Persefoni, a climate data reporting company launched in 2019, has seen its customer base of portfolio companies reporting to banks and private equity firms skyrocket over the last year from around 1,000 to more than 8,100, according to Kentaro Kawamori, the Arizona-based startup’s co-founder and chief executive.
In remarks to New Private Markets, Kawamori attributed Persefoni’s growth to “disparate parts of the climate discussion connecting very quickly”. Initiatives to address climate change, Kawamori said, have led to heightened ESG expectations from investors. Now, climate disclosures are being institutionalised by regulations.
“The beauty for us is that it all starts with carbon accounting,” he said.
In recent years, as regulators signalled rules were coming to require the reporting of greenhouse gas emissions, a swath of tech startups readied themselves for a business boon. Now, after the US Securities and Exchange Commission released its first climate-reporting proposal last week and following the EU’s Sustainable Finance Disclosure Regulation framework unveiled last year, that bet appears to be paying off.
Suddenly, investors face an urgent need for carbon-accounting solutions.
In 2020, the developing market to service that demand included 600 ESG ratings and ranking providers, according to ERM, a sustainability consultant acquired by KKR last May in a deal valued at $2.85 billion. The ESG data market is growing at an annual rate of 20 percent and was on pace to top $1 billion by the end of 2021, UK-based research analytics company Substantive projected in a report published in December.
The rising value of ESG data companies has not gone unnoticed by private markets investors. In 2020, Luxembourg-based private equity firm CVC Capital Partners committed $200 million from its second growth-equity fund to acquire EcoVadis SAS, a European sustainability ratings platform providing ESG measurement and performance benchmarks.
More recently, in a $1.4 billion deal last July, Blackstone purchased the ESG software company Sphera, which measures ESG performance and risk exposure for 3,000 companies. Last month, Blackstone said Sphera is at the centre of the firm’s “carbon reduction goals” of reducing portfolio greenhouse gas emissions by 15 percent.
Reporting ESG data involves embedding automated software within a company’s IT systems. The software aggregates information such as electricity usage, emissions from business travel, or the number of trees cut down during construction, which is extracted to a digital platform accessible to the company’s investors.
ESG data companies have primarily targeted asset managers, debt providers and portfolio companies as potential users so far. But institutional investors are beginning to show interest in their services, according to Paymun Saket, managing director for LP products at Allvue Systems.
Allvue, an investment and portfolio management platform formed in a 2019 merger backed by Vista Equity Partners, is currently developing a system to filter data collected for GPs to meet the ESG needs of their LPs, Saket told New Private Markets. The “flexible” platform will allow investors to “create report designs” needed to meet shifting internal standards as well as new regulatory requirements, he said.
“Investors are taking notice that regulatory requirements are coming,” Saket said. “Public markets are now getting pressed for ESG information. In the near future, [private investors] are going to be pressed for that information as well.”