E Co Sound bites: Conversations with AEs Episode 1 Transcript – FMO & Eversource Capital

15 June 2021, Category: All insights, News

This is the transcript for Episode 1 of Conversations with Accredited Entities: Green Growth Equity Fund in India with FMO & EverSource Capital. You can listen to the full episode here.

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About this episode

Project: Green Growth Equity Fund in India

Organisations: FMO and EverSource Capital

Podcast Speakers: Dr Grant Ballard-Tremeer – E Co., Jim Brands – FMO, Rupali Gupta – EverSource, Seth Landau – E Co.


Grant: Well done and congratulations for getting approved at the 28th board meeting of the GCF! Can you introduce us to your project?

Jim: Would you like some background on FMO first?

Grant: Yes, that would be great.

Jim: I’m with FMO, the Dutch Development Bank. The Bank has been here for 51 years and has its own balance sheet, where we have the mandate to invest in developing countries in three different sectors – renewable energy, financial institutions (financial inclusion), and agribusiness (food and water). We do that in debt but also have a parallel department for private equity that invests in those three sectors as well as funds. This is where the Green Growth Equity Fund (GGF) comes into play.

We have around EUR 10 billion in funding and manage funds on behalf of governments, including the European Commission, Dutch Ministry of Foreign Affairs, USAID. We’ve been accredited for the GCF since 2016 and have had one other project approved – similar to the GGF, it was Climate Investor One.

Since two years ago, we’ve been looking to invest in a GGF in India. Our private equity department is very excited about this opportunity because they invest in sectors like e-mobility and waste to energy that are a bit unfamiliar for FMO, so we don’t have a lot of direct exposure to it. Our energy department wants to get more experience with such investments. Therefore, we thought it would be nice to get this investment.

Our team has been looking at it but I think we were a bit afraid of the risk/return because of the fragility of these sectors and them being quite new. As well as FMO normally investing USD 20-30 million in a fund, which is already a large size, and the GGF is aiming for close to USD 950 million. Along came the GCF opportunity where we are looking to invest up to USD 137.5, which would give FMO a much bigger stake and the opportunity to make a bigger impact.

This is something we started a year ago in May 2020, where we got approval from our board to go with this. Since then, we’ve been simultaneously running the process of doing our own investment, which is yet to get final approval but is very close, and the GCF process which was approved at the last board meeting. Maybe Rupali wants to give more insights into the components and activities of the GGF?

Rupali: Yes, I’ll also just provide a brief background and describe the GGF as we go along. So the GGF was approved at GCF 28. This particular fund (GGF) is probably the only large-scale equity fund in India focused on climate change. Its objective is to distribute a significant volume of institutional capital into the indian green growth sector through its distinctive strategy of investing in rapidly scalable green sustainable businesses. It does this through two main focus areas 1). Decarbonisation of energy and its uses, which included renewable energy, energy efficiency, storage, e-mobility, and the entire value chain there. 2). Environmental conservation, basically adding to low-carbon and circular economy which includes sectors such as water and wastewater management, and waste management.

So it’s really the only fund which not just invests out of an allocation for investing in renewable energy generation but goes beyond that and looks at doing both renewable energy generation, which is a bit more of a proven business model, and extends to other business models that are not as proven – energy efficiency, e-mobility, waste, and water. That is the interesting thing about this particular programme.

To provide a background on how it came about – it was created with seed funding from the UK and Indian governments, who wanted to create a unique and effective investment method to tackle climate change in India. India is reeling under pressure of air pollution, it has some of the most polluted cities in the world. It has a very large population, so definitely multi-pronged solutions are needed. Both governments came together and said they’d seed fund a particular fund that can become a solution in India.

EverSource Capital – which is a joint venture between two groups, Everstone Capital India and Lightsource BP – was selected as the manager of the GGF through a rigorous selection process that both NIF and DFID undertook. Everstone is a manager of private capital in India and Southeast Asia, it’s pretty successful in private equity, real estate, venture capital and now infrastructure has USD 5 billion AUM. Lightsource BP is a large developer of renewable energy, with assets around the world. It was a coming together of these two that led to the management of the GGF.

