The allocation of Corporate Social Responsibility (CSR) funds to start-ups has been a subject of debate because of uncertainty regarding the actual impact of start-ups on society and their ability to address social and environmental issues. No surprise, of the total CSR spend of more than ₹20,000 crore in India, less than ₹100 crore is allocated to incubators (through which CSR funds can be routed to start-ups). However, given that humanity is facing serious climate challenges that disproportionately affect the economically vulnerable, CSR provides hope by funding early-stage climate start-ups that work in high impact areas such as water, waste and agriculture and require patient capital.
Corporates are allowed to invest CSR funds in start-ups through technology incubators. Investments in select technology incubators were permitted in 2014, and this was further liberalised in 2021 to allow all government funded incubators to access CSR funds. However, incubators have had limited success in obtaining CSR capital for start-ups in general, let alone climate start-ups, which are a relatively new category.
Climate start-ups, however, may be an exception due to their ability to address local problems such as improving water access and enhancing agriculture — issues that align with the objectives of CSR budgets and their ability to help corporates meet their sustainability targets.
In India, there are over 2,000 climate start-ups, that work in themes of electric mobility, renewable energy, agriculture, sustainable food and WASH (Water, Hygiene, Sanitation). Many of them face funding difficulties, particularly in the early stages of product development when they are not yet ready for venture capital investors or debt providers. While climate start-ups struggle to raise funding, a significant amount of CSR capital, totalling over ₹1,500 crore, is allocated to various sustainability initiatives, such as providing clean water, distributing clean cooking stoves, and agroforestry. However, these initiatives may only grow linearly, unlike start-ups that have the potential to grow rapidly and create large-scale impact.
Visibility and goodwill
When it comes to corporate CSR spend, the primary goals are visibility and goodwill creation. Corporations want their CSR initiatives, such as donating an ambulance, to be recognised, thereby creating a positive brand image. Additionally, they aim to generate impactful benefits for local communities, such as improving education and healthcare in areas where they operate.
However, corporations face constraints, including limited resources within their CSR teams to evaluate trustworthy agencies and a lack of strategic integration between CSR objectives and company missions, which often leads to ad hoc spending. On the other hand, most incubators are relatively young, less than five years old, and may lack established relationships with corporate CSR teams. Fundraising from CSR may not be their top priority, given the time required to build relationships, submit proposals, and the limited visibility they can provide to corporations. Moreover, the funding amount per grantee or company is often less than ₹10 lakh, making it a less attractive return on investment considering the effort involved.
As per Ramanathan V, who is a senior mentor to UnLtd, an incubator for social enterprises, there is a growing trend of climate action becoming part of the CSR agenda for many corporates, with some of it trickling down to incubators too. Established incubators like IIT Chennai and Venture Centre, Pune, have always managed to secure CSR funds for their deep tech start-ups, including those in the climate sector, due to their long-standing presence and established track records. Premnath from Venture Centre states that corporates are showing increasing interest in supporting climate start-ups with CSR grants and also engage with start-ups who help them document and meet ESG goals. However, it takes time and effort to build such relationships, and also nurture a pool of start-ups that are ready to engage with corporates for pilot programmes. As per Prof. Mahesh Panchagunla, Dean-IIT Madras, the involvement of faculty in pre-incubation and incubation programmes has attracted significant CSR interest in the deep tech start-ups at IIT Madras incubation cell.
Climate start-up investment aligns well with CSR objectives of giving back to local communities. However, for corporates to jump on the climate start-up bandwagon, a few of these start-ups need to hit it big and showcase their impact and generate goodwill for the corporates. Presently, very few incubators have expertise to identify and nurture such start-ups, highlighting the need to develop and enhance this skill set.
This writer is founder of FineTrain, an advisory firm for green businesses