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ESG professional services

Bernd Jung Partner, Strategy& Germany
September 2, 2021

ESG has become one of the most important topics of our time. Currently, no day passes without new ambitious announcements by businesses to reduce their carbon footprint or increase transparency in their supply chain. Covid-19 has accelerated the ESG momentum across industries and has put the private sector’s role in helping to solve today’s biggest challenges in the spotlight. Overall, the relevance of ESG is growing due to four key drivers.

Key drivers of growing ESG relevance

Companies increasingly utilize the ESG framework to assess and reconfigure strategy and operation and improve their impact on our environment, societies, and corporate governance. The framework includes subjects beyond environmental protection and considers questions of social and societal welfare as well as the adequate governance of our industries. Responding to global challenges within the ESG framework increases business opportunities – and demand for ESG services. The large variety of challenges that the ESG spectrum entails, results in different priorities and applications for individual companies. Complexity and ambiguity within the ‘ESG alphabet soup’ thus remain omnipresent and the demand for data, tools, and advice is at an all-time high.

ESG professional services

‘ESG professional services’ is a newly emerging industry that is well-positioned to benefit strongly from new regulations and the above-mentioned private sector demand for ESG data, reporting tools, and general advice on how to reduce complexity and tackle ESG challenges in practice. Based on the Strategy& ‘where to play’ ESG impact assessment, five attractive and positively impacted sub-sectors have been identified. The ESG impact score indicates how positively or negatively a sub-sector is impacted by ESG and its underlying trends. Naturally, these trends materialize differently for the different sub-sectors. The value of the score is the sum of all trends which have different ‘impact values’. The value ‘-2’ indicates a negative tipping point of a trend while ‘+2’ shows a positive one. Subsequently, the values are weighted with the ‘trend probability’: 20% indicates an unlikely occurrence and 100% a certain occurrence.

ESG impact by subsector in ESG professional services
  1. ESG education and training: Score 3.3
    Businesses that educate professionals on ESG aspects. In the financial sector, for instance, the CFA institute offers an increasingly popular ‘ESG investing’ course. The two main growth drivers for this sub-sector are:
    • Regulatory requirements: The carbon emission targets for certain industries require businesses to reduce their CO2 output and thus require skilled staff
    • Shift in customer preferences: Consulting firms are required to upskill their newly formed sustainability teams as the demand for expertise increases
  2. ESG reporting and software as a service (SaaS): Score 4.4
    Businesses that develop the latest technology-based data platforms for firms to measure their ESG performance across the entire value chain, and that enable reporting according to ESG standards (e.g., UN SDGs, SASB, PRI). Three main drivers accelerate growth in this market:
    • Regulatory requirements: European regulators require certain industries to disclose ESG information. Hence, the need for reporting software increases
    • Shift in customer preferences: Customers increasingly demand ESG transparency from their suppliers. Furthermore, investors also demand ESG information to assess target performance
    • Enabling technology: New APIs and open code sources allows reporting providers to be easy to use, thereby improving market penetration potential
  3. ESG rating, certification, and TIC: Score 5.2
    Businesses that provide services and/or tools to review a firm’s ESG practices, compare them to regulatory requirements, and grant a certificate for specific ESG areas. This also includes ESG services for testing, inspection, and compliance (‘TIC’). Growth in this sub-sector is mainly driven by two aspects:
    • Regulatory requirements: European CO2 emission targets require businesses to be within a certain threshold
    • Shift in customer preferences: As companies are investing to perform well in ESG metrics, they also want to stand out from the crowd through ratings and certificates
  4. ESG and alternative data provider: Score 5.6
    Data companies that provide ESG and alternative data solutions to assess corporate ESG performance and that offer benchmarks within and/or across industries. The three main growth drivers are:
    • Regulatory requirements: Carbon emission targets for certain industries require companies to collect, measure and report their emission data
    • Shift in customer preferences: Customers and investors increasingly demand ESG transparency
    • Enabling technology: New big data technology applications, for instance for manufacturing processes, allow companies to collect emission data. Hence, solutions to properly structure and analyze this data are required
  5. Sustainability and ESG consulting: Score 6.4
    Consulting firms that provide ESG services to transform the business and operating models, that introduce tailored frameworks, and that measure a company's progress against ESG KPIs. The two main growth drivers are:
    • Regulatory requirements: European CO2 emission targets and various sustainability goals have created a complex ‘alphabet soup’. Individual solutions need to be tailored to a company’s specific situation, thereby increasing demand for consulting services
    • New or changing ecosystems: ESG leaders outperform peers. This creates pressure on all industry players to articulate their ESG strategy and act accordingly

In a recent Strategy& analysis, more than 40 European standalone ESG professional services firms have been identified across all sub-sectors. Approximately 80% of them are early-stage start- or scale-ups. Only a few mature businesses exist in an overall fragmented market. Yet, the search for well-positioned targets with relevant sizes is intensifying given the attractive margins of these sub-sectors. The ESG consulting branch, for example, typically realizes an EBITDA margin between 30% and 40%. SaaS and data-based businesses even reach more than 40%. Leading private equity houses have already conducted significant ESG transactions to capitalize on the momentum. The New York City-based private equity house KKR, for instance, recently acquired a majority stake in the sustainability consultancy firm ERM valuing the firm at nearly USD 2.7 billion1.

1) KKR to Buy Sustainability Consultancy ERM From Canada Funds, Bloomberg, May 17 2021.

How General Partners (GPs) should invest in ESG professional services

Given the industry’s attractiveness but lack of sizable players, the question of how GPs should capitalize on the ESG momentum remains highly relevant. Depending on whether a GP is already active in the industry or any associated sub-sector, two strategic approaches exist.

ESG professional services investment strategies

A) Buy and build strategy
In case GPs are not active in any associated sub-sectors, Strategy& recommends a ‘buy and build’ strategy. At first, this requires a rigorous search for a well-positioned ‘platform’ company that has the potential to become the basis for many ‘add-ons’. After the acquisition of the platform company, the search for add-ons should be intensified to execute the positioning strategy while at the same time consolidating the market.

B) Add-on strategy
In case GPs are already active in associated sub-sectors, Strategy& recommends an ‘add-on’ strategy. At first, a thorough platform feasibility check should be conducted to determine whether the platform company is well-positioned to become a market leader in one of the segments. Secondly, the search for ‘add-on’ companies should be intensified to execute the positioning strategy while again at the same time consolidating the market.

Both strategies are common in the private equity industry. However, as the ESG professional services industry is fairly new, GPs are currently searching for platform companies depending on the sub-sector. The two sub-sectors ESG reporting software and data providers are still very early stage and determined for a platform strategy. ESG education, certification, and consulting, on the other hand, are maturing, and established players start to search for ‘add-ons’.

In conclusion, the ESG professional services industry is determined to grow significantly in the next decades and the consolidation of the industry has not yet started. Depending on the sub-sector, first-mover advantages in building platforms and starting the consolidation process can yet be realized by GPs. By nature, large corporations in associated industries (e.g., rating agencies) are strong competitors for GPs when entering and consolidating this industry.

Carina von Heimendahl, Marius Lorenz, and Levi Baier also contributed to this article.

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Bernd Jung

Bernd Jung

Partner, Strategy& Germany

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