Grant: Fantastic. It sounds like a fascinating fund, as it brings together both the more traditional renewables that people are doing and the broader circular economy, decarbonising and resource conservation. It’s a really interesting model for this type of fund. We’re really interested in how the process went for putting together the GCF project. Jim, you mentioned you were working on this from May 2020, is that when you started the GCF aspect of the GGF?

Jim: I think Rupali and team were doing it before and speaking with GCF colleagues. But for FMO, if we start doing such a project, because it’s quite an obligation for being the accredited entity, we require board approval. This was in May 2020. If you look on the GCF website, I think it says it took us 250 days to get board approval.

Rupali: The only thing I would add is that we were engaged at EverSource Capital. Given that while we were waiting, we were using the seed capital to make the investments. The important thing is to fundraise and channel capital into the fund. It needs to be of a substantial size to make any impact. We were in conversation with investors, including FMO. FMO was spending time with us to understand how we were designed and how this could interest them. We were also speaking to the GCF and realised we would need a good accredited entity to work with, to shepherd this project through the GCF process. It was lucky we were having this conversation with FMO, and FMO was interested so we worked together on this and got board approval. We were trying to shorten the deadlines further, to try to make B.27, but we couldn’t make that. But otherwise, we were working super-efficiently to work quicker.

Jim: It was a fluid process, I’d say. Compared to our other fund investment with the GCF, it went quite smoothly. We didn’t miss any big deadlines, nor did the GCF.

Grant: 250 days is around average but if you were almost ready for the previous board meeting, apart from the letter of no objection, then you could’ve been quicker through the process?

Rupali: It was still quite a mad rush to B.27. When we did get an extra quarter there was a sigh of relief, that we have a little more time to get things done because there is a lot of work that goes into getting GCF approval – on both of our sides.

Jim: I would say it’s not the best comparison to take with the average GCF project. I do think these types of programmes, especially these funds, have longer times for getting approvals. It is more complicated and a little less known to GCF, so the diligence is higher.

Rupali: The GCF is designed to evaluate a project whereas we’re a programme and a PE fund. That is not easy for everyone at GCF to understand when evaluating proposals.

Grant: You mean they’re more oriented around a project design that has a clear start and end, delivering certain things on the ground. When you come with a project like this, it’s quite different?

Jim: It’s the discussion they always have during the board meeting. To what can the board approve within their mandate? For the GGF, it’s not clear what they will invest in in four years. They have their mandate, but it could be anything within that mandate. It’s hard to complete an ESS or a gender action plan when you do not know the investment yet. So, there’s a lot of complications there and we’ve had lots of discussions with their team.

Rupali: They way to look at it, this is going to be multiple projects under the GGF. As Jim said, the ESG programme, gender action plan or risk management framework will be very different for a standard renewable energy project versus an e-mobility project versus a waste management project. They’re very different kinds of businesses. Some of these investments have not been made yet, private equity funds tend to work off a concept and investment strategy but haven’t yet made the investment. It’s very difficult to design the necessary documents for such programmes which are not yet invested in or will be very different from each other.

Grant: What did you need to do to get through to the GCF or explain how this fund works in a different way? How did you navigate that process?

Jim: The easy answer is a lot of discussions with their team and our teams, and explaining how we and the GGF operates. The outcome is that we’re treating these documents as live documents. For example, we’ve made the commitment that we will create an individual gender action plan when we invest in a specific project. There were constructive conversations with the Secretariat, we found a way.

Grant: Does that mean there is a framework that gets tailored for each investment?

Jim: Yes, it is a framework that will be specified for each single investment.

Rupali: The process with the GCF was pretty consultative, I’d say. They have their various departments and colleagues who pitch in for these different types of documents. We had a discussion with them and explained the exact design of the programme. It makes sense to them, sometimes they provide solutions or we go to them with solutions that they feel will work – to that extent it was a collaborative and consultative process.

Grant: From the ESS perspective, it is categorised as I1. That is intermediated and what we call a category A project, is that correct?

