Last December, Persefoni raised over $100MM for its Climate Management & Accounting Platform. Earlier this year, Watershed closed a funding round with a reported $1B valuation. Salesforce has a Net Zero Cloud sustainability management module, and so does SAP. When talking about carbon accounting, the question that comes up most frequently is whether there’s any more room for more solutions. There is. Here’s why.
“Carbon intelligence” is an ecosystem, not a platform
A quick primer on carbon accounting solutions: they are enterprise software products that help corporations understand, track, manage and report their carbon emissions (see Appendix for an in-depth discussion). Though carbon accounting solutions get the most attention, they are really just one part of a larger carbon intelligence ecosystem. A useful way to understand this ecosystem is to examine how carbon data flows from its creation to its eventual consumers.
Perhaps the closest thing to ground truth for carbon data lies in the emissions data for common processes and activities. An example is the amount of CO2 emitted to produce one ton of steel. This data exists in many forms, from data sources like Ecoinvent to the private database maintained by Sphera, a leading supplier of Lifecycle Analysis (LCA) software. This data then flows into the carbon coefficients and emissions factors that are commonly used in carbon accounting practices, such as those maintained in the GHG Protocol.
Carbon accounting produces carbon data at the company-level, some of which is published to the public, and gathered by orgs such as the CDP or other data aggregators, that will then deliver that data to research orgs, other ratings agencies and other companies.
The carbon data ecosystem may sound robust and mature, but it really isn’t at all. While process and activity emissions data is the backbone for almost every carbon estimate you’ve seen, it is unclear to most users where any specific data point comes from, how often it is updated, and how well it represents the instance you are analyzing. While most of the data is understood to come from academic studies, many of these studies can be decades old and not representative of current practices.
Similarly, the carbon coefficients that companies rely on for carbon accounting are lacking in precision and granularity. The result is that meaningful differences are lost to aggregation. A survey by BCG of corporate sustainability executives reveals that lack of access to granular emissions factor data is a primary reason the majority don’t believe their estimates to be accurate.
All this to say that a carbon data ecosystem does exist today, but it is neither robust nor mature. Analyzing carbon emissions remains a nascent activity. Most of this usage is manual - it’s data analysts with spreadsheets. Quality carbon analytics remains overly technical and generally inaccessible.
Like reading, carbon analytics is fundamental
But there’s hope for rapid progress in carbon analytics over the next decade, beyond the activity today in carbon accounting. And that’s because carbon analytics is fundamental for carbon mitigation solutions, which are garnering billions in investment. Climate conscious investing has experienced an exponential increase in attention and dollars in the past three years. From ESG to electric mobility to venture investment in deep-tech solutions such as carbon capture (CCS), we’re putting our money towards our self-interest, expecting both financial return and a chance to preserve the long-term habitability of our environment. What is the carbon mitigation value of a new solution compared to the status quo? Answering this question requires carbon intelligence.
Even if private capital loses momentum, regulation coming from climate-forward governments for carbon reporting continues to drive the need for solutions. Just recently, the SEC mandated reporting from public companies in line with the TCFD standards, following a similar mandate last year in the UK. It’s hard to see how we turn our focus away from carbon data and analytics when that data is both the foundation and guidepost for our mitigation efforts.
The precedent: billions of dollars of marketing data
In an earlier post I discussed how the evolution of marketing technology and data is a reasonable precedent for the carbon intelligence ecosystem. Rewind two decades and audience measurement/rating for media and advertising effectiveness was accomplished manually through surveys and panels. Media expenditures were planned and committed annually, at the levels of large media properties, such as “during Friends”, or “front page of the New York Times.” The marketing technology ecosystem was sparsely populated.
Then consumer media attention shifted to digital media, and that attention got progressively “cheaper” to buy and more plentiful thanks to social media and user-generated content. The source of value in media shifted from attention to information, or data, and that led to creation of a robust data infrastructure to collect, share and monetize it, and an explosion of technology solutions to use it.
Today marketers can determine in almost real-time whether your purchase in the store today was related to an ad you saw three weeks prior. The LUMAscape, which tracks these technologies, counts thousands of technology solutions in this ecosystem, with Alphabet’s Google and Meta’s Facebook at the center, and the companies they and their brethren acquired in their orbit. The motivating force for this diverse and dense ecosystem is the $780B dollars that is spent annually on advertising. The desire to spend that money intelligently gave rise to the diversity of solutions that we see today. The carbon analytics ecosystem can be propelled by a similar force. The Climate Policy Initiative estimates that we spent $632B on carbon mitigation in 2020, but notes that the figure pales in comparison to the over $4T annually we need to spend to meet carbon goals.
