ESGtech Ventures Must Focus On 2021 Demand Not 2030 Pledges To Avoid Repeating Past Mistakes
Despite the pandemic – or perhaps because of it – 2020 has witnessed a never-ending series of announcements about new ESGtech ventures and investments. Clearly hopes are high that a new technology category will be created. Entrepreneurs, financial investors and strategics envisage a future where access to capital markets for the world’s 650,000 listed firms requires investment-grade ESG data. What we are seeing is a battle over who defines ESG data standards, who captures source data, who controls the data, who is best able to aggregate and analyse the ESG data. What is underpinning this competition for control of ESG data? The hypothesis is that investors with better ESG data and analytics can better predict share price movements and increase fund inflows. For executives, better ESG data means they can improve operational performance, enhance access to capital markets and boost their share price. The potential size of the prize runs into tens of billions.
So much for the theory. The big challenge for ESGtech vendors is to stay focused on today’s market realities. There is a precedent. In 2006, the corporate sustainability and climate change agenda appeared set to boom. But the financial crisis and a lack of regulatory drivers meant that the overwhelming majority of firms – at least 95% of listed entities – adopted a passive sustainability strategy. They hired a senior manager in corporate comms – the “VP Sustainability” – published an annual sustainability report and made long-term “pledges”. As a result, the expected multi-billion market proved to be a mirage. From 2012, the Big Four slashed funding for their climate change and sustainability practices. Boutique services firms in consulting and communications never grew beyond 40 employees. Sustainability management software vendors like Clear Standards, Credit360 and Hara either pivoted to EHS, flat-lined or were acquired. The product/market fit wasn’t there. Not enough changed in the 2010s to revive the market opportunity.
What’s new? In the last four years, the investment community has decided – to varying degrees – that firms which disclose high quality ESG data, manage risks relating to ESG factors and improve their performance in relation to ESG metrics could perform better than their peer group. In short, issuers of debt and equity with a strong ESG strategy will deliver superior shareholder returns. Assuming this theory is correct, a diverse range of software vendors, analytics specialists and IT consultants will experience a boom in demand from 2021. That’s why Atos bought EcoAct, Steve Wozniak launched Efforce, Nasdaq invested in Matter and why EY appointed Steve Varley as Global Vice Chair for Sustainability. There is a slew of innovative GHG emissions data providers such as Emitwise, GHGSat, iClimaEarth and Urgentem. Before they save the planet, all these ESG solution providers need to figure out which corporates will heavily invest in ESG data lakes, disclosures, risk management and performance improvement in 2021. In a post-COVID economy that is far from obvious.
To learn more attend the Verdantix webinar: “Investor Focus On ESG Will Reshape The Sustainability Market Opportunity.”