Rupali: That is correct. That is something we had an internal debate about. As a fund we do not intend to make investments into category A projects. We usually only evaluate category B projects and would only be in very exceptional circumstances that we would look at category A projects. The mindset internally is that we will avoid investing in category A projects. Having said that, given that we’re a fund, we wanted to make sure we have the ability to evaluate a category A project. However, it would be very rare that a category A project would be evaluated.

Jim: That’s the nice thing about designing a project for the GCF, that we think of this in another way. If we had been classified as I2 or B, what would’ve happened if an investment came along in 6 years from now that would have been a category A is that this would have been considered a major change event by the GCF. This would mean we would have to go to the NDA and ask whether this is ok. If they don’t reply within 30 days, it goes to the board meeting again to approve this change. So this is a super significant thing that we don’t want to have to do. We’d rather have flexibility from the beginning than have to make changes later on.

Grant: That makes a lot of sense. You get the framework that gives you the maximum flexibility and may as well do the due diligence at the start that allows for flexibility later on. It sounds like the design process went pretty smoothly. One of the elements of the project includes USD 4.5 million in technical assistance funding as a grant. How was that element received by the GCF and what is the intention for the funding?

Jim: It is EverSource Capital that is the executing entity, FMO is the accredited entity so we have no investment decision. Money flows down via a grant agreement to a domestic manager at EverSource. I can say on the GCF that they were ok. They wanted us to give them a budget and explain to them what we will be doing. There were some questions that were perceived as potential lobbying to the government and from iTAP. But they were fine with it. Rupali, maybe you can add a little on the technical assistance.

Rupali: Yes, sure. An important aspect was thinking about how better we can design the project given GCF’s involvement. We thought that we do have the equity portion which will be invested into various sectors but the programme would definitely be helped with a grant for technical assistance. The programme was structured to provide that additional finance which would be complementary to the existing funding for the initiatives that we were taking on anyway. The TA grant will be used to create an enabling environment in India for the uptake of green infrastructure projects. It became an integrated approach to finance and help accelerate the transfer of low-carbon technologies and convert them into innovative business models in target sectors and contributing to systematic shifts. This will be done in three main components:

  1. Capacity building (e.g e-mobility such as e-bus rollout and driver training, gender inclusion)
  2. Knowledge building – research in all of these sectors and coming up with most viable business models. For example, studies in energy storage – a new sector with limited invested capital – we’d be interested in working with the Indian Institute of Technology or other institutions to give us insights into the best technologies for energy storage.
  3. Policy dialogue – a lot of these sectors are new and have limited policies in place. It is very important to work with governing bodies to design better policy frameworks, advise them, lobby with them and interact with them to create better policies in these sectors. The government needs some kind of help and guidance in how these should be designed.

Grant: It would be good to hear your view on private sector projects in general. Your project was the only one from the private sector to be approved at B.28, what are the challenges for private sector projects? Why are there so few?

Jim: I think there are a lot of reasons, but the biggest one is that private sector entities are not as used to working with donors like the GCF as public sector entities. For example on policies, like ESMF and gender action plans, the GCF has very different requirements than what FMO would normally do. We think of this as a good opportunity to learn more from other institutions, but this is definitely something that needs traction internally and requires some capacity. There are different questions that we have to answer compared to others, I think that’s holding the private sector back a bit. It’s the same on regulation.

We can use the example of EverSource or Climate Investor One, the policies of the GCF requires veto rights in the voting structure. This is something that makes a lot of sense for public sector projects but it’s very difficult to accomplish in the private sector. It is hard to get all the legal documentation ready to allow onboarding of the GCF. Another thing I’ve definitely noticed in designing GCF projects is the no objection letter. I think it’s a good concept to have country ownership and local stakeholders agree on what you are doing. These local stakeholders are often quite high up the tree, for example in India she was a minister. So it’s quite difficult to even start the dialogue. We were lucky that EverSource was well connected and we were able to set up that dialogue. But for Climate Investor One we tried to get 30-40 NOLs and on a lot of occasions the NDAs didn’t even reply or it would be very complicated to get it. For public sector banks, like EBRD, it’s much easier, it’s a different game they’re playing. They would be the main reasons why it is harder for the private sector.

