The way forward for ESG - Pro MFG Sustainable Circular Economy Round Table

#Biofuels #ESG #ESGFinance

Team Pro MFG Media

The second Pro MFG Sustainable Circular Economy roundtable Doing Well by Doing Good powered by BiofuelCircle addressed the outlook, key hurdles, and potential solutions for ESG and Energy Transition in India.

Setting the tone for the discussion, BiofuelCircle co-founder Suhas Baxi explained that these roundtables are aimed at fostering the right environment for the circular economy businesses. He stressed the need for "committed leaders" and stressed his endeavours towards "a multi-dimensional approach that covers innovation, policy and investment." He added that, "Such an approach can act as a catalyst to the development and sustainability of circular economy-based businesses."

Investment on a growth spurt

There is a clear growth in the number of mutual funds that are ESG focused and indeed investor numbers are growing as well.

Namita Vikas, founder and MD auctusESG shared her own experience of watching ESG gain ground as a concept, saying that when she started talking about the concept in 2012, there were very few takers. However today, less than a decade later, there are a total of 10 ESG focused equity mutual funds. According to Vikas, the buzz around ESG among investors and AMCs has increased drastically over the last year, because "7 of the 10 ESG mutual funds that currently exist on the market, only came into being in the last one to two years."

Interestingly Namita's experience is that financial institutions woke up to ESG when the financial implications of emissions, air and water pollution and the real figures of freshwater availability became evident to industry and corporations. Her view on this was backed up by Santhosh Jayaram, Partner & Head - Sustainability & CSR Advisory, KPMG who said that "2020 was a critical year because it drew attention to climate-change driven bankruptcy."

"Over the last year these 10 equity mutual funds managed 1.4 billion USD worth of mutual funds," Namita said. These numbers are a clear indicator that ESG is being taken seriously.

Moreover, these funds have performed well according to Vikas. "The index shows very clearly how ESG focused companies perform better than others," she points out, adding that benchmarking can bring in more investment. The MSCI India ESG Leaders Index was launched in 2013.

She also noted the emergence of Funds by big, global finance brands like HSBC and BNP Paribas.

Jigar Shah, CEO of Maybank Kim Eng India and Head of Sustainability Research, Maybank Kim Eng also put an encouraging spin on things saying that private equity players are indeed pumping capital into bioenergy projects. He explained that this is possible because PE firms typically have a lower cost of capital. He added that the government is also working to channel foreign inflows towards bioenergy businesses.

However, given the scope of the sector, this capital is only a drop in the ocean. Lt. Col. Monish Ahuja (Retd.), Managing Director, PRESPL said, "I have a conservative estimate that we’ll be a Rs. 10 Billion biofuel business in the next 5 – 7 years." Ahuja's figures might seem overly ambitious at first, but he backs them up saying "There will be 250 metric tonnes of biofuel required over the next few years. In a highly uncrowded market space, where we are the market leader, we are only able to supply 2 lakh tonnes. The scope is enormous." He added that the business is not rocket science. "People are using PRESPL as a model," he says.

Innovation needs a push

Santhosh Jayaram, Partner & Head - Sustainability & CSR Advisory, KPMG explained that investing is still lazy. From his description, truly there is a lack of focus and creativity when choosing companies for the funds to track. "If you actually sit down to study the mutual funds, you will notice that most of them are investing in IT and banking companies."

This however might be due to the "large cap focus" that Namita Vikas has noted among ESG mutual funds. Investors too - in general- tend to prefer large cap exposure since it is said to be safer. This possibly inhibits investment in small companies trying to do their bit for the environment. Moreover, since ESG is new, one might expect hands-on players to be nascent.

It would be unfair to say that the need for innovation is limited to AMCs and their fund managers. There is also a need for innovation among hands-on businesses in sustainable energy, in some cases. K. Krishan, India Chair BRICS Business Council, Energy & Green Economy WG, who is also the Chair of FICCI Committee on Climate Change, said, "Modern and traditional biomass need to be differentiated. Fermenting sugars were used 150 years ago - why are we going backwards when biotechnology has progressed so tremendously." Krishan also drew attention to the advanced biofuels.

What is needed for sustainable energy - specifically biofuel to gain traction, demand and investment?

Krishan sums up the need of the hour very neatly: "When companies are able to convert biomass into a form of energy that successfully replaces fossil fuels, the money will begin chasing such projects rather than the other way around”, he explains.

Santhosh Jayaram, Partner & Head - Sustainability & CSR Advisory, KPMG pointed out the relevance of "true cost economics" in driving demand for biofuel. As valuations of natural and social capital become more widespread, we can expect a change in mindset. This might be a slow process of transition but concrete moves are being made.”

Jigar Shah said that while PE firms and FDI were channelling some amount of capital towards biofuel businesses, the fact remains that reducing emissions is still optional. “If companies have to cut their emissions - if it were to become a rule - there will be no dearth of financing and innovation."

In addition to policy and innovation, Krishnan adds that there is a need for distinguishing different categories of biomass in order to address the whole universe of energy.

Funding came across as a huge bone of contention for the biofuel business. Lt. Col. Monish Ahuja, Managing Director, PRESPL said that he initially experienced tremendous difficulties getting funding. All of the panelists nodded in agreement and there was a general consensus that the finance sector is not yet aligned to finance these businesses. There are limited ways at the moment to define the risk and transfer the risk, which puts financiers in a tough spot. Meanwhile tenures are a problem for the biofuel businesses. Ahuja feels that there is a need to relook at investment horizon of the medium to long term timeframe as these projects take time to become profitable.

"Blended finance might be a solution to the need for capital," Namita Vikas said, adding that the "Government needs to incentivise bio energy as it has been/is doing with solar."

There is also scope for widening the application of biofuel, according to Ahuja. "Opportunity goes beyond electricity which comprises only 18% of the energy universe. The other 82% is made up of transportation, cooking, aviation and manufacturing (heating and cooling) and that is the big opportunity," he explains.

Suhas Baxi, Co-Founder, BiofuelCircle, summarised the roundtable, "The way forward calls for cooperation from all stakeholders. Moreover, it is essential that we adopt a long-term view and also avoid going the checklist manifesto way. After all, like every colour green too has 50 shades. We need honest disclosure and standardisation in reporting. While India is developing its guidelines, there is a need to maintain a balance rather than an iron fist so that bio energy is inclusive and inviting to more players. The financial benefit needs to become extremely apparent and absolutely tangible for biofuel businesses to attract investment. Today's investor is more aware and "more conscious" which in turn results in the investor choosing to park their investment capital with responsible businesses.”