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Requirements for Climate Disclosures Driving Increased Carbon Accounting Software Investment
To many corporations, carbon accounting software is a new concept. After all, accounting software is not typically associated with reporting on hot tech innovation. However, increased global regulations for climate action and emissions reporting are undoubtedly clearing the way for new climate tech companies, especially in climate-related Software-as-a-Service (SaaS). Companies need to track and calculate their carbon emissions footprints in a way that is compliant with the Greenhouse Gas (GHG) Protocol and other carbon accounting methodologies, and these are swiftly evolving from voluntary to compulsory disclosures. As laid out by the Intergovernmental Panel on Climate Change (IPCC), complacency could have dire circumstances, from species extinction to widespread food and water shortages. While governments are influencing legislation to address climate change, investors are driving demand for climate disclosures and carbon offsets. Shareholders of public companies want to know about the risks of climate change to their investments (e.g., risk to buildings, coastal properties, agricultural losses, etc.) and how not doing enough to respond to environmental and social issues could affect the future of the company (e.g., reputational risk). With current voluntary disclosures, climate risks and carbon footprint data collection are inconsistent and not easily compared across global companies. Several organizations are trying to get everyone on the same page. The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for companies to disclose climate-related risks and opportunities. The TCFD reports that since 2018, the number of organizations supporting TCFD has increased five-fold, and the market capitalization of companies supporting the framework is more than US$25 trillion. Several global stock exchanges and financial regulatory organizations are also implementing obligatory changes to climate-related disclosures. These mandates will undoubtedly result in more companies turning to carbon accounting software solutions to account for their GHG emissions.
Software That Automates and Standardizes Carbon Accounting
This surge in climate-risk and carbon-emissions reporting is spurring significant investment in climate-related SaaS. Large software conglomerates and SaaS startup companies are racing to replace the traditional methods for carbon accounting. Company approaches to GHG accounting and climate reporting vary widely, ranging from sophisticated high-margin corporations developing in-house software to track CO2 emissions to small and midsize businesses (SMBs) manually calculating GHG emissions on Excel. Midsize-to-large companies also typically hire a consulting firm with sustainability credentials to assist with manual calculations. Many of these firms offer proprietary approaches, and new carbon accounting software startups will argue these different methodologies can introduce inconsistencies with auditing. A key strategy for all the software players in this eco-conscious market will be aligning with the global sustainability reporting standards set forth by the TCFD and other organizations, such as the International Sustainability Standards Board (ISSB). Regional requirements will also have to be addressed. The following is a list of companies capitalizing on the growth of the sustainability and carbon management software market.
Carbon Accounting Software #1: Persefoni
In October 2021, Persefoni announced that it had raised US$101 million in its Series B funding round, which is a large sum for a climate tech SaaS company. Persefphoni’s Climate Management and Accounting Platform (CMAP) is pitched as an “ERP for Carbon Data” (Enterprise Resource Planning software), as it automates GHG accounting and climate data for financial disclosures.
Strategy and customer base: Persefoni markets their carbon accounting product heavily to asset managers, banks, and financial institutions, and they report to be working with four of the top ten Private Equity firms and four of the twenty world’s largest banks. Persefoni is also expanding to larger corporate clients. Moreover, Persefoni has integrated several partners, including Workiva (market-leading software for SEC filings) and Bain & Company and Consultants to Government and Industries (CGI) for helping clients implement an overall climate strategy. In Q2 2022, Persefoni is offering a free tier of its platform to SMB organizations.
Carbon Accounting Software #2: Watershed
Watershed has worked with a distinguished list of digital companies, such as Airbnb, Sweetgreen, Twitter, and Stripe, to be an all-in-one carbon accounting platform for measuring, reducing, and reporting climate emissions. In February 2022, Watershed announced that it had raised US$70 million in a Series B investment round by storied investors Sequoia and Kleiner Perkins, who valued the company into unicorn status at US$1 billion.
Strategy and customer base: Watershed seeks to target forward-thinking firms with mature programs for sustainability, rather than focusing on financial institutions or industrials. Watershed also emphasizes enabling climate strategies and projects for companies (modeling the costs of achieving certain carbon reduction pathways), rather than just offering a carbon accounting platform.
Carbon Accounting Software #3: Salesforce (Net Zero Cloud)
In February 2022, Salesforce made “sustainability” a fifth core value of the company, adding it to customer success, trust, innovation, and equality. Today, the software company has net zero emissions across its value chain and uses 100% renewable energy for its own operations. With this focus on carbon neutrality as a company, an internal tool for GHG emissions accounting ultimately became a public product.
