Taken together, these shifts represent an initial wave of consolidation that’s characterized by growth. Strategic acquirers realize this is a growing space, and they want to get a foot in the door through comprehensive ESG reporting platforms that are focused on corporate carbon accounting. They’re flexible about the size of the target as long as the technology is strong. Strategic acquirers see ESG reporting tools as highly specialized, making them strong candidates for M&A. Many companies have already marketed corporate strategies on selling ESG software solutions, but don’t yet have their flagship offering. This has led to many of the leading ESG reporting and management providers being heavily targeted by companies at earlier stages in their lifecycle than they would expect to exit.
With customers already asking for solutions like these, acquirers can be flexible on the size of the company they buy. While each acquirer has a somewhat nuanced set of criteria, most are starting with tools that help with carbon accounting and climate-related metrics. Case in point: one vendor in the space told us while customers like to see an offering or roadmap that covers many aspects of ESG in their purchase criteria, what they’re using and paying for today is mostly environment-related metrics.
This is cultivating an environment in which many remaining acquirers will make their strategic M&A move in the next 12 to 24 months. This initial consolidation will continue, especially among point solutions in more mature markets like Europe, or as a handful of strategic acquirers pursue remaining leading private companies. But in parallel we see other distinct waves of consolidation emerging.
What will characterize future waves of consolidation?
In the second wave of consolidation, we expect to see an emergence of acquisition capabilities that align with regulatory roadmaps or solve specific pain points. Why? As new regulations come into effect and frameworks multiply or consolidate, solutions will need to address user needs while also enabling organizations to futureproof their reporting.
That aligns with what we’re seeing in the market and what we’re hearing from vendors about the growing importance of innovation. The pace of change and need for specialized knowledge will likely lead companies using M&A to drive their roadmap.
That’s already happening as acquisition wish lists become increasingly nuanced and expand to include capabilities like:
- Automation in terms of Scope 3 data collection, general data management through APIs or other means, and reporting through XBRL tagging technology
- Ability to manage supply chain data
- Physical climate risk assessment tools
- Ability to perform lifecycle assessments
- Ability to report nature-based and biodiversity indicators
- More comprehensive metrics and reporting around social and governance
- Strong benchmarking and strategy management tools
- Stakeholder engagement tools
This is generating a landscape in which a third wave of consolidation will likely be grounded in specialized reporting platforms capable of supporting industry-specific customer needs. Vendors are already looking to the horizon to prepare themselves for this direction, telling us that certain industries have a level of complexity that industry-agnostic tools can’t take on, and that specialization will be required in the long-run.
Most players in this space are marketing themselves as industry-agnostic solutions. But we have seen some distinction, as solutions with more of a mid-market customer base tend to be more turnkey and serve less complex industries. Others have had more of an enterprise focus, tending to serve more complex industries with highly configurable solutions.
That said, as the market grows, we believe this will further segment toward industry focus given the complexity of reporting and the need for strong data management. The bulk of consolidation around certain industry specializations is still a few years off. Still, we’ve seen early evidence of this, as companies pursue unique and large industries like real estate and financial services, and some very early-stage startups address other areas. Private equity or industries with robust supply chain reporting have also been seen as attractive targets, given their potential to accelerate distribution through network effects.
What does this consolidation mean for industry participants?
Consolidation is impacting all industry participants. What should stakeholders keep in mind?
1. Customers, be patient as the space evolves. The meaningful investment being made will create a strong set of world-class solutions that solve pain points, meet regulatory requirements and meet the unique needs of each company.
2. Acquirers, dig in to understand consolidation so far — and what’s to come. You may need to move quickly and be flexible or creative in entering this dynamic space, which will likely require a combination of buy and build.
3. Software vendors, prepare for continued and meaningful disruption. Expect a constant stream of new and well-capitalized entrants able to spend significantly on marketing, and more players going to market with end-to-end offerings. For example, some EHSQ providers are offering ESG solutions for free to retain or win customers. Consider how you can best compete, whether by continuing your current trajectory, strategically repositioning, partnering or raising additional capital.
