48962 - Profectus Green Bond

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Summary of Investment Information

Project Number

48962

Company Name

Profectus Capital Private Limited

Date SPI Disclosed

Feb 7, 2024

Country

India

Region

South Asia

Projected Board Date

Mar 11, 2024

Environmental Category

FI-2 - Limited

Status

Active

Last Updated Date

Oct 6, 2024

Department

Regional Industry - FIG Asia & Pac

Industry

Financial Markets

Previous Events

Approved : Aug 2, 2024
Signed : Sep 19, 2024
Invested : Sep 30, 2024

Sector

Other Non-Banking Financial Institution (NBFI)

Project Description

The proposed investment envisages an Indian Rupee (INR) denominated investment of up to US$25 million equivalent in Profectus Capital Private Limited (PCPL, or the Company). The investment will be made by subscribing to green bonds issued by PCPL with a tenor of up to five years and the proceeds will be used for financing energy efficient (EE) machinery for micro, small and medium enterprises (MSMEs) (the Project).

Associated Advisory Engagement

IFC is also proposing an advisory engagement to (i) identify its baseline portfolio (ii) measure the impact by quantifying the potential greenhouse gas (GHG) emissions savings (both in existing portfolio as well as new business), and (iii) create a business growth plan to scale up its EE portfolio. This will include setting up processes for capturing data and information needed for reporting and impact measurement and associated capacity building of relevant teams.

Sponsor / Cost / Location

Product Line	IFC Investment (million USD)
Risk Management
Guarantee
Loan	25.0
Equity

IFC's loan to the financial institution described in this SII is targeted for on-lending to the following sector(s):

Product Type	Use of Proceeds
Straight Senior Loan	Loans to SME Borrowers

IFC's Definitions of Targeted Sectors can be found here.

Development Impact

Stakeholder Effects- Increased access to climate finance for Energy Efficient (EE) equipment by MSMEs: Through the Project, IFC will support PCPL in increasing access to climate finance for EE equipment by MSMEs. Most MSMEs in India are traditional and small and deploy inefficient technologies. The sizeable quantum of energy consumed by the MSME sector combined with the use of conventional and less efficient technologies offers a significant potential for energy savings through replacement of old machines with new EE machines and even through EE retrofits in the prevailing production processes. Assessment of Contribution to Market Creation- Competitiveness: The proposed investment is expected to promote greater competitiveness in the MSME climate finance market through demonstration and replication channels. Despite the prevalence of strong and mature FIs in India that have strong liquidity, green finance is still a relatively new concept for most private sector FIs in India, especially when the target segment is MSMEs, and more so for smaller NBFCs. IFC’s support through the Project will demonstrate to other banks and NBFCs that there is a scalable business opportunity in this market segment and is expected to lead to replication from other FIs in the market, promoting greater competitiveness in the market with more banks and NBFCs scaling up financing in this segment.

IFC’s additionality in this Project is both financial and non-financial. Financial additionality would be achieved through an innovative financing instrument. IFC will support PCPL with the issuance of green bonds, which is still a relatively new asset class for FIs in India, especially for entities the size and vintage of PCPL, and which would require PCPL to undertake significant commitment towards forming a Green Bond Framework and to establish processes for proper monitoring and reporting of use of proceeds. As part of the project, PCPL would also be required to obtain a second party opinion (SPO) to review and validate PCPL’s Green Bond Framework. Non-financial additionality would be achieved through knowledge, innovation, and capacity building. Currently, PCPL does not have a Green Bond Framework in place. IFC will assist PCPL in developing a Green Bond Framework in line with ICMA Green Bond Principles, and to obtain an SPO from an independent party. In addition, IFC will also provide advisory engagement to (i) identify additional EE assets in PCPL’s portfolio, (ii) measure the impact by quantifying the potential GHG emissions savings through reporting on IFC’s CAFI (climate assessment for financial institutions) tool, and (iii) create a business growth plan to scale up its EE portfolio. This will include setting up processes for capturing data and information needed for reporting and impact measurement; and associated capacity building of relevant teams.Financing structure: IFC will support PCPL with the issuance of green bonds, which is still a relatively new asset class for FIs in India, especially for entities the size and vintage of PCPL, and which would require PCPL to undertake significant commitment towards forming a Green Bond Framework and to establish processes for proper monitoring and reporting of use of proceeds. As part of the project, PCPL would also be required to obtain a second party opinion (SPO) to review and validate PCPL’s Green Bond Fra

E&S Category Rationale / Risks and Mitigation

The project entails an investment of up to US$25 million in a 5-year green bond issued by Profectus Capital Private Limited (“PCPL”, or the “Company”). The proceeds will be used for financing energy efficient machinery for micro, small and medium enterprises (MSMEs). PCPL’s SME portfolio mainly comprises businesses in food, pharmaceuticals, plastic, auto components, engineering, packaging textile and readymade garment sectors. These industry sectors in SME segment present medium-low Environmental & Social (“E&S”) risks and impacts which are readily manageable. Hence, the project is categorized as Category FI-2 in accordance with IFC’s Environmental and Social Sustainability Policy. The typical risks areas include labor and working conditions, occupational health and safety, supply chain risk including child labor and biodiversity risks in the agribusiness, air emissions, waste management, and handling of hazardous materials, in the SME borrower’s operations. The project will not support coal-related activities and higher risk business activities that may involve a) involuntary resettlement, b) risk of adverse impacts on Indigenous Peoples, c) significant risks to or impacts on the environment, community health and safety, biodiversity, cultural heritage, (d) risk of significant retrenchment, or e) significant Occupational Health and Safety risks. For this investment, the E&S requirements will include the IFC Exclusion List and national E&S laws and regulations. The company will be required to apply Performance Standard 2 requirements to its own operations.

The key risks are related to the ability of Profectus to identify and manage environmental and social risks associated with its lending activities to the MSME clients. Additional E&S risks and impacts of PCPL derive from the capacity and systems in place to manage these risks. As part of the Project, PCPL will be required to (i) nominate an E&S officer (ii) develop and implement an E&S Management System (ESMS) and (iii) provide training on ESMS to the staff. PCPL will be required to: (i) maintain its ESMS procedures; (ii) remain committed to applying the labor standards established by the IFC Performance Standard; and (iii) submit a periodic report to IFC. PCPL's HR policies are aligned with Performance Standard 2 on labor and working conditions and the company follows the applicable Life and Fire Safety requirements in its own operations.

Title	Anticipated Completion Date
Establish ESMS	03/29/2024
Nominate E&S officer	03/22/2024
Staff training	03/29/2024

Contacts

For Inquiries About the Project, Contact

Profectus Capital Private Limited
Hemant Sethia
Head, Treasury
+91 22 4901 4400
hemant.sethia@profectuscapital.com
B-17, 4th Floor, Art Guild House, Phoenix Market City, Kurla West, Mumbai 400070, Maharashtra
https://www.profectuscapital.com/

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