Rupali: I would add that it’s a very different approach that the GCF takes. I have experience of raising funds for the last 17 years, and this was a very different experience. It’s very different from going to another institutional investor like FMO, or a pension fund, or a sovereign fund. They have their own way of evaluating you. It’s very important for them that you can prove additionality. These are concepts that are very new for traditional fundraisers. It is not a question that other institutional investors ask. So you have to really change your way of thinking to deal with the GCF. They do this because of the kind of capital that they bring to you. You learn the GCF process as you go on, their way of doing things, their way of looking at documents, their way of asking for information. I think for private sector participants, it’s not that easy. Now that I’ve done it once, next time round will be easier. But the first time round, it takes a lot of resources, rethinking and explaining internally why we’re doing this with the GCF.

Grant: It’s like speaking a different language and each organisation needs to learn that language. For the private sector, you have decision making structures that ask ‘why are we bothering with the GCF instead of a pension fund and dealing with all these extra complications’?

Jim: Yes, that is certainly a key question. Even at FMO, we do know the additionality question as it’s the main part of my job. But there is definitely a lot of defending towards our board and internal management about why we require the GCF and why we’re going to a more extensive process rather than another donor or using our own funding.

Grant: At the board meeting, the question asked was about carbon capture and storage. Was that something you knew would be raised?

Jim: We had a very constructive call with civil society organisations the week before, before they sent in their questions. This was part of those questions. We discussed it with them and internally a lot, among EverSource and FMO, and agreed that we would be ok to exclude it from the mandate. We were prepared for the question and felt we had already answered it, but were happy to answer it again.

Grant: How did it feel to speak at the board meeting?

Jim: I wasn’t really expected to be speaking at the board so I was a bit surprised, but it was a nice experience. I was a bit sad it was a virtual board meeting, it would have been really cool to be in Songdo.

Rupali: Over here, the experience that FMO has as an AE really helped us. They understood that it has to be a consultative process with the CSO and board members. In the run up to the meeting, we were receiving queries from the board and CSO, and FMO did a great job of having a session to address their concerns and thinking about which components were core to the programme and should not be changed. It was a good discussion and we decided that carbon capture could be excluded and took the CSO’s suggestions on board.

Grant: How did you react when approval came?

Jim: Relieved and happy, definitely. It was 10 months of working extensively. I think Rupali and I spoke every day for 300 days. We were all very happy when approval came and I think the people on the board were also happy as it was 3.30am in Songdo.

Rupali: It was a sense of relief and I was quite ecstatic. For a few minutes when the CSO representative talked about their laundry list of concerns, which we had addressed, we thought they might not approve it then and may go to a separate discussion. But we were happy to see the approval came on the spot and all of the prep work we had done with consultations seemed to have helped.

Jim: It was a bit tense in terms of timing. I was most afraid of whether they would discuss it. As usual, there was a bit of tension in the beginning and then they came to the funding proposals and a lot of them were sensitive. There was an issue with UNDP and with Cuba, and it was 3am, so we weren’t sure whether they would discuss our proposal. That was the most frightening thing for me.

Grant: Jim, how did you get into this business? What brought you into the work you’re doing?

Jim: A bit of a random story to be honest. I applied to FMO four and a half years ago now. I started work at our blended finance department and, on my first day, I had a meeting with the European Commission who were setting up a new guarantee programme. This was a fund for sustainable development and they asked us to design programmes for it. I started doing that from then, and after the EC came the GCF. Since then I’ve been developing a blended finance programme with both donors. I’ve been liking it a lot, I think blended finance is a very promising thing. Using a little amount of donor funding to get a large amount of commercial funding is something that should be able to work. I still see a lot of issues that we have to overcome before it becomes as powerful as we want it to be. I’m very excited to work in the sphere of climate finance.

Grant: Rupali, what brought you to EverSource Capital, what’s the story behind that?

Rupali: I have been doing fundraising for private equity funds for the last 17-18 years and at that time, people didn’t understand what private equity was. I was part of one of the earliest funds in India and worked with them for several years. The first fund they ever raised was USD 125 million and now they are a multi-billion dollar fund. After, I moved to doing this for infrastructure and focused on raising capital for investment in that sector. I’m a bit of a restless soul and I wanted to explore doing different things. I wanted to work and live in a different country and four years ago I moved to London. I started working with an African focused infrastructure investment platform, because I thought it would be exciting to work for Africa as a continent. I was with them for a year and a half as their Head of Investor Relations.

