Q1: Lok Capital stands with an established track record of investing for impact in sectors such as financial inclusion, agriculture and healthcare. How are you now looking at investing for climate action? Could you share your investment thesis with us?

Our investment thesis for climate-tech centers on leveraging technologies that enable climate resilience, climate-risk mitigation, and low-GHG (greenhouse gas) production. Our focus is on scalable, technology-driven solutions that address climate challenges while fostering economic development. This involves investing in technologies that enhance the ability of communities and businesses to withstand and recover from climate impacts, supporting innovations that reduce the risks associated with climate change, and funding ventures that promote low-carbon technologies and practices across various industries.

By prioritizing these areas, we aim to drive impactful change, creating synergies between economic growth and environmental stewardship, ensuring that our investments contribute to a sustainable, low-carbon economy while delivering robust returns for our stakeholders.

Q2: You have emphasized the importance of integrating an ESG lens in your investment approach. In this context, could you share some best practices that the industry could consider while building an ESG-compliant investment thesis?

At Lok Capital, we integrate ESG at each step of the investment process, starting with initial screening at the time of sourcing till we exit the company. Lok categorizes the potential investee based on ESG risks and conducts a third-party ESG due diligence followed by making of an ESG Action Plan that forms a part of the legal contract when the investment is consummated. Our corporate governance evaluation is based on a proprietary scorecard that is used as the guiding framework by the deal teams. We evaluate the governance on various parameters throughout the investment process, and draw up an action plan upfront to drive improvements.

We actively work with our portfolio companies in achieving the ESG-AP by providing dedicated knowledge building sessions and hands-on support. Even after the ESG-AP is completed, we track set metrics on a quarterly basis and do monthly check-in calls with the dedicated ESG Manager at the portfolio company.

Q3: How could we move beyond looking at ESG as not just a compliance requirement but also as an impact investing approach?

At Lok, ESG-first investing and impact investing are viewed as separate approaches with us working at implementing the latter since the past two decades. We are also cognizant of the blurring lines between the two which leads to impact-washing in the industry.

ESG-first investing focuses on integrating environmental, social, and governance factors into investment decisions to ensure responsible corporate behavior and mitigate risks. It serves as a baseline for ethical and sustainable business practices, aiming to improve long-term financial performance and sustainability. ESG criteria act as a set of standards that help investors screen potential investments based on their adherence to responsible practices.

In contrast, impact investing goes beyond the risk mitigation and compliance aspects of ESG. It is characterized by the intentional pursuit of positive social and environmental outcomes alongside financial returns. Lok actively seek to generate measurable positive impact through their investments, addressing specific issues such as climate change, social inequality, and community development. The core difference lies in the intentionality; while ESG-first investing ensures operational hygiene and regulatory compliance, impact investing is driven by a commitment to effecting tangible, beneficial change in society and the environment.

While viewing ESG as a foundational element rather than just a compliance necessity, investors can adopt a more holistic approach, it is only the first step towards building an impact-first business. This involves recognizing ESG criteria as essential for sustainable business practices while simultaneously embracing the intentionality of impact investing to drive meaningful and measurable positive outcomes. This dual approach not only enhances the ethical and operational standards of investments but also aligns financial strategies with broader societal and environmental goals, ultimately contributing to a more sustainable and equitable world.

Q4: As someone who has closely assessed sectors like financial services, healthcare and food & agriculture, do you see an avenue for investors to align a climate-centric angle to their investment in these sectors?

In sectors like financial services, healthcare, and food & agriculture, there are significant opportunities to integrate a climate-centric perspective. In financial services, this can involve investing in green finance initiatives that support renewable energy projects, EV uptake, sustainable agriculture, and climate-resilient infrastructure. In healthcare, promoting sustainable practices within facilities, such as energy-efficient buildings, waste reduction and capacity building and adaptation for climate hazards can drive significant impact. In food & agriculture, supporting sustainable farming practices, organic farming, and technologies that reduce carbon emissions and enhance resource efficiency can align investments with climate goals, driving systemic change while achieving financial returns.

