Climate Change Capital Ltd (CCC), the world’s largest private sector carbon fund, is betting big on the transition to a low-carbon economy. It advises and invests in companies that recognise combating global warming as both a necessity and an economic opportunity. In India, it invests from the $830-million fund focussed on carbon and clean energy markets. In an interview with VCCircle, Nakul Zaveri, Senior Investment Officer, Climate Change Capital, talks about their investment strategy, focus areas, CDM (clean development mechanism) landscape and expansion plans for India. Apart from investing in carbon embedded assets, the fund will also look at property and energy infrastructure (green buildings) in India. CCC’s investment portfolio focusses on carbon finance, private equity and property and energy infrastructure. Excerpts:-
What kind of capital are you looking to invest in India?
Investments into India flow from our carbon fund. We are the largest private sector carbon fund managing €750 million ($830 million) focussed on clean energy markets. Our investors include some of the world’s largest pension funds. CCC does not have a specific allocation for different markets. India is a key focus area for us given its huge growth and very supportive policy environment, and the group considers investing in India as an integral part of its strategy for its present and future funds.
What will be your size of your investments? What is your differential investment strategy here?
CCC has committed significant capital in numerous deals and through various structures in India. Our present strategy in India is to engage in emission reduction projects in the municipal solid waste (MSW) and energy efficiency sectors. In addition, CCC is also targeting renewable projects including mini-hydro, wind and biomass. CCC has contracted with four of India’s leading MSW companies for a number of methane abatement projects. One of them is Nature & Waste Management (P) Ltd based in New Delhi and dedicated to converting the organic component of MSW to compost. CCC has committed substantial capital over the crediting period with all the above companies under different carbon structured contracts.
What are you betting on in the CDM space?
India has the largest number of service providers in the carbon markets. However, most of these players are either consultants or aggregators. CCC is one of the very few buyers with a large pool of committed capital for the carbon markets. In addition to capital, the carbon finance group has expertise in carbon finance, project finance, private equity, power project development, portfolio management, environmental and technical consulting and policy. The team has made investments in China, India, South East Asia, the former Soviet Union and the US.
What is India’s place in the global CDM landscape?
India ranks second after China in terms of value and volume in generating emission reductions under the CDM. India’s share is 33% by number of projects and 20% by volume of CERs (certified emission reductions) in the Asian region. In 2009, India ranked first in number of CDM projects submitted for prior consideration to the United Nationals Framework Convention on Climate Change (UNFCCC). The Indian government has also been very progressive in the CDM space and is accelerating various policies for the adoption of clean energy in India.
What does it mean to invest in carbon as a PE strategy?
Until recently, carbon credits were usually contracted under a pay on delivery contract. Now, the low hanging fruits are gone and, there are various structures evolving such as upfront advance against potential future CERs generation, debt and investing private equity into projects with carbon embedded assets. All investments in clean energy will become mainstream going forward and the future for all private equity investors will be to focus on sustainability. Post the Copenhagen outcome, most investors are awaiting more clarity on the post 2012 international agreement and also monitoring US participation in the carbon markets.
How do you mitigate the risk of CERs accruing from a project?
CDM projects carry a number of risks including validation, registration, verification and impacts from continuous evolution of the UNFCCC’s CDM policies. In addition, all CDM projects are exposed to regular project risks such as financial closure, implementation delays, regulatory and compliance issues. We do strict due diligence before taking up any project. We cover CDM, financial and legal risks and closely monitor financial closure, implementation and any development at the policy level which may impact the project.
What do you make of the opportunity available in mapping a company’s carbon footprint, reducing emissions and encashing credits?
We are seeing signs that the Indian corporates are increasingly appreciating the fact that the transition to a low-carbon economy will reshape business opportunities and risks and will have far and broad implications for businesses. Some large corporate houses have already voluntarily started creating inventories of their greenhouse gas (GHG) emissions and are mapping their carbon footprint and taking part in global initiatives such as the carbon disclosure project. In addition, there may be compliance requirements in the near future which will create additional opportunities to reduce emissions and encashing credits.
From a private equity perspective, how do you unlock value in the Indian carbon market?
There are certain sectors which may give better returns than the others largely driven by the GHG global warming potential combined with the aligning of the project with the UNFCCC process. The investment approach needs to incorporate carbon due diligence and inherent mitigation to risks associated with innovative investment structuring. The volume may become very critical due to the high transaction costs associated with it.