As green shift sees affordability challenges in the West, India's green discount pulling in climate investments

LeapFrog’s $500-million climate fund is primarily focused on high-growth companies in emerging markets.

Unlike the western markets where green technologies often come at a premium, India offers a green discount, creating an economic incentive that is hard to ignore, a top executive at LeapFrog Investments, a private equity firm looking to deploy $500 million in green solutions in Asia and Africa, told Mint.

This green discount, as opposed to the green premium seen in developed countries, is drawing substantial climate investments into the country, reshaping the landscape of green finance here, Nakul Zaveri, partner and co-head of the firm's climate investment strategy said.

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LeapFrog’s $500-million climate fund is primarily focused on high-growth companies in emerging markets, particularly in Asia and Africa, with some of the firm's largest exposures being in India.

The fund's strategy revolves around investing $30-50 million in segment leaders across energy, mobility, the environment, and food and agriculture sectors. These investments are not only aimed at achieving financial returns but also at creating a significant positive impact, a concept LeapFrog terms “double materiality”, Zaveri said.

On economic grounds

Zaveri emphasizes that the green discount in India is getting “accelerated” by not asking customers to make choices based on moral grounds but on economic ones; economic rationalization makes the transition to greener solutions more appealing.

“Electrification, especially in the mobility sector, is a secular trend we are very convinced about. The green discount in India means the cost of adopting electric vehicles (EVs) is significantly lower than traditional combustion engines, making it an economically viable choice for consumers,” Zaveri said.

LeapFrog’s recent investment in New-Delhi-based Battery Smart's $65-million Series B round was the first in its newly formed climate fund. Despite the lack of a comprehensive policy for battery swapping in India, the company’s ability to achieve positive unit economics and scale has made it an attractive investment, Zaveri argued, adding that the battery swapping model addresses two critical barriers to EV adoption: high upfront costs and the lack of adequate charging infrastructure. By enabling rapid battery swaps, the model offers a cost-effective and convenient solution, fitting in with the needs of emerging markets.

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India's urban transportation dynamics further enhance its attractiveness for climate investments. The country has a unique transportation ecosystem where two-wheelers and three-wheelers dominate, not only for personal use but also for commercial applications such as delivery services.

Zaveri points out that the electrification of these vehicles can have a disproportionate positive impact on emerging consumers. The government's targeted policy interventions, such as the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME) scheme, have also played a crucial role in fostering this ecosystem.

Enabling rather than prescriptive

"India's policy approach is enabling rather than prescriptive, focusing on safety standards rather than dictating technological choices. This flexibility allows for innovation and scalability, which are crucial for the success of green investments," Zaveri explains. The government's approach ensures that as long as safety standards are met, companies have the freedom to innovate and scale their solutions.

The broader outlook for climate investments in India remains robust despite some short-term challenges, Zaveri said. While there has been a temporary stagnation in EV sales due to policy adjustments and market disruptions, Zaveri is confident that these are transitory issues.

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“The structural transition towards electrification and sustainability is irreversible. The rapid urbanization and increasing consumption patterns in emerging markets like India necessitate a shift to cleaner technologies,” he said.

LeapFrog’s climate investment strategy is not limited to mobility. The fund is keen on exploring opportunities across the entire EV value chain, from battery management systems and grid management software to charging infrastructure and recycling. “Beyond mobility, we  are also looking at sectors such as renewable energy, sustainable agriculture, and waste management, and have a very, very strong pipeline already,” Zaveri said.