Then the EverSource opportunity came along, they needed someone to raise the GGF. It was something that really spoke to me and I got excited when I heard about this opportunity. When you raise money for an emerging market fund, you are creating impact but this particular opportunity goes beyond that. It goes beyond creating employment, gender equality etc, there will be visible climate impact, not just in India but globally. When I looked at the strategy, it was exciting to see the generation and consumption of clean energy in India and contribute to clean transport and waste management systems which are kinder to the earth which are all new concepts in India. That’s an excitement that I see not just in myself but everyone in EverSource, that we’re contributing to new age sectors and making them viable. We’re creating business models as we go along and create a virtual cycle which will hopefully become larger and larger. It has been an exciting journey and very fulfilling. Fulfilment is the word that describes the difference between the other fundraising that I’ve done, this one gives the extra fulfillment and feeling of satisfaction.

Grant: It’s lovely to hear that it’s a passion and interest that is driving both of you that adds something extra. I’d like to ask a couple of quickfire questions. What are you reading and watching at the moment?

Jim: I can answer both. I have to admit the COVID-19 pandemic made me complete most of Netflix but the one I’ve just been watching is Bad Banks. It’s a German series on the financial sector, which is very critical about it. It’s fiction but it’s been very interesting. I’ve just finished reading a book called the Grand Hotel Europe, it’s a novel about how tourism changed Europe and how we perceive tourism in Europe. It’s a light tone, really nice to read.

Rupali: I’m reading two books at the moment. I’m not much of a non-fiction reader and you wouldn’t normally find people reading these two books. I wanted to go back to classics. So I started reading Tale of Two Cities and am finding it fairly interesting. I thought I’d start reading it and not be able to sustain it but I am finding it interesting. The second one is the biography of Napoleon, through the eyes of the women in his life – his wives and mistresses. I’m enjoying both the books. I just started watching something called the Worn Stories. I came across it and started reading it. It’s very interesting how it’s been made, it has a human kind of story of different characters in each episode. It talks about their journey through the clothes they wear, uniform, or their suit and how it impacts their identity. It’s very interesting and very different.

Grant: To round things off, what experiences from the work that you’ve done, not just with the GCF, would you recommend listeners really pay attention to in project design or fundraising?

Jim: There will be a lot of setbacks in the GCF process and a lot of changes. I can remember for the GGF that we were talking about the required mobilisation rate of the concessional funding of the GCF and to what extent the size of their investment would be. We thought we had a solid understanding for months of how this mechanic would work and this changed late in the process which fundamentally changed the funding proposal. I remember having colleagues on the phone and everyone was panicking. I tried to get everyone to calm down a bit and told them that this might happen five more times, take a few deep breaths and see how we can come up with a solution to fix it.

To be honest, we haven’t had too many with the GGF but definitely with Climate Investor One. There we didn’t initially get the concept of the GCF, to be honest. We thought it would be a good idea to get no objection letters from every country that was eligible for the fund – which was around 60. So, we had a colleague of ours who flew to nearly all 60 countries to get these letters. The GCF provided feedback saying the fund would not invest in a one-size-fits all project and asked us to make it more specific. We got 11 initially and eventually 18, but the whole proposal had to be completely reshaped. I guess that would be my tip, prepare for changes in the beginning and make the best of it. There is a lot of dialogue to be had with donors that will require a lot of changes but eventually you end up with something that’s better for them and yourself, and for the world which is why we’re doing this.

Grant: Persistence coupled with flexibility and realising that big things can change, even at the last minute.

Jim: Yes, exactly. Try to make the best out of their expertise and requirements, and get a constructive dialogue going.

Grant: How about you, Rupali?