Strategy and customer base: Salesforce’s Net Zero Cloud product is a good fit with customers already familiar with its Customer Relationship Management (CRM), sales, and marketing tools.
Carbon Accounting Software #4: SAP
This German multinational is the world’s third largest publicly traded software company and largest non-American software company by revenue. SAP specializes in developing enterprise software for business operations and customer relations.
Strategy and customer base: SAP already has a large customer base, and for their sustainability reporting offerings, they provide four enterprise-level products, including solutions for sustainability and ESG reporting, climate change (reducing carbon footprint), circular economy, and social responsibility. In 2021, the company announced the launch of its SAP Product Footprint Management. This carbon accounting platform lets enterprises track the GHG emissions for their products, encompassing the entirety of the value chain. As a result, the client can do things like share its climate action results or choose materials/ingredients that align with sustainability goals.
Carbon Accounting Software #5: Wolters Kluwer Enablon
Enablon, a Wolters Kluwer business, is a top provider of Environment, Health, Safety (EHS), risk management, and sustainability software. The Enablon sustainability and ESG reporting application collects, tracks, and generates reports for social and environmental data.
Strategy and customer base: In addition to ESG reporting, Enablon allows large companies to create climate action plans and meet environmental, safety, and compliance challenges, such as required permits and certifications for air quality, water use, waste, and chemicals.
Carbon Accounting Software #6: SINAI Technologies
San Francisco-based SINAI Technologies has raised US$14 million in funding. The carbon accounting company was named a World Economic Forum Technology Pioneer of 2021 for producing software to “cost effectively measure, analyze, price, and reduce emissions”. SINAI joins the Decarbonization-as-a-Service market, recognizing that internal carbon pricing is becoming the norm in businesses.
Strategy and customer base: SINAI has communicated a strategy for filling a niche with companies that are currently making net-zero pledges but have not yet established a roadmap for achieving their targets.
Carbon Accounting Software #7: Sweep
Since its launch in 2020, France-based startup Sweep has raised nearly US$100 million in developing software to help businesses reduce their carbon emissions.
Strategy and customer base: The Sweep platform’s approach is seeking to reduce emissions across global supply chains, including for multinational conglomerates Saint Gobain and JCDecaux. The founders are committed to helping digitize carbon reporting for mature companies and manufacturers in Europe that have been established for decades but may not have all their processes fully automated and digitized.
Carbon Accounting is Messy, Hard, and Expensive
In a recent Oracle survey assessing more than 11,000 consumers and business leaders, 91% of respondents reported major challenges to emissions reporting and ESG tracking programs. The biggest obstacles were accurate GHG emissions data from partners and third parties (35%), a lack of data (33%), and the time-consuming nature of the manual reporting process (32%). With carbon accounting software, these three problems can be managed in a much easier manner. The carbon conversation becomes much more manageable, from measuring CO2 emissions and target-setting to reducing and reporting on value chain emissions when digital tools are introduced. This explains why the carbon management SaaS market is estimated to reach nearly US$20 billion by 2026, almost double the market value of 2021. Some of this value is variable across sources depending on how the market is segmented, as different companies are offering slightly different approaches. For example, carbon management SaaS packages can be priced by offering (software, consulting services), by application (emissions tracking, circularity solutions), by industry (oil & gas, manufacturing), or by geography (specializing in regional reporting requirements).
Finally, the primary driving force in the carbon accounting software market is a significant global regulatory shift toward decarbonization. To manage the process effectively, CO2 emissions must be measured in a standardized way. Tedious manual calculations are not the answer. To limit global warming to 1.5 degrees oC, or at least to well below 2 degrees oC, carbon accounting must get beyond a one-time-per-year event with employees or a consultant manually estimating a company’s Scope 1, 2, and 3 emissions. GHG accounting of the future should seek to integrate carbon considerations into everyday operations. For the companies mentioned, the carbon accounting software that treats accounting as just the first step will ultimately win market share. The best all-in-one offerings will track and calculate total carbon emissions, generate standardized ESG reports, analyze return on investment (ROI) calculations for sustainability projects, and incorporate carbon-reducing recommendations for everyday decision-making. Carbon management SaaS is just one of many sustainable technologies leading the way to a lower carbon economy.