Original content provided by BDO Global.
As ESG and sustainability solutions become need-to-have across business operations and industries, market growth is attracting more investors and multinational technology companies. Carbon tracking and reporting start-ups illustrate the boom in climate technology funding, M&A, and market size.
Simultaneously, many organisations viewing the speed at which things are moving are confused by what they need to do to track and report their carbon emissions. There are many options and solutions which increase the odds of finding the perfect fit for a company’s ESG needs and plans.
However, automating and streamlining parts of ESG-related processes such as carbon documentation and reporting requires careful preparation and well-defined strategies. There is a close correlation between ESG information, data quality and the potential for using automated systems for data gathering and reporting.
Increasing focus on ESG
Environment, Social, and Governance (ESG) factors are increasingly top of mind for companies and organisations across industries for a multitude of reasons, including:
- Evolving legislation: including increased documentation and disclosure demands.
- Tax requirements: new tax schemes that include ESG and sustainability-related taxes.
- Legacy setups: manual, time-consuming data gathering and structuring remains a major issue.
- Strategic considerations: clear, proactive ESG disclosure and related initiatives are becoming increasingly important for employees, customers, and investors.
A string of young companies offer solutions aimed at solving these multifaceted challenges. One example is carbon footprint calculation and reporting. The sub-industry presents a microcosm of how ESG requirements are increasing, the market for solutions is growing – and how start-ups by no means have it all to themselves.
In fact, large-scale companies and investors are actively pursuing M&A to stake their claim to the future of carbon capture software and the broader climate-tech space.
Holistic ESG impacts
Increased focus on ESG and sustainability is evident across business functions, strategic areas, and operations:
- ESG issues remain high on boards’ priority lists, including exploring options on how to comply with changing requirements and communicate ESG efforts (BDO Pulse Survey 2021)
- ESG risks are top of mind for senior global business leaders across Europe, the Middle East, Africa, Asia-Pacific and the Americas (Global Risk Landscape 2021)
- ESG influences hiring ability, with social purpose mentioned as a core professional driver by three-quarters of respondents in a survey of Gen Z students (Global Natural Resources 2022)
- ESG impacts the bottom line, having a positive impact on long-term financial performance, say 86% of 150 middle-market tax executives (Tax Outlook Survey Report 2022)
- ESG boosts M&A, as metrics and sustainability reporting contribute to determining business value, operational efficiencies, access to new markets and supply chain resilience (BDO Horizons 2022)
Simultaneously, a sweeping trend is changing how companies view ESG, moving from a risk-centred view to a more holistic and opportunity-focused approach. This includes for carbon tracking, reporting, and management.
Closing in on carbon
Carbon tracking and reporting revolve around the central question: What is your company’s carbon footprint? Finding an answer is often complicated by the three scopes of carbon impact:
- Scope 1: emissions from sources that an organisation owns or controls directly.
- Scope 2: indirect emissions created by an organisation, such as those from the energy it purchases.
- Scope 3: emissions from various stages of an organisation’s value chain and supply chain.
Furthermore, the data and information needed to calculate the impact are often spread throughout organisations, and gathering it involves time-consuming, manual work.
Disclosing your organisation’s carbon footprint is becoming a bigger part of operations; in part because of evolving legislative and compliance requirements. Simultaneously, investors are increasingly focused on making their portfolio companies carbon neutral.
With the above in mind, it is no surprise that the market for solutions which can automate and streamline carbon data gathering and help minimise carbon footprint is expanding. One analysis projects the market for carbon emission management software to grow from US$10.4 billion in 2020 to US$43.6 billion by 2030.
Funding in a busy space
The market projection may well be in the low end, as carbon footprint solutions are evolving. Start-ups and scaleups in the space of carbon accounting, management, reporting, and mitigation can be split into four categories:
- Carbon tracking software: gathers information to automatically track emissions.
- Vertical carbon tracking software: as above, but with focus on specific aspects of a company’s emissions or specific industries.
- Carbon tracking and reduction: combined emissions tracking and ways to lower a company’s carbon footprint.
- Carbon tracking and offsetting: tracks emissions and offers ways of offsetting them by financing carbon reduction.
BDO research shows how start-ups in the space are attracting funding from VCs:
Data, research, and graph: BDO Global
Particularly notable is the Persefoni deal. The company, which describes itself as “ERP for carbon data,” now has a war chest to back up the free version of its software for small and midsize enterprises. Persefoni also partners with Patch, which offers companies ways of offsetting their carbon footprint.
Big players investing
Attracting clients through freemium models and building close collaboration with related service providers may stand companies like Persefoni in good stead as competition grows.
Carbon management and mitigation solutions are seeing heightened interest from large-scale technology players and financial investors, increasing competition and the likelihood of consolidation.
In 2020, Amazon invested in Pachama, a carbon monitoring start-up. Google has backed carbon emissions tracker Normative and helped it develop the free version of its solution. IBM is among the most active companies in the space. It recently acquired environmental data start-up Envizi to further bolster its package of ESG offerings.
ERP companies are also active. Salesforce and SAP have both developed ESG and carbon accounting solutions that are offered through their platforms. The same applies to Microsoft, which enables companies to create environmental reporting via its Cloud for Sustainability.
Aspiration, a bank, bought Carbon Insights, a carbon footprint tool start-up. Investment firm GEF has invested in carbon footprint Bluesource, which has since merged with TPG-backed Element Markets.
Booming markets for climate tech
In this way, carbon management, reporting, and mitigation solutions mirror the broader climate and sustainability technology space. The market for climate technology was identified in a World Bank report as a US$6.4 trillion opportunity over the coming decade – already in 2014.
Fast-forward to today, and the positive take on green investing has, if anything, intensified. BlackRock CEO Larry Fink wrote in his 2022 letter to CEOs that sustainable investments had reached US$4 trillion, saying that:
“[…]this is just the beginning – the tectonic shift towards sustainable investing is still accelerating.”
Some of said investment is headed for climate technology start-ups and scale-ups.
According to a Holon IQ report, VCs injected a total of US$37 billion into climate tech start-ups in 2021, equal to 2.5x investment levels before the pandemic.
Crunchbase also looked at investments and found that US$1.3 billion had gone to companies at the intersection of climate and software, such as carbon tracking and reporting software, between April 2021 and April 2022.
PE and banks are also increasingly active, with JPMorgan acquiring the ESG start-up OpenInvest, and Blackstone’s landmark acquisition of sustainability software provider Sphera for US$1.4 billion.
The need for proper data planning
Companies across industries may well be asking themselves what this all means for them.
The short answer is two words: opportunity and confusion.
The many open options and solutions increase the odds of finding the perfect fit for your ESG needs and plans. However, identifying which solution is correct can be both complicated and confusing.
Simultaneously, automating and streamlining parts of ESG-related processes such as carbon documentation and reporting requires careful preparation. A company’s strategy, current and future situation, developing legislative ESG requirements and much more must be taken into consideration.
Furthermore, all available solutions rely heavily on the quality of a company’s ESG information and data. Without correct data, companies run multiple risks, including accusations of greenwashing, which can damage both reputation and revenue.
So, the quality and accuracy of data must be verified. This data collection step can include tracing it back to its source and performing detailed data audits.
These steps, along with identifying the best possible ESG solutions for your company, are some of the ESG and sustainability-related services offered by BDO.