While massive amounts of capital provide a primary motivation for development in carbon analytics, there are also structural changes in carbon that mirror the factors that drove this transformation in audience measurement and media.
Theme 1. A shift in the sources of value. In the media and advertising world, “brand” value made room for “performance” value. Once we could measure media’s impact on sales more directly, performance became the predominant value driver. Similarly, we’ve come to realize that energy and the outputs stemming from energy don’t just need to be cheap, they should also be sustainable. And sustainability is gaining in importance.
Theme 2. A new resource. In media and advertising, this was digital media, and the new concept that marketers could “own” their own media channels, such as Twitter, Facebook and mobile apps. Similarly, we are seeing clean alternatives for a large number of emissions-heavy business activities, from energy and fuel to materials, processes and vendors.
Theme 3. More granular and accurate data capture. In media, the digitalization of media meant that marketers could access audience demographics, interests, and shopping history for individual marketing opportunities in real-time. Today, new instrumentation and availability of computing power can estimate and monitor CO2 emissions data of processes, buildings, energy and companies at a granularity and frequency that were impossible ten years ago.
It is fair to characterize the carbon intelligence ecosystem as nascent today. While there are probably 40 or more new carbon accounting companies in the last five years, we’re only now seeing new companies emerge that focus on data quality, accessibility and usability. I fully expect to see this trend continue until we can claim a truly robust carbon intelligence ecosystem.
Why I’m wrong (and carbon analytics will fail to launch)
While predicting the future is foolish, predicting why your prediction could be wrong is a version of magical thinking. And yet, here we go:
Macro problems overwhelm the need for optimization. We live in eventful times – will the next ten years be less turbulent? Recent events have reminded us again of the adverse consequences of our fossil fuel dependency, but that doesn’t necessarily lead to productive action. We might be more willing to fight another Cold War than take on the discomfort of electrifying our lifestyles and our economy. If that’s the case, expect much less progress in building a carbon intelligence ecosystem in favor of a renewed pursuit of cheap energy (which might still favor some renewables - silver lining?).
Regulation goes to 11. If the US federal government today effectively banned the further use of fossil fuels, our economy would reel. But we’d also no longer need carbon accounting. Carbon accounting is most important in a mixed carbon world where tradeoffs must be made between carbon-emitting alternatives at different price points. So the robustness of this carbon ecosystem is related to the degree and effectiveness of carbon regulation and our swiftness in adopting it.
It’s greenwashing all the way down. The backlash against corporate and financial greenwashing is louder in Europe than the US currently, but that can easily change. An increasingly negative sentiment around corporations reporting their environmental impact and sustainability will put a damper on the potential growth of carbon accounting. That’s because marketing value remains one of the primary benefits (and consequently motivators) for corporations to take on net-zero commitments and sustainability programs. If the negative public sentiment grows, it will diminish that marketing value, budget and effort devoted to sustainability.
Stung by low data quality. Can we trust the numbers? Today it’s unclear. Tomorrow it can’t be.
The socially responsible investing trend reverses. The recent massive interest in socially responsible investing has also been a potent weapon for corporate financial officers to champion sustainability reporting projects and justify budgets. Critics of socially responsible investing say that the way it is structured today does not materially impact companies’ capital costs and access, pointing to regulation as the more impactful approach. This discontent may eventually sour investors on the idea of socially responsible investing, especially if returns begin to lag the market.
Carbon intelligence everywhere
Today carbon emissions is specialized knowledge in the domain of experts. This understanding of the sources of carbon and key decisions that impact a corporation’s “carbon footprint” is not shared by the average professional who contributes to sustainability efforts or perhaps more importantly, the middle managers, procurement officers, engineers and operations staff whose decisions have the largest impact to a company’s emissions – that’s why corporations will continue to rely on expertise from external sustainability consultants that no software platform can deliver on its own. The same can be said in the world of finance, where expertise in emissions is offloaded to ESG specialists and ratings firms, resulting in little meaningful impact on today’s capital flows.
This needs to change. Carbon intelligence is ultimately not for sustainability professionals, but for everyone. Likewise, carbon intelligence solutions must introduce an understanding of carbon to every decision-maker, in addition to deeply serving the needs of the professionals that are tasked with achieving sustainability goals. Most opportunities for carbon reduction require a commitment to invest time and resources, often at a cost – how much to invest for what reward? The answer will vary, but it can only be answered well when an understanding of carbon emissions is internalized by all parts of an organization that materially impact its carbon footprint.
