In the first part of two part series we look at the ESG software space and make a prediction as to where we think this fledging marketplace will go.
Type “ESG” into any browser and the top results, be they sponsored or unsponsored, will be a list of software providers offering numerous solutions, with some also offering AI capabilities too. Click on any of the links and nearly every landing page will promise similar things: that their software will ensure you’re compliant for reporting, that software is better than excel, that all your data will be in one place and that you’ll be able to use ESG henceforth to your advantage. Whilst there is certainly merit and advantages to many of these claims for a prospective client, it is not the whole picture.
Curiously, whilst it seems there are several new ESG software solutions companies coming to market every week, the predicted ESG software market of around USD 2 billion by 2030 has barely changed in the last five years, so what is the reason for this? The growth of new sectors being caught by new ESG legislation is offset by falling prices and increased competition in sectors where ESG has been around for a long time, so the nature of the market is shifting rather than growing exponentially.
Let’s take real estate as an example. KKR’s Stanley Kwong at an ESG conference earlier this year talked about how ESG in this space has been around for a very long time and was well established. Building and energy performance certifications have been a yardstick because of the symbiotic relationship whereby saving energy leads to direct OPEX cost-savings. Software solutions in their current form are unlikely to add much value on top of what’s existing. In many other sectors, however, ESG is new and software is an excellent starting point for firms to get on top of this fledging space.
So what can software do? To be on top of your ESG credentials you need, at the very least, to know where your firm is at in the here and now. In short, that means stringing together many different data points. Only once you have this can you start to build a picture and this is where many of these start-up software and enterprise solutions come in. They are certainly useful at forcing you to locate data and get it into a format so that its performance can be assessed, tracked, benchmarked etc. It’s only once you have a certain level of transparency that you can even start to get around creating and protecting value, the promise that is supposed to come along with ESG enlightenment. As well as knowing where you’re at you’ll need to be sharp about developing a robust strategy and this is something software is not very effective.
Many regulators require ESG reporting for companies above a certain size. Software providers really do go quite a long way to fulfilling this requirement and helping firms to become transparent up to a point. Most software solutions are more than just glorified excel spreadsheets and nearly all include the relevant swathes of background data you need to be able to provide credible numbers and metrics (e.g. climate data). When it comes to tracking supply chains there may be a role for blockchain to play though this is still in its infancy. AI algorithms could also be helpful in analysing large data sets and so predict environmental risk and spot patterns more effectively, however, both of these technologies still have quite a long way to go. There are certainly strong arguments for these technologies to help when it comes to looking into more complex themes such as embodied carbon or upstream/downstream effects of your products.
The most recent elephant in the room with software solutions, particularly when it comes to looking at supply chains, is the data itself. Most of this data is based on estimated data and the reliability of this is now subject to scrutiny. Many investment companies and investors are pushing for more and more real data, making estimated data solutions increasingly redundant. It goes without saying, if your AI or Blockchain solution is based on estimated data, then you won’t really be able to trust the output fully either. In reality, it will take some years before real world data is available or even measurable but the trend towards this has certainly started, which likely means more hardware with the associated software!
Like many scientific disciplines, however, there is an associated art required when it comes to getting the right results and that is all down to having the right strategy in place first. The holy ESG grail of protecting and creating value is not about merely meeting regulatory criteria but by being able to fully grasp the big picture starting with your very own stakeholders: top of that list are a firm’s employees, investors and clients. This is where the human touch is required, in particular one from the smaller and more boutique firms. They are far less likely to be hemmed in by conflicts of interest issues and are more likely to give a far more honest and fairer description of where their client actually is and needs to be.
By combining a thorough strategy consultant with reliable ESG software, a firm is likely to be well placed to deal with the endless regulatory hurdles, changing tastes and trends. There is a strong case to suggest that software will become more or less free in the long run, with revenue coming from consulting and advisory add-ons. When the likes of virtually every enterprise software now also include ESG modules it is clear the whole space could already be at maturity. But in any case, there is no getting around the fact that software will help with getting your data in line, show you any gaps and help you report to the authorities.
In the second part of this series we will discuss how ESG software consulting is being applied in the real world by firms. We carried out some in-depth analysis across several sectors and the results are surprising as are some of the emerging trends. Spoiler alert, the use of excel as a lynchpin is unlikely to change anytime soon!