Apart from looking at business models which directly align with a climate impact in other sectors, at Lok, being an SFDR Article 9 compliant fund, we do a climate risk assessment for all our potential investments.

Q5: Your investment portfolio includes Super Bottoms which is part of the now-growing circular economy segment. What is your assessment of this segment from an investor perspective? Is there a growing market for climate-friendly and sustainable consumables?

Our investment in SuperBottoms, a leading player in the reusable diapers segment, highlights our commitment to sustainability. The circular economy, which focuses on reusing, repairing, and recycling materials, offers significant potential for investors. From an investor's perspective, the circular economy presents several advantages, such as reducing dependency on finite resources, minimizing waste, and leading to cost savings and operational efficiencies. Additionally, growing consumer awareness and preference for sustainable products drive market expansion, and increasing governmental support for circular economy initiatives provides a conducive environment for growth.

However, it is the responsibility of investors to ensure that the claims made by the potential investees are validated scientifically to avoid greenwashing. In the case of SuperBottoms, Lok conducted a life cycle assessment of the product to estimate its GHG reduction potential. Due to design innovations , SB products led to reduction of plastic usage and upto 80% GHG emissions reduction across the lifecycle of a set of 200 nos. disposable diaper sets.

The market for climate-friendly and sustainable consumables is indeed growing, driven by consumer preferences and regulatory frameworks that encourage sustainable practices making it an interesting avenue for investors.

Q6: As a fund which is compliant with SFDR Article 9, how do you assess the environmental and social impact of your investments? Could you share a little on the Climate Framework that you have developed to manage your investments?

As a fund compliant with SFDR (Sustainable Finance Disclosure Regulation) Article 9, we have developed a robust Climate Framework to assess the climate-related risks and opportunities of our investments. This framework includes conducting physical risk screening and technical risk screening for all investments to evaluate potential climate-related risks and vulnerabilities in the pre-investment due diligence stage. Thereafter, we establish specific, measurable impact metrics related to carbon footprint, resource usage, and social outcomes, implement rigorous data collection processes to monitor and evaluate impact performance and support our portfolio companies in building internal capacities to monitor and report the same.

We believe that SFDR Article 9 compliance presents a great learning opportunity for not only Lok but all its portfolio companies as well. We appreciate the response from our portfolio companies in seeing the reporting requirements as not just compliance but actively being involved in improving their performance against the set metrics. Even before adopting this framework, Lok practiced impact management and measurement for all portfolio companies on a quarterly basis, supporting them in their impact management journey. Our Climate Framework ensures that we not only comply with regulatory requirements but also drive meaningful environmental and social outcomes through our investments.

Q7: Going forward, how does Lok Capital intend to develop its climate-tech investment strategy? What could be some of the focus areas in the near term?

Looking ahead, Lok Capital aims to deepen its focus on climate-tech investments. Our strategy will prioritize clean energy, mobility, energy efficiency, sustainable agriculture, and waste management. This involves investing in technologies that enable the transition to renewable energy sources, reduce GHG in mobility and urban transportation , improve energy efficiency in industrial, commercial, and residential settings, promote agri-tech solutions that enhance productivity while reducing environmental impact, and back startups that develop advanced waste management and recycling technologies

We look forward to investing in commercialised and high primary impact climate friendly businesses, which have technology and innovation as the primary moat. We will also look at asset-as-a-service plays in emerging fields such as batteries, energy efficiency, water among others.

Background of Lok Capital

Lok Capital is a pioneering India-focused impact investing firm established in 2004. It invests in early to growth stage investments in fast growing, high impact and tech-enabled business models in financial services, healthcare, food & agriculture and climate & sustainability solutions in India. In a context where financial gains and societal impact are perceived to be mutually exclusive, Lok strives to build companies that go beyond this binary.

Its focus is on Series A+ ventures that leverage technology to deliver quality in an affordable, accessible and sustainable way with a strong discipline on generating above market returns. Lok has multi-dimensional, contextual impact screening criteria that incorporate founder intent, gender, income levels, geography and a focus on underserved consumer segments.