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ESG startups and vendors are investing in climate-data reporting

Just like the earth, the market for climate reporting software is heating up.

Driven by pressure from investors, regulators and consumers, demand is rising for software that can track and report environmental data. When it comes to betting on the messy business of wrangling environmental data from disparate sources, investors spent more than $570 million backing startups in the first six months of 2021 alone, according to a report by PwC.

Shareholders have made it overwhelmingly clear that a company’s approach to sustainability can make or break its investment prospects. But it’s not enough for enterprises to say they’re sustainable — they have to prove it. That’s why the Big Four accounting firms are already being asked to audit carbon progress in the same way they would financial results, explained Ron Beck, director of marketing for industrial software company AspenTech. “It’s not just can the government audit it — that’s actually even less of the concern — it’s, can the investment community audit it?” he said.

That question has sent companies scrambling for ways to collect, aggregate and report environmental data in a way that resonates with their investors.

At SAP, head of Sustainability Product Management James Sullivan said only 5% of the company’s institutional investors used to be socially responsible investors. But now, “as we looked at the latest data, we’re well over 35% and that’s long-term, more stable money,” he said.

The cloud giants — which fall all over themselves to demonstrate how environmentally friendly they are, despite their enormous data-center footprint — aren’t strangers to sustainability reporting. ServiceNow, Salesforce and Microsoft all have burgeoning sustainability offerings. ServiceNow added an ESG reporting function in October of last year, Salesforce offers carbon emission tracking via its net zero-as-a-service and Microsoft enables environmental reporting via its Cloud for Sustainability.

As companies look to quickly bolster their ESG reporting capabilities, dealmaking is on the rise. In June 2021, JPMorgan bought ESG startup OpenInvest, followed by Blackstone’s acquisition of sustainability software Sphera for $1.4 billion a few months later. To start off the new year, IBM acquired environmental data startup Envizi and SAP launched several new products to enhance its sustainability outcomes measurements.

The market driver for all this activity is not as much about goodwill as it is about money. BlackRock CEO Larry Fink wrote in a recent letter to CEOs that sustainable investments had already reached a whopping $4 trillion, indicating the magnitude of investor appetite for ESG-conscious assets. “We focus on sustainability not because we’re environmentalists, but because we are capitalists,” he wrote.

It’s a data problem

But among the companies that want to invest in sustainability reporting, most “customers have a data problem,” said Kareem Yusuf, whose AI applications team at IBM led the acquisition of Envizi. “How are they going to pull together this data? And I think this is the most important: in a verifiable, and automated way.”

Yusuf’s team provides software to help those customers operate and maintain physical assets like industrial equipment, real estate or civil infrastructure, a form of enterprise asset management. He realized that by working in supply and asset management, his team was working “at the operational endpoints that have a real read on sustainability,” he said. That led his team to acquire Envizi: to leverage its AI and analytics capabilities not only internally at IBM, but also for customers.

But in the industrial sector, there aren’t a lot of devices capable of capturing the kinds of sustainability data most important to investors. When today’s factories were first created, few companies anticipated the need for the types of sensors, monitors and meters necessary to capture that information.

Then there’s the challenge of aggregating data that could reside across multiple refineries or chemical sites, for example, said Beck. The big one investors want to track are carbon emissions, but many also want reports on land use, water use or renewable content.

Compounding all this is the anticipation that investors will want to see sustainability reports more frequently. Yusuf expects investors won’t be satisfied with annual reports on sustainability metrics. “If you can only track it once a year, how are you going to take corrective actions? How are you going to operationalize it?” he asked.

Yusuf calls IBM’s strategy to address this problem “sustainability performance management.” The approach entails moving beyond merely capturing and reporting data to actually improving operational performance based on those insights.

At SAP, Sullivan’s team is working to do the same thing. A lot of companies “can put a pretty dashboard together,” he said, but the harder part, and the one that drives the most value, is using that data to drive decision-making.

This requires pushing that data “into day-to-day operational systems so that people can make the right choices — whether they’re in a procurement process, whether they’re in an HR hiring process — whatever their day-to-day operations are,” said Sullivan.

SAP’s advantage is that its software is already a big part of many enterprise reporting systems. That ability to plug and play by injecting sustainability data into existing workflows is a major part of its appeal. There’s also a treasure trove of sustainability data already residing in SAP’s systems. The system currently tracks many of the sustainability metrics outlined by The World Economic Forum, for example, said Sullivan.

staying hot

But with more data comes more problems. Although there’s a growing range of software applications to assist companies with managing their environmental data, many are still struggling.

“The volume of information is really vast and their information is fundamentally unstructured,” explained Reinhilde Weidacher, head of ESG Data Strategy at Institutional Shareholder Services. To keep up, companies need to constantly evolve their ESG data structure and infrastructure.

They can also leverage emerging technologies: blockchain to verify sustainability data, drones to analyze methane emissions or machine learning to mine data sets.

At IBM, Yusuf’s team has been working on blockchain-based capabilities to capture and verify indirect emissions that occur. At AspenTech, Beck said NGOs “are already starting to figure out how to use things like satellite data or drones.” By flying a drone over a chemical plant, for instance, an NGO can use “sensors to figure out how much methane has been released,” he said. And at ISS, Weidacher said that “applying machine learning and NLP in data gathering and data processing is absolutely critical.”

The scale of these challenges means the market for environmental data isn’t cooling off anytime soon. “I think you’re gonna see big tech companies continue to take interest in acquiring and rolling up companies that offer something unique, or expedite the process of being able to deliver for metrics,” said Daniel Newman, principal analyst at Futurum Research. That’s especially true now, when markets have contracted and valuations have lowered, he said.

IBM’s approach has been exactly that, focusing on strategic acquisitions, while SAP is spending its time developing in-house software and building partnerships.

For IBM, the acquisition of Envizi was a way to leverage the startup’s impressive Rolodex of clients and its deep domain knowledge. According to Yusuf, Envizi has been building its infrastructure for the past 12 years, and IBM was a client before the acquisition. Envizi is “well-steeped in the subject matter, has provable technology and a provable customer base,” said Yusuf. “I don’t think there’s a gazillion of those out there, if I’m just being blunt.”

At SAP, although “everything is on the table,” from mergers and acquisitions to partnerships, Sullivan said a key element of SAP’s sustainability strategy will be “homegrown efforts.” This is all part of SAP’s ecosystem approach, which extends to startups, implementation partners and even competitors.

Regardless of how companies enter the environmental data market, it won’t be easy. There’s “a high level of stakeholder awareness and scrutiny, high expectations, sophisticated requirements and ultimately the existence of multiple sets of standards that you are expected to comply with,” said Weidacher. “There’s a lot at stake.”

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