The starting point for developing that internalized carbon intelligence is the adoption of carbon accounting and analytics platforms. Historically, attempts at carbon analytics have been more scientific curiosity than economically motivated. But that’s changing. Bill Gates or Arthur C. Clarke and perhaps many others famously said, “People overestimate what can be done in one year, and underestimate what can be done in ten.” Taking that advice to heart, I don’t expect to see a meaningful change by next year, but I’d be surprised if we didn’t know carbon in ten years like we understand our The Social Dilemma today.
APPENDIX: Carbon accounting's many goals will lead to specialization and more solutions
Carbon accounting solutions today cover a wide range of distinct activities. Can any software platform competently cover them all? To find out, let’s look at the activities individually.
The first activity is gathering data to understand carbon emissions. The technology problem is how to retrieve data from the far reaches of an organization and from vendors ranging from local utilities to overseas materials suppliers, validate and clean that data, then apply the latest accepted methods for calculating equivalent CO2 based on those inputs. The knowledge gap in corporations is perhaps more challenging to solve. What data is important in the first place? Environmental and sustainability consultants have focussed on this problem for decades, and they remain a necessary part of the solution. Watershed acknowledged this by building its own consultancy. How effective can pure software solutions be without the expertise to use them?
The second activity, tracking and managing emissions, is perhaps a more modern and challenging need, arising from more companies making “net-zero” commitments and needing a way to track progress against those commitments. There are two distinct software challenges here:
Data integration is the evolution from ad-hoc, manual data gathering and calculation to always-on data pipelines that enable data to programatically flow between internal systems and from external data providers (e.g. energy providers). The problem is complex, requiring establishing and maintaining connections to tens to hundreds of data sources, then applying programmatic transformations of the data so they can be integrated with other data for analysis. Many large enterprises have built data pipelines to optimize marketing expenditures in the past five years, often turning to custom data lake-based solutions after initially dabbling with off-the-shelf software. Why? Enterprises recognized the value of “owning” data and wanted flexibility for more customized uses of the data for targeting and marketing measurement. We could see carbon data follow a similar path.
Reporting management describes the application layer of software that provides the executive stakeholders, sustainability managers and various operators across the company the visibility to track the progress of sustainability projects and carbon mitigation activities. Good software for reporting management is about great workflow, roles management and building a solid user experience for many different users. Not easy!
The third unique activity under the carbon accounting umbrella is reporting, both external, such as for regulatory requirements or customer or investor requests, or internal, for benchmarking against competitors and peers. With an increasing number of regulations and reporting schemes arising from around the world (see CDP, GRI) and specific to various industries, the software challenge is to support multiple standards, which not only entails different reporting formats but may also require using different methods to calculate emissions and different levels of reporting granularity.
Beyond the core three activities of carbon accounting are many ancillary pieces. Watershed is working on a marketplace for carbon mitigation vendors. Third-party data providers such as MSCI or WoodMackenzie can offer companies more insight into vendors and peers. Carbon accounting is still very new, so expect more activity specialization as we get more experience under our belts.
Specialization and commercial factors suggest more carbon accounting companies
It’s worth mentioning that in addition to the very distinct activities under the umbrella of carbon accounting, there are the distinct needs of different types of customers. Manufacturing. Retail. Transportation. Tech. Services. Financials. Real Estate. Each industry and sub-sector has different predominant sources of carbon emissions, and it’s difficult to imagine how a platform that specializes in serving the needs of certain manufacturers, who may be primarily interested in managing process and transportation energy costs, will also be well suited for real estate companies, where building characteristics and usage are primary. The well-known carbon accounting names have clear focus areas. Sinai targets certain industrial sectors. Persefoni, private equity. Watershed, new D2C and high brand value retail. Considering the scope of activities that can lead to material carbon emissions and the variety of companies this software needs to serve, there are easily enough different needs to expect that we will see many different solutions arise to serve them.
Finally, consider how commercial considerations will shape the ecosystem. The destination for most software in this space is acquisition, most likely by the dominant business software giants: Salesforce, Oracle, SAP, Adobe, Microsoft and Google. Business customers of these companies tend not to pick and choose solutions from multiple vendors, or rather, these vendors do everything in their power to discourage that behavior. So what happens when Salesforce acquires the first big sustainability software package? What do Oracle-based customers of that sustainability software do? They migrate to the Oracle solution, which itself was likely acquired shortly after Salesforce made its move. And so on down the line.