Inside the ESG software arms race

Hello from London, where the mood music around green policy has moved firmly into a minor key.

Ahead of next year’s general election, Prime Minister Rishi Sunak’s ruling Conservatives, who consistently trail Labour by 20 points in opinion polls, are frantically seeking a way to seize back the initiative.

Some seem to have taken inspiration from a narrow by-election win last week in Boris Johnson’s former seat of Uxbridge. The Tories squeaked to victory (while suffering heavy defeats in two other seats), after a local campaign that stressed their opposition to tighter restrictions on polluting cars.

Rightwing Conservatives perceive an opportunity to win votes by scaling back green pledges made under Johnson, and trumpeting the costs of Labour’s more ambitious plans for the energy transition. They will have taken heart from statements by top government figures in the past few days.

Grant Shapps, secretary for energy security and net zero, called Labour’s plans to halt new oil and gas licences in the North Sea “a policy of self-harm”. Michael Gove, the housing secretary, said the government was “asking too much too quickly” with requirements for landlords to invest in heat pumps and insulation. Sunak, meanwhile, delivered a strikingly tepid defence of the UK’s net zero commitment, saying he wanted to pursue it without creating “hassle” for voters, fuelling speculation about an imminent rollback.

This framing of the energy transition, with a relentless emphasis on the attendant costs and inconvenience, strikes a stark contrast with the messaging from leaders in the US and EU, who are presenting it as an engine of long-term economic growth. While Washington and Brussels have committed hefty doses of financial firepower in recent months to galvanise a new era of energy investment, the UK risks falling behind.

In today’s edition, Patrick looks at a flurry of activity in software for ESG reporting, and Kaori looks at how a €300bn EU initiative could boost progress on sustainable development. Thanks for reading. — Simon Mundy

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Flurry of ESG rules unleashes fight among software businesses

As authorities worldwide write new corporate sustainability regulations, a market for software that helps companies with compliance has blossomed — but has not gotten much attention yet.

Now Verdantix, a research and advisory group, has published a report on the 20 most prominent software providers for ESG reporting. While it might seem sleepy on the surface, this sector has been a hotbed of merger and acquisition activity since the start of last year. Nasdaq acquired Metrio, a Montreal-based ESG software provider. Computing giant IBM acquired Envizi, a software provider for environmental performance management. Private equity investors such as Blackstone and Hamilton Lane have also been funding smaller rivals in the ESG software space, Verdantix said.

New software tools are becoming crucial for compliance with European regulations. The new Corporate Sustainability Reporting Directive will require companies to report with machine-readable text for data tagging and will also phase in requirements for third-party assurance.

And new regulations don’t stop in Brussels. The Netherlands has a new child labour due diligence regulation and Norway has adopted its own supply chain rules. Also, in 2024, the European Banking Authority will require about 150 banks to publish a “green asset ratio” that will show a bank’s “green” assets to holdings that produce fossil fuels.

One of the biggest winners from all this action has been Netherlands-based software and services provider Wolters Kluwer. In February, the company announced a new ESG division of about 2,500 employees to serve corporate clients. Wolters Kluwer has ESG reporting tools for companies and financial institutions, especially banks that need to disclose the EBA’s green asset ratio.

But the biggest area of opportunity for these companies could come from Washington, where the Securities and Exchange Commission is expected to finish climate disclosure rules later this year. Small businesses “do not want to commit to purchasing software until they have to”, Verdantix analyst Jessica Pransky told me. This means a big pay-off is looming for the software providers once the SEC rules are finalised.

Workiva, a publicly traded software company that Verdantix analysed, has been pushing the SEC to finish its rules. Workiva’s former chief executive Marty Vanderploeg has said that corporate arguments against the SEC rules because they are expensive aren’t really valid. Software tools, such as those offered by Workiva, already exist to make complying with the SEC rule doable.

With the SEC rule on the horizon, dealmaking in ESG software has ramped up. Measurabl, an ESG data reporting provider that focuses on the real estate sector, raised $93mn in May. Clearly, an ESG software arms race is under way. (Patrick Temple-West)

EU aims to counter China’s Belt and Road with €300bn Global Gateway

We are far from achieving the UN’s Sustainable Development Goals — a set of 17 global targets adopted in 2015 that range from eliminating hunger to achieving universal access to water and education. That was the reality delegates faced last week in New York, where there were some uncomfortable discussions at the UN’s High-Level Political Forum on Sustainable Development.

With a $4tn investment gap in developing countries hamstringing progress, we are “unfortunately off track”, Jutta Urpilainen, the EU commissioner for international partnerships told me.

To bridge this gap, the EU is stepping up efforts to mobilise the cash in the €300bn Global Gateway initiative it launched in 2021 by rolling out more than 70 projects this year. Most recently, the European Commission signed a partnership deal on critical minerals with Chile, the world’s largest producer of lithium, which is key to the green energy transition.

Urpilainen is confident that the EU’s efforts can provide a competitive option to China’s long-existing Belt and Road Initiative. She said it could present potential partner countries with “a more holistic, 360-degree approach”, including training and education as well as support in the development of regulations.

The EU hopes such efforts will also help provide stability for private investors, who view political risk and changes in the regulatory or business environment as an investment risk.

In the case of critical minerals especially, she stressed that “we don’t want to create dependencies, but we want to strengthen the resilience and strategic autonomy of our partner countries”. So far, in her discussions with partners in Africa and Latin America and the Caribbean, “the feedback I have received is positive”, she said.

At the same time, policymakers are aware that public funds alone cannot bridge the financing gap. To engage private sector investors, “we need to be creative and we need to have new kinds of tools in order to fulfil that $4tn gap”, Urpilainen said. (Kaori Yoshida, Nikkei)

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