Deal makers are bullish on ESG opportunities

Mark Golovcsenko

Mark Golovcsenko

ESG Strategy Leader, KPMG US

+1 212-954-2373

Marcus Leach

Marcus Leach

Director, Advisory, KPMG LLP

+1 864-506-4106

The M&A market for ESG technology companies is taking off. The reason? The pressure on companies to focus more on environmental, social and governance issues and disclose more information on their ESG performance is about to ratchet up in the U.S.

The SEC earlier this year created a new “Sr. Policy Advisory for Climate & ESG” role and is expected to announce soon (Q4’21) proposals to mandate disclosures on climate risk, human capital, and cybersecurity risk. The regulations may include an audit requirement of disclosures for public companies by 2023. U.S. regulators are taking cues from their counterparts in the European Union, where an expanding set of mandatory ESG reporting for large companies is already in effect. We believe the anticipated SEC pronouncements will be a catalyst for M&A activity in the ESG reporting software market.

The importance of ESG has risen dramatically for companies in recent years. We expect the total number of U.S. companies making ESG disclosures, whether mandatorily or voluntarily, to jump from fewer than 7,000 in 2020 to almost 35,000 by 2030. With consumer scrutiny of sustainable business practices increasing, there is a realization among both investors and executives that ESG performance can have a material impact on long-term shareholder value creation. This has prompted a growing number of companies to launch ESG initiatives as an integral part of their business strategy, plans, and goals—all of which they need to track and report back to shareholders, investors, and eventually regulators.

Such needs require software that can provide analysis of ESG data and performance transparently and reliably. Companies currently use a mix of in-house and third-party solutions to meet their ESG tracking needs. But even as companies spend more buying third-party ESG software, the supplier landscape remains highly fragmented with more than 40 vendors. We believe the market will continue to undergo rapid expansion that will drive deals in the sector.

The ESG software market in the U.S. and Europe, currently estimated at $300 million, is expected to grow at about 20 percent CAGR to reach $1.7 billion to $2.2 billion by 2030. Most companies say they are willing to pay $50,000 or more for end-to-end ESG software solutions that cover everything from data consolidation to reporting/publishing to auditability. The M&A case is built on the assumption that vendors will compete to meet that demand.

In Q3’21, three M&A transactions with implications on future deal making around ESG were announced. Blackstone agreed to pay $1.4 billion for Sphera, a leading provider of ESG software and solutions, citing how ESG issues are “a key thematic investing focus for Blackstone.” Meanwhile, the Conservice-Goby deal for an undisclosed amount targets ESG reporting in the property sector. Diligent Corporation, a leading governance, risk, and compliance software vendor, acquired Accuvio, an ESG data aggregation and reporting platform, also for an undisclosed sum. The CEO of Diligent noted: “ESG is the most frequent topic in boardrooms and executive suites globally.” All three deals position the buyers to take advantage of the growth opportunity expected in ESG reporting.