At our 2023 ESG and sustainability services M&A Dinner we asked if ESG M&A was a bubble or a generational shift in appetite. The consensus was ‘no’, and the last 12 months have proven it. While the wider economy is still weathering headwinds, the sustainability services sector continues to grow as does acquirer appetite – driven by stakeholder pressure, regulatory enforcement, and C-suite engagement.
The current market is also adjusting to the election of a new UK Government; the first time since 2010 that the Labour Party has had the power to shape the 'green' agenda.
At this year’s dinner our guest speakers discussed what these dynamics mean for consultants working across the sustainability services sector.
The panel
The challenge around ESG for clients is that the pace of regulatory change continues to move it beyond their in-house capabilities. This creates opportunities for consultancies and service businesses who remain at the cutting edge of this market change.
The sector is, however, maturing, with changing client dynamics illustrated by the increasing presence of lawyers in the room. Often, when consultants are reporting back to their clients they have to go through their legal advisers first. Sustainability professionals can still be visionaries, but their outputs increasingly need to tread the tightrope of legal and commercial advice.
Is sustainability moving beyond carbon?
This was the keynote question for our expert panel. The consensus was that while carbon is still central to sustainability, it’s no longer synonymous with it. The ‘E’ is still the first letter for a reason, but it now includes wider recognition for topics such as water, nature-based solutions, and biodiversity, and there’s a growing focus on the 'S' and the 'G'. All topics are interlinked though – global warming is causing social problems, and you can’t enact the net-zero transition without trade-offs between nature, biodiversity and decarbonisation.
Environment
The future for consulting on the 'E' will almost certainly include rising prominence of niche topics such as water. Together, global water use, storage and distribution – and the lack of wastewater treatment – contributes 10% of global greenhouse gas (GHG) emissions, making it key to the net-zero transition.
Social and governance
There aren’t many market participants purely serving social and governance. The ones that find the most success are those which have a fundamental base of expertise in social value underpinning a technology or SaaS platform. This is distinct from a pure-play tech business pivoting to add social value consultancy.
The popularity of B Corp certification is illustrating the increasing focus on governance, an often-overlooked part of ESG. The process asks a lot of questions companies don’t think about on a day-to-day basis. Many of them have gone through a transformation because they’ve realised that they have to get their houses in order.
How will the new Government shape the market for sustainability services?
With the dust settled on the general election, the panel agreed that Labour is talking a good game on ESG. They’re positioning decarbonisation as a driver for economic growth, with the King’s Speech and party conference illustrating the plans behind that rhetoric. This is an opportunity for market participants to capitalise, but there are also question marks over delivery. How do you pay for it? Will it be tax and spend? Who will be the net beneficiaries, and the potential losers?
Their overall prosperity plan is to grow the economy by £15 billion per annum. Bringing in private investment is key to that. We can already see potential winners in green steel, industrial decarbonisation, ports, and gigafactories. It’s clear that the Government wants businesses to lead on going further and faster without having their hand forced by regulations, but if it does start to slow down they will take action.
Labour’s mission-led approach is critical to understanding the expectation on private companies to continue stepping up on sustainability. For example, laws around procurement in the public sector are coming. The Social Value Act will require public sector buyers to consider the social value and sustainability of their suppliers. If you don’t adapt your corporate strategy to align with these missions you’re going to have a hard time winning work. That’s a new opportunity for selling consultancy into them right there.
The US election result
Our own change in Government isn’t the only political shift that will impact the market for sustainability services. Following the US election on 5 November, there's likely to be a heightened hostility towards ESG as a concept, in line with Trump's first administration. However, even with a Democrat in the White House, the word ESG was nigh-on taboo in the United States, with panellists stating they have often removed the term in all client communication instead focusing on ‘Sustainability’. There are reasons for optimism though. The US is clearly behind Europe on regulations, but many corporations’ customer base means they have to comply with its requirements regardless.
The ESG backlash is real, but companies are still doing it, quietly, because consumers, employees, and investors are demanding it, rather than because they're being strong-armed by regulation.
Where will sustainability go next?
In the last 18 months we’ve seen an uptick in companies asking how their operations fit into the ESG agenda. Are they on the right side of history? Are they doing something with impact even if it’s not pure-play sustainability? It shows how mature ESG has become that it’s a priority regardless of whether it’s a regulatory requirement.
The specific dynamics are hard to predict, but there will always be opportunities to advise companies on how they can implement it into their business models. While there has been a focus on compliance with new regulations this year, this should be a catalyst for the next chapter of sustainability as companies address the findings and embed sustainable performance into their strategies.
For more insight and guidance, get in touch with Nigel Le Bas.
