sustainable. By making the shift towards EVs, India stands to benefit on many fronts. India boasts an abundance of renewable energy resources and availability of skilled personnel in the technology and manufacturing sectors.

^[2] India already has the largest corporate fleet commitment in the EV100. ^[3] The EV 100 consists of 128 entities (as of July 11th 2023) who have made a commitment to switch their vehicle fleets to EVs and/or install charging for staff and/or customers by 2030.

There is a tangible EV ecosystem already established in India. India’s Faster Adoption and Manufacturing of Electric Vehicles scheme II (FAME-II) clearly highlights the Government of India’s intent for promoting EVs. A large number of start-ups have come up in this space in various parts of the ecosystem – OEMs, component manufacturers, charge point operators and other service providers. Established players have laid down their EV strategies and large investments have been committed.

Q5: Blue Orchard recently made a debt investment in a company which is one of the first entrants in the electric vehicle charging infrastructure business.

What were some of the critical success factors of this enterprise that has enabled them to scale up?

Given the growth of the sector, what kind of business models do you see having potential to receive debt and later stage equity?

An early mover in the EV space, the referred company has positioned itself as a front-runner in the market and concluded successful partnerships with the main EV manufacturers and e-mobility operators in the country. The company commissioned India’s first ever EV charging hub for 50 electric buses in Ahmedabad, Gujarat in 2019 and India’s first solar-powered EV charging station in Patna in 2022. Since then, it provides charging services to reputed companies for their fleets of electric buses and electric cars.

We focused on financing the infrastructure part of the EV charging ecosystem, and supporting them to scale up with our investment.

Of course, there are also other business models coming up in India with interesting opportunities for investors such as in the segments of battery swapping, and EV Vehicle financing.

Q6: Apart from financing support, your global and Indian initiatives have also involved capacity building and technical assistance to social entrepreneurs.

What is the nature of support that BlueOrchard extends and are there any specific areas within climate tech in India, where you would be focusing on building financial and technical capacity?

BlueOrchard provides technical assistance through several strategies, for the purpose of this discussion, we will focus on the Technical Assistance Facility (TAF) for the InsuResilience Investment strategy. The main objective of TAF is to “support the investee in implementing or expanding climate insurance targeting the low-income population”. TAF helps source and hire consultants with relevant expertise to implement the project in close collaboration with the investee. It helps to accelerate growth of investees, reduce time-to-market and set-up costs by utilizing grant funding, and reduce the commercial risk associated with expanding/growing climate insurance products. The TAF has executed over 30 Technical Assistances across the globe.

Q7: Solutions in climate adaptation have found lesser investors in India as compared to mitigation based solutions. What is BlueOrchard’s strategy and future outlook for investing in this space?

Asia is facing severe impacts from increasing temperatures, heat waves, droughts and extreme precipitation and flooding. According to a new report by consulting firm McKinsey Global Institute, entitled “Climate Risk and Response in Asia”, it is estimated that by 2050, between 600 million and 1 billion people in Asia will be living in areas with lethal heat waves. In sticking with BlueOrchard’s mandate of protecting the most vulnerable communities, BlueOrchard continuously focuses to support decarbonization strategies that will help support SMEs. Such a strategy aims to help companies manage E&S risks but also to enable greater investment flows and deepen the financial market development. We see that green financing in Asia is channeled primarily to the energy sector, whereby the outreach to SMEs is very limited. In our opinion, shifting Asia’s economic development towards more sustainability is only possible with the active contribution of SMEs. We also see sustainable farming as a critical sector going forward. Sustainable agricultural financing will enhance the reliability, continuity and quality of food supply, while boosting incomes of the rural population. The strategy is to target financial institutions and non-banking financial institutions with green and sustainable private debt instruments with the purpose to support Asia’s SME Transition Finance towards decarbonized economies. As per the strategy, India will be a target market, and financing will be spread across agricultural financing, green projects, affordable housing and the SME sector.

^[1]Cyclone Biparjoy: India, Pakistan evacuate more than 170,000 - BBC News
^[2] Making electric transport the new normal by 2030 | Climate Group (theclimategroup.org)
^[3] E-commerce sector to drive electrification of fleet in India: report - Times of India (indiatimes.com)

Background of BlueOrchard Impact Investment Managers

BlueOrchard is a leading global impact investment manager, renowned for its dedication to generating lasting positive impact for communities and the environment. Founded in 2001 through a private initiative of the UN, the firm's primary mission was to mobilize capital for microfinance institutions around the world. Throughout its evolution, BlueOrchard has expanded its impact investment solutions, encompassing private debt, private equity, listed debt, and sustainable infrastructure investments. With a robust 20+ year track record and a global outreach reaching over 280 million people in 90+ countries, the firm has invested more than USD 8 billion. As a member of the Schroders Group since 2019, BlueOrchard continues to pave the way for innovation and inclusivity in climate-tech and financial inclusion, catalyzing positive change for a brighter future.