Rupali: Definitely what Jim has mentioned but what I think really helped us was the collaborative approach. Having good partners to work with and the whole dynamic of three different teams working with each other was important. Having a great working relationship is essential. It is true for any working situation, but in this particular case it was all the more important. The FMO team and our team found a rhythm and way of working well together. We’ve never met, it’s a bad time with the pandemic. But, in spite of that, to build this relationship and to have each other’s back has been tremendous. It is a recommendation, for sure, that you should definitely have a comfortable and happy relationship with the teams you’re working with and I’m very fortunate to have that.

Grant: I’m joined now by my colleague, Seth Landau, who is a Principal consultant here at E Co. Seth has decades of experience in organisational and project development, with a focus on project finance and the design and development of financial mechanisms related to climate change. Seth, welcome. What stood out to you in that interview? What did you make of it?

Seth: Thanks, Grant. I thought it was interesting for a variety of reasons. There were three main areas that I thought were the most interesting. The first was the difficulty in getting private financing on board. You’ll notice there was a private financing institution in this project, but at the same time they’re backed up by a public financing institution from the Netherlands. So, it’s sort of private but also sort of public and I feel like the amount of work that goes into these projects and the different language that the GCF speaks versus private finance—and I will say, just GCF, I think it applies to the broader community as well—that the language is so different that it almost requires a translator in order tor get private sector on board. I think that’s more now in the actual projects that have been approved at the GCF, as well.

The second thing that was quite interesting, for this particular project, was that they wanted it to be a broad-based project without pre-judging the types of investment and making that happen is a big struggle for donor organisations who say, “No we want to know the exact amount that goes to the exact type of project.” Of course, in this project, GCF is part donor but also part investor, but I think that’s a real challenge when you’re talking about these broader-based investment mechanisms in which you don’t want to pre-judge the types of investments. I think they had a very innovative way of making basically exclusionary lists and trying to keep the door open for even relatively higher environmental impactfu or socially impactful projects, even though they’re not planning on counting it.

One of the very interesting, let’s call it ‘tools’ on the international market that’s being further developed, is the idea of call the taxonomy of environmentally friendly investments. It’s currently being developed by the EU and can serve as a useful framework, or maybe, it’s not a standard yet, but let’s think of it as a standard, where we can say, all of our investments or projects can fall under these categories, which, I think is potentially useful.

Grant: One of the things that they mentioned in that call was about going for the Category A project, even without any intention to have Category A projects approved, and that’s part of trying to keep, for private sector projects, the door as wide open as possible, in case any of those types of projects come forward.

Seth: Yeah, certainly if you want to start an investment fund, you want to have your parameters from which you’re going to be investing. But once you start getting out of, “Ok, we’re going to be just investing in wind and solar,” and you start going into a broader scheme then it becomes quite difficult to both define a project well enough to get an international donor such as the GCF on board, but also provide the flexibility to move on investments.

The third thing that I noticed, and it ties in to the first point of public versus private organisations, is that they mentioned they were going for a multi-country project, but they didn’t have easy access to the NDAs to get letters of sign offs for the projects, and I think that points to broader issues. For private sector companies, it will be relatively rare that they will have access to the Ministries to Environmental—or the high-level figures to get such a sign off like that. So, I wonder in getting private sector finance actors involved, there might be some scope to discuss whether that’s absolutely necessary or whether there’s some other workaround to make that happen, because otherwise I can see it being a big barrier for private sector.

Grant: Yeah, we’ve seen in the Global Environment Facility, the non-grant instruments that’s provided are outside of the normal staff allocations, therefore it has a different way and process of approval, when it’s targeting specifically the private sector. Maybe that’s an aspect that could put into the mix there, with GCF projects as well. That is a very big challenge, especially, because the context would normally have to be with the Ministry of Environment—the private sector often dealing with Ministries of Finance.

Seth: But even if they’re dealing with the Ministries of Finance, it’s not usually going to be on a political level, but rather on an operational level. The political level discussions of getting such a sign off letter are not—if you’re operating a business, maybe you don’t have these [political] contacts, which, in this case, the Indian partner did have these contacts, which made it possible. But to do that on a consistent basis is not a trivial matter. So, either you have to get lucky, get a public sector institution involved, or an international organisation involved, or you have to figure out a workaround that doesn’t necessitate the involvement of the NDA.

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