Driven by increasing regulatory pressure and consumer awareness, corporates world over face the challenge of walking the talk on sustainability and climate action. No longer defined just by marketing activities and annual reporting, corporate climate action is now expected to be a core business mandate. Regulators, shareholders and consumers alike expect companies to actively manage and report progress on emissions reduction measures, which in turn opens up a world of possibilities for disrupting a traditionally consulting services-driven exercise. Through innovative software offerings, start-ups have an opportunity to capture the burgeoning market for corporate emissions accounting solutions.
Over the past few years, regulatory pressure favouring corporate climate disclosures has increased manifold. And why not? Corporates have a clear role in both causing and addressing climate change.
According to a CDP report, just 100 companies have been linked to as much as 71% of industrial greenhouse gas emissions since 1988. The recent climate-related disclosure proposal by the US Securities and Exchange Commission is the latest in a slew of global steps towards increased corporate climate accountability. In November 2020, the UK started the countdown to require all companies to disclose the climate change impacts of their business by 2025. Within the broader European Union, negotiations are underway on the Carbon Border Adjustment Mechanism, which would require businesses to disclose emissions impact of individual product exports. Clearly, governments around the world want to hold businesses accountable for their climate-related targets.
Governments are not alone though; consumers too are becoming increasingly conscious of the climate impact of their consumption choices and are demanding sustainable alternatives. In Europe, two-thirds of consumers surveyed said they are more likely to think positively about a brand that could demonstrate it had lowered the carbon footprint of its products. According to another study in the US, products marketed as sustainable grew 5.6 times faster than those that were not, during the period 2013-2018.
Further, corporates themselves have realised the risks climate change poses. By 2020, over 1,000 companies spanning 60 countries and with a combined market capitalisation of over $15.4 trillion — including one-fifth of the Global Fortune 500 — signed up with the Science Based Targets initiative to reduce their emissions.
So, how does a company actually go about reducing emissions? While the approach differs across industries, the first step is the same – measuring emissions. Very simply put, you cannot manage what you cannot measure. However, that is easier said than done. Measuring emissions from fuel combustion in owned factories, company vehicles or even purchased electricity (Scope 1 and 2 respectively for the terminologically minded) is straight-forward. The challenge however, and consequently the value, lies in capturing emissions from the remaining value chain (Scope 3) of a company. Previously, companies could get away with reporting numbers for their direct emissions and efforts to reduce them. But now, regulators and consumers also want to know how a company is thinking about emissions from its suppliers, investments, employee travel etc.
Already a ~$10bn market, corporate carbon accounting is largely carried out by services firms along with some non-profit entities. However, current service offerings are expensive, especially for small and medium businesses. Moreover, the process can take months and has been largely seen as an annual exercise. With increasing prevalence of climate disclosures and the need for decarbonization, the market for emissions measurement and management could grow exponentially. Imagine every single business in the world having to constantly track and manage its emissions, and the potential for software solutions becomes clear. There is immense opportunity for disruptors providing solutions that are faster, smarter and more affordable for businesses.
In response, multiple start-ups are hot to the scene, building off-the-shelf SaaS platforms. Notable front-runners such as Watershed, Persefoni and Sweep have already raised funding to the tune of hundreds of millions. Despite these companies’ early success, we firmly believe the complexity of corporate supply chains will lead to the emergence of industry-specific leaders in the carbon accounting SaaS space.
After all, different industries have different emissions hotspots – oil and gas majors need to manage fugitive methane emissions during drilling while consumer goods’ conglomerates must focus on sustainable procurement. Given such varied and complex supply chains, industry-specific solutions will soon be the order of the day.
An even bigger white space is the unmet need for solutions that provide more granular, customer-facing data to consumer goods companies i.e., the emissions footprint of individual products. Most start-ups have focused on offering solutions for measuring and managing emissions at the organisational level due to the immediate regulatory requirement. Few consumers, however, read sustainability reports when shopping for their monthly list at the supermarket. Communicating emissions impact of individual product SKUs is a lot more impactful albeit difficult.
Some early movers such as All Birds and Just Salad have started carbon labelling their product offerings. Recognising the growing shift in consumer demand, companies such as Unilever and L'Oreal have already announced commitments to carbon label all of their products. The opportunity is huge when one considers other industries such as cosmetics, apparel or retail – imagine differentiating between your two favourite brands of potato chips based on their emissions footprint. Now, extend the thought to all the different goods you see in retail stores and the scope for product emissions calculation becomes clearer.
We believe solution platforms can take one of multiple long-term options. Eventually, these companies can function like credit ratings agencies such as CRISIL or Moody’s, albeit focused on emissions ratings. Another possible long-term outcome is integration of product emission calculation solutions into product design tools – to facilitate design teams to actively analyse and improve the sustainability profile of products during the design cycle. Yet another possibility is for plug-ins that integrate into existing customer ERP systems and become part of business intelligence workflows.
Whatever the long term goal, Indian entrepreneurs, with their penchant for creating software solutions for the world, have a tremendous opportunity to build multi-decadal businesses that influence how companies act on their climate targets.
Lastly, start-ups in the space shouldn’t limit themselves to measurement solutions – there is more value to be captured from supporting companies in their emissions reduction journeys. Once reporting metrics are standardized by global authorities, companies will only be able to differentiate themselves based on the strength of their emissions management and offsetting solutions.
In summary, accounting isn’t known as a hotbed of innovation. However, with increasing regulatory, consumer and business recognition of climate change-related threats, the market for innovation in corporate emissions measurement and management is full of opportunities, and we at Enzia are excited about all of them.
Nikunj Bhimsaria is currently interning with Enzia Ventures.