Spend Matters welcomes this guest post on the technology market for ESG and sustainability solutions from Jack Freeman, Principal at PeakSpan Capital.
BP, Ford, American Airlines, Volkswagen, Tesco, Sony, Panasonic and Maersk. These are just some of the companies promising to be carbon neutral by 2050.
General Motors, Honeywell, Amazon, Fedex, PepsiCo, Toyota, Verizon, Walmart and Schneider Electric. These companies are promising to be carbon neutral by 2040.
Apple, IBM, IKEA, Intuit, Microsoft, Starbucks, Unilever, LG and Siemens. These companies are promising to be carbon neutral by 2030.
A quarter of the Fortune 500 intends to be carbon neutral by 2030.
In January 2021, US President Joe Biden announced a series of executive orders with the goal of achieving a net-zero emission ECONOMY by 2050.
Do you see a trend?
At PeakSpan, we are taking notice. In addition to efforts made as a company at PeakSpan and in our own lives, we see sustainability-focused scale-ups as an excellent sector to invest behind for the coming decades. If not already obvious from the above, here is our thesis:
Complex, data-driven initiative + uber important to the Fortune 500 = important to us as software investors.
In the enterprise segment, Fortune 500 companies are the biggest buyers of business software and typically set the tone/adopt earlier than mid-market and SMB. If 25% of the Fortune 500 (soon to be all) decide to suddenly drive feverishly toward having a carbon-neutral footprint, you better believe this group will need the help of software. In fact, sustainability focused software (sometimes called green technology) is estimated to grow at a 24.3% CAGR from 2020 to 2027, reaching nearly $50 billion in total addressable market (TAM) by the end of this period.
Where specifically do we see areas of opportunity in software?
ESG reporting: We have no other way to say this. This is a NO BRAINER software market. Looks and feels and smells a lot like what we saw when the Sarbanes-Oxley accounting-reform legislation was rolled out. With continued focus and emphasis from government bodies, industry authorities, investors, employees and consumers, the need to measure and report on one’s carbon footprint in a consistent manor is going to be a necessity. We see this as a multiple-decades-long market opportunity with near-term advantages to those who can get to market quickly and achieve mass adoption. While still the early in the market development cycle, this will no doubt be a large and thriving market and has potential for full adoption in the enterprise segment.
Supplier management (SXM): For large multinational enterprises with lots of suppliers, it will be impossible to measure one’s own sustainability without having good visibility into the sustainability of one’s suppliers. We have evaluated companies in the supplier information management (SIM), supplier data and supply chain visibility (SCV) markets that are now turning their focus to supplier sustainability as a use case. Rolling this data up into a consistent holistic view of sustainability efforts and an enterprise’s overall carbon footprint is easier said than done and will require next-generation software and intelligent orchestration across multiple constituents, processes and technologies.
Supply chain visibility (SCV): With new carbon-neutral claims making headlines consistently, board rooms everywhere are turning to supply chain executives and asking “where do we stand?” While the ESG reporting market represents the lowest hanging fruit application and process for enterprises to adopt, anyone with a baseline understanding of how complex supply chains are will share the view that true supply chain visibility takes extensive expertise, change management and software to pull off. Carbon-neutral reporting will be accurate if the underlying supply chain function and tech stack is strong. It’s unclear how large the market will be for pure “sustainable supply chain visibility” platforms, but we can at least add sustainability efforts to the list of reasons that enterprises need to invest behind supply chain visibility technology.
Food waste: This next sentence makes us sad. According to the USDA, it is estimated that 30% to 40% of the food supply in the US goes to waste. WHAT!? As the focus on sustainability efforts from businesses and consumers continues to rise, this is a natural area to attack. We see opportunities across the food and agriculture supply chains, the restaurant vertical and in corporate America more broadly. Tracking and optimizing food waste is not straightforward and will require the assistance of next-generation technology platforms. Reducing this figure to 10% to 15% could have monumental impacts on the food supply chain and environment.
Property management: Building owners will see increasing incentives to “go green” through Property Assessed Clean Energy loans, renewable energy purchasing incentives and green tax credits. Tenants are also taking initiative to be green. Historically, tenants consume 40% to 60% of the total energy used by buildings, and until recently, managing energy conservation efforts has only been an afterthought. Going forward, tenants will be folding in efforts to be more socially and environmentally responsible, which will surely involve the real estate that they own or lease. We also have continued to see an explosion of new energy sources such as solar that will have a profound impact on the real estate world. From a business software perspective, businesses and owners of real estate will need software to implement, orchestrate and optimize the carbon footprint of their physical assets and energy sources. Real-time data generated from connected devices and equipment will be crucial toward measurement and ensuring sustainability focused infrastructure investments are driving yield (both to make sure efforts are worthwhile and to provide proof for rebate programs).
Employee and customer engagement: Sustainability efforts start from the top in some ways (decisions on real estate, company policies, supply chain decisions, procurement decisions). However, it can’t be understated the influence and pressures that companies face from the people they serve. Both consumers and employees are “demanding more” from the brands they buy from and work for. One concrete example of this is Patagonia, which in 2019 announced that it would not be co-branding with companies that were “ecologically damaging.” Sorry, Wall Street … you can find your branded fleece vests elsewhere. The Patagonia employees and target customer base feel passionately about efforts to save the environment, and while they may have been early to this effort, they have since been joined by droves of other companies.
Sustainable commerce and logistics: For all that e-commerce has brought to our economy, there surely is a “cost” to providing consumers with the luxury of attaining any item they desire, delivered to their doorstep in 1-2 days. This trend has resulted in more waste generated from packaging, more trucks on the road, more returns, the list goes on. Software focused on sustainable commerce and supply chain operations will need to see continued investment and adoption. This category of sustainability focused scale-ups has the potential to be massively impactful but is still in a relatively nascent state given how fast e-commerce logistics is evolving more broadly. For every green technology vendor, there is likely three last-mile logistics vendors.
Sustainable procurement: Last but certainly not least, we have seen the majority of procurement software categories adapt to this new world of sustainable procurement. Whether we are looking at supplier data, supplier information management, e-procurement, procurement performance, sourcing tools, marketplaces, etc. — nearly every node of the procurement process is transforming to assist clients in achieving more sustainable procurement.
We could go on. Other categories of sustainability focused software solutions include SMB-centric solutions, vertically oriented solutions, energy consumption management, climate intelligence, tax-credit management, carbon offsetting, materials management, smart farming, air quality management, renewal energy, water management, waste and recycling management, etc.
Sustainability is a massive challenge that we all must tackle together, but it isn’t easy. Software will undoubtedly play a central role in spurring growth and adoption in green initiatives — and ultimately seeing results.