Industries evolve in waves. Coffee is a classic example - after the first wave of coffee becoming a commodity and the second wave of coffee going upmarket (the advent of Starbucks), we’re now in the “third wave”, where single-origin beans, specialty roasters, and sustainable sourcing are more and more common.
Much like the coffee industry, I believe we’re at the early stage of corporate sustainability software’s “third wave”. We’ve now experienced two clear “waves” - the “Cleantech 1.0” bubble of the earlier 2000s (in which corporate sustainability software played a small role) and the cambrian explosion in climate tech and “carbon management software” around 2018-2022.
Through my consulting and advising work in climate tech and recent conversations I’ve had with founders, I’ve noticed the following trends emerging to mark this “third wave” of corporate sustainability software:
Consolidation towards the bigger software players and consultancies
While the estimates vary by source, the amount of funding raised by corporate sustainability software companies in the last few years represents close to or more than the expected future total addressable market - a clear sign that the market is ripe for consolidation. This isn’t some novel insight; consolidation has already been happening for several years. That being said, big funding rounds raised during periods of lower interest rates means some companies haven’t yet thrown in the towel. In the coming years, I’d expect talent, customers, and capital to continue consolidating towards the more established software players.
Meanwhile, consultancies like McKinsey, Bain, BCG, PwC and Deloitte have been heavily investing in growing their service offerings in this space. The Big 4 (PwC, Deloitte, KPMG, and EY) particularly see a massive opportunity to be the go-to partner for compliance/reporting in the sustainability world, just as they already are in the financial world.
Much like the world of accounting/finance, corporate sustainability tasks like carbon accounting and checking compliance with various standards such as the EU taxonomy, CSRD, etc. are data collection and organisation tasks that can be made much easier with the right software solutions. Generally, bringing original software to market is not a core competency of big consulting firms. I’d expect them to be the other big acquirer during this third wave - we’ve seen several public cases of this, and I’d heard rumblings of a number of would-be deals that fell through.
In most cases, big consulting firms won’t be buying these companies to market their product to their clients directly. Instead, they’ll often be buying the talent and the platform, which they will pivot to focus on building internal tooling for their sustainability consultant. These pivots fit better into the business models and incentive structures at these big consultancies, while trying to scale an external-facing software product generally plays to their weaknesses.
Regulatory compliance as a niche
Historically, the “second wave” of corporate sustainability software was heavily focused on carbon accounting. I’ve purposely not framed this post as one about “carbon accounting” software, as the category is growing beyond this framing. Existing players are doubling down on helping companies comply with various policies and standards, not just with calculating their carbon footprint, and new players are emerging with niche focuses in regulatory compliance.
Indeed, the complexity in many compliance processes suggests that there’s room for niche players to build strong businesses around compliance with a specific standard, such as the EU Taxonomy. I’ve seen and spoken to several companies popping up in this space, and I expect several of them to do quite well.
Eventually, I wouldn’t be surprised if niche solutions these are rolled up by consultancies or the larger players in the space (see above).
Industry specific niches may work, but may not be venture scale
There’s an increasing number of players looking to own the corporate sustainability software market for a specific industry with specific reporting quirks or challenges.
I’ve seen several examples with clear potential, but many of them look better positioned to be a strong 1-5M ARR business, rather than a venture-scale billion dollar unicorn. Why is this? It appears that niche solutions work in industries with specialized supply chains, and these markets don’t seem to be big enough to support massive businesses. Niches that do perhaps hold promise for large businesses include fashion (shoutout to my friends at Carbonfact!) and shipping. The complexity of data models and associated data collection in these industries also particularly justifies choosing a niche solution.
For companies looking to own a niche, think about whether the market size and problem space of your solution matches your funding strategy!
A renewed focus “downmarket”
In every wave of corporate sustainability software, teams have tried to crack the SME/SMB market. I was part of one of these teams myself - we had lofty goals of democratizing carbon accounting for small businesses, but ran headfirst into a market that required more hands-on support than we could provide in an economical, scalable way. Ultimately, the unit economics just didn’t work. And we weren’t the only ones - a number of other small business-focused players started and stopped during the “second wave” of 2018-2022, while the companies that thrived went upmarket and worked with large enterprise customers.
In this third wave, I see new reasons for optimism around the downmarket business model. Smaller companies have a greater understanding of sustainability topics, policy, and risks than they did even a few years ago, and regulatory trends mean these companies will be more motivated than ever to take action.
There’s also room for optimism on the other side of the equation - the unit economics of servicing many small clients. The increased accessibility of AI tools and chatbots creates opportunities to automate some of the handholding these clients require. AI could also aid in more efficient data ingestion, which further improves the unit economics (see below for more on this).
While it’s possible that the SME/SMB market will still be a challenging one, there’s enough of a “Why now?” argument to inspire new and existing companies to take another swing at it.
AI for data ingestion and cleaning
Anyone who’s spent any time in the corporate sustainability software world can tell you that data ingestion and cleaning are one of their biggest challenges - mapping an organisation’s impact of the planet involves mapping their entire business and associated processes.
The use of AI opens up several opportunities to more efficiently clean up this data mess. Take electricity consumption as an example - if we need to ingest utility bill data from a variety of sources (countries, file types, formats, etc.), ingestion and standardisation of this data historically required sophisticated custom data pipelines. While it’s still early days, I’ve seen AI prototypes that could make this process much simpler and easier to stand up, at much a lower cost.
Admittedly, it feels like a cliche prediction these days to say that the use of AI will become more widespread in an industry, but in this case it the use case is quite clear, and integration of AI into these tools is happening right now.
Conclusion
No matter what happens, corporate sustainability software will continue to be a meaningful part of the climate tech world for years to come, likely driving adoption of a number of downstream solutions given their position as the “cockpit” for corporate sustainability decision-making. For this reason alone, it’s worth paying attention to the coming third wave.
I’d love to hear your thoughts on these trends - are you seeing the same thing? Something different? Feel free to reach out on LinkedIn or email.
Thanks to Vicky for reading drafts of this piece.