ESG consultancies are becoming hot property and PE has taken note

Sustainability consultancies and data providers are drawing the interest of private equity firms as corporates’ ESG reporting requirements push up demand for their services.

Joe Baratta, global head of private equity at Blackstone, told affiliate publication Buyouts Insider that the firm has identified “corporate expenditure on ESG” as an investment theme for the year ahead, because it is one of the “narrow themes that we think have long-dated tailwinds. There’s a big enterprise systems opportunity in addressing the need for ESG tracking, reporting and monitoring.”

Blackstone acquired Sphera, a Chicago-based ESG software, data and consulting services provider, from private equity firm Genstar Capital for $1.4 billion last year. The deal was made through the firm’s flagship private equity strategy.

Blackstone is not alone. Last year, KKR bought sustainability consultancy ERM from Canadian pensions the Ontario Municipal Employees Retirement System and the Alberta Investment Management Corporation. The deal valued ERM at $2.85 billion. At the time, Jonathan Musselwhite, European head of OMERS PE, told New Private Markets that competition for ESG-related assets had intensified since the LP originally invested in ERM in 2015: “Between [then] and today, everyone has woken up to the importance of ESG and that good sustainability equals good business. ERM inevitably attracted more interest today than in 2015, when fewer people saw that opportunity.”

CVC invested $200 million in sustainability ratings service EcoVadis SAS in 2020 via its second growth fund. Aaron Dupuis, senior managing director at the firm, said in a statement that CVC had “followed EcoVadis for several years as part of our longstanding efforts in supply chain risk management, where we identified ESG as a particular area of focus for best-in-class companies”.

The ESG service provider market is fertile ground for buy-and-build expansion strategies, according to research by Verdantix. The research and advisory company said there were 13 acquisitions of ESG and sustainability consultants in 2021, compared with just four in 2020. “Consultancies that serve the ESG and sustainability space are adapting as larger firms bolt on smaller specialists and invest in innovative technologies to help meet client demand,” said Kim Knickle, research director at Verdantix. “Sustainability boutique consultancy firms are being acquired by large consultants as a mechanism for the latter to bolster their in-house sustainability expertise and further enhance their credibility.”

ERM has acquired eight smaller sustainability shops since 2019, including SustainAbility and Sustainalize. Anthesis, which received a minority investment from UK-based Palatine Private Equity’s first impact fund in March 2021, has made 15 acquisitions since it was established in 2013.