Nigel Le Bas and Lewis Jowett explain the outlook for the sustainability consulting market, following their recent experience completing the sale of ESG strategic consultancy Carnstone.
Organic market growth in corporate sustainability is reflected in an increased appetite for sustainability consulting acquisitions with a wide range of international buyer pools who recognise the need to expand their sustainability practices as their own clients prepare to make changes. This period has been described as 'the decade of action.'
What are the market drivers for sustainability consulting?
The global corporate sustainability market is forecast to grow at 17% CAGR until 2027. The growth is being driven by several factors, largely related to rising expectations from consumers, employees, and investors.
Increasing stakeholder pressure
Internal and external stakeholders are applying collective pressure on organisations to demonstrate they're acting sustainably.
Employee attraction and retention
Impactful companies who demonstrate authentic ‘ESG’ credentials are finding it easier to attract and retain talent, with 65% of employees saying they would be more likely to work for a company with robust sustainability policies and procedures.
Increasingly consumers are taking a stand, with 49% reporting they paid a premium for products branded as sustainable in the last 12 months. Perhaps more pertinently, 59% of consumers are prepared to boycott brands who fail to act on climate change.
Investors and capital
Investors are applying pressure on executives to demonstrate and improve their ESG credentials, demanding greater transparency and accountability from where they place their capital. This can be evidenced through the rise and success of impact-related private equity funds and how ESG analysis is now woven into due diligence processes.
85% of mid-market lenders are reporting that a firm’s ESG status or its ability to transition to net-zero influenced their credit risk assessment, with 65% of firm’s surveyed in our own H2 2022 International business report stating they understand how ESG metrics will impact their ability to raise finance and the price they pay for borrowing.
Senior business leaders are focusing on developing sustainability strategy and driving through operational change to meet long-term ESG goals, with 80% of CEOs believing sustainability investments will driver better business results within five years. Sustainability services are increasing, acquired by ExCo members higher up the value chain compared to traditional procurement avenues.
The mitigation of corporate reputational risk is driving leaders to recognise the internal and commercial benefits of having an authentic and impactful ESG strategy. Organisations cannot afford to be left behind by competitors when it comes to sustainability action. Indeed, executive pay is being increasingly linked to ESG performance criteria.
The UK government’s target of a net‑zero economy by 2050 is supplemented by increasing regulation and climate-related legislation including the adoption of TCFD reporting requirements and ESOS schemes. This pressure is increasingly driving SMEs to action having historically focused on the largest corporates.
Incoming legislation, such as TNFD, requires further transparency on nature‑related risks encompassing a wider sector shift towards nature-based solutions.
Additionally, corporates are increasingly seeking specialist advice on social legislation changes such as the 2015 Modern Slavery Act and increased inclusion and diversity reporting requirements.
Global legislation is also driving behaviour change, with the impending SEC regulation in the USA, which will detail the climate-related disclosure requirements for US companies already driving action. Acquisitive US consultancies are increasingly looking to export experience and knowledge from the Europe to help prepare their clients.
Inflexion point and market appetite
Many businesses in this space are feeling the strain of the rapid commercial and operational growth, with the demand for talent combined with the dearth of experienced sustainability consultants meaning founders are often at an inflexion point in determining the strategic next steps.
This experience is coupled with an increasingly competitive landscape as companies in adjacent sectors, be that accountancy firms or larger consultancies are looking to offer ESG services to their clients.
This broadening competitive landscape is mirrored in the types of acquirers looking for sustainability consulting assets. This includes, but isn't limited to larger environmental consultancies, accountancy firms, global management consultancies, marketing communications agencies, and traditional TIC players alongside a plethora of private equity houses.
Continued market evolution
Consultancy services in areas such as carbon footprinting, TCFD disclosures and supply chain transparency, are likely to commoditise through the growth in software and technology solutions.
Rising concerns about biodiversity and carbon-negative business practices, and expansion of environmental solutions beyond carbon-reduction, are increasing the demand need for nature-based solutions.
Perhaps historically neglected by clients, there's an increasing focus on the ‘social’ and 'governance’ elements of ESG. Supply-chain transparency, inclusion and diversity policies, and sustainable working practices are as important to maintaining a company’s market reputation as their energy-efficiency.
The ongoing struggle for experienced recruitment will continue as demand is set to outstrip supply in the coming years. While this is helped by graduates increasingly choosing to work for organisations with a sustainable business model or purpose-driven.
What does this mean for you?
The combined force of these generational tailwinds means that the sustainability consulting market looks set to continue its growth trajectory. However, the services provided will likely need to become more strategic and specialised as client’s understanding of topic areas increase and technology solutions replace spreadsheets. Nevertheless, given the exceptional pace at which the sustainability world is evolving, internal sustainability teams are likely to continue to need expert consultancy advice to supplement their teams and help navigate businesses through the ‘decade of action.’