Sustainability services: A market for purpose and partnership

As the pace of change in the sustainability services market accelerates again, the appetite for sustainability-related acquisitions and investments is matching it, with the total consulting market worth an estimated USD 14 billion in 2023.

‘ESG’ and ‘sustainability services’ range from analysis of human rights protections in global supply chains to the technical decarbonisation of energy-intensive manufacturing facilities. This breadth of specialisms is reflected in the diverse pool of interested potential acquirers.

Sustainability services M&A market remains buoyant

As client demand for ESG services, driven predominantly by increased stakeholder pressure and regulation, is becoming more sophisticated, so is potential acquirers’ and investors’ understanding of what good looks like across the market:

• Energy services firms pivoting to decarbonisation and Net zero roadmaps
• Historically-technical environmental services firms, such as SLR, APEM, and ERM, are seeking to widen their ESG advisory services offerings
• Private equity-backed ‘pure’ sustainability services firms, such as Anthesis, Simply Sustainable, and Xynteo, are aiming to provide a ‘one-stop shop’ for corporate sustainability needs
• Sustainability reporting, marketing, and communication agencies, such as Flag, servicing ESG reporting requirements
• Technology players, previously focused on environment, health and safety data, such as Cority, Sphera, and EcoOnline
• Sustainable engineering firms looking to soften their services for the built environment
• Management consulting firms interested in using strategic sustainability services as a beachhead to wider business transformation projects
• Testing inspection and compliance specialists, such as Alcumus and Celnor
• Private equity and impact investors can see the ‘generational’ market tailwinds driving the industry

However, potential acquirers, particularly private equity houses, should be aware of the unique traits of the sector when appraising transaction opportunities.

Stakeholder demands for solutions require collaboration and transformation

In 2024 we worked on multiple key deals across the market – giving us a strong understanding of current trends and the direction of travel we expect to see in the next few years.

More than in any other industry, the sustainability issues facing end-clients and their supply chains are best tackled through collaboration. This environment often results in seemingly unique business models based on membership and partnership approaches.Indeed, Carnstone, a strategic sustainability management consultancy (now part of SLR), founded and facilitates numerous collaborative multi-client partnerships designed to help tackle sustainability projects best approached as a collective. These range from the Book Chain Project, where publishers and paper suppliers can share environmental audits on paper mills, to the DIMPACT coalition, focused on science-based solutions for the environmental impacts of the digital media industry.

Similarly, collaboration is at the heart of the Supply Chain Sustainability School, run by Action Sustainability and funded by a collection of partners, which provides innovative and free-at-the-point-of-use sustainability learning across the built environment sector, training over 40,000 learners and 7,000 companies a year.

End-clients are demanding solutions rather than just advice, so businesses which can take them on a transformational sustainability journey rather than providing increasingly commoditised reports are likely to stand the test of time.

This is exemplified by Planet Mark, that joined the Alcumus Group last year, which have built their innovative membership model around guiding clients on their Net zero journeys. Businesses like Planet Mark drive year-on-year improvement to maintain the certification, rather than simply re-measuring every 12 months, and we’re seeing increased appetite for the implementation of sustainability strategies rather than pure consultancy work.

These relatively unique collaborative business models are a huge positive aspect of the industry and something acquirers and investors should ensure they’re fully comfortable with if they want to enter the space.

Holistic approach is highlighting the S and the G

Perhaps understandably, carbon measurement and the ensuing ‘Net zero roadmaps’ have often been the most tangible aspects of benchmarking sustainability performance. However, not having modern slavery links within your supply chain is as, if not more, important than meeting any Net zero or carbon neutrality targets.

This increasing analysis of sustainability through a holistic lens has led to the rising prominence of Social and Governance issues on clients’ agendas, demonstrated by the growth in sustainability roles related to them.

Even when staying within the Environmental aspect of ESG, issues such as biodiversity, nature-based solutions, circular business models, and water usage are rightly gaining increased prominence in the minds of clients, resulting in higher demand for related services and ultimately investor and acquirer interest. This was the key topic of discussion at our recent sustainability services M&A dinner.

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The power of purpose

For acquirers and investors, understanding the impact and purpose motivations within the wider sustainability services industry is crucial to assessing business models and ultimately building lasting relationships with founders.

While not every sustainability services firm is ‘purpose-driven,’ a large proportion of the employees within the industry see having a positive impact as a core part of their overall reward and career motivations.

From our experience, businesses which recognise that growth is an enabler of greater impact are likely to perform the strongest on both commercial and impact metrics. Unsurprisingly, the organisations which can match impact and strong traditional financial metrics are likely to attract the most interest.

Likewise, acquirers and investors who recognise and embody the correct cultures will have significant advantage over their peers when operating in competitive auction processes. Often, the first questions an owner-manager will ask themselves when meeting potential suitors is “what will my people think?” closely followed by “how will my clients react?”

Aligning on culture and purpose during the deal process makes it much more likely that the new partnership will be a success.

The outlook for the sustainability services market

The tailwinds driving the sustainability services market are strong, as is the appetite for assets from a wide range of buyer pools. We expect this to continue, as corporates are increasingly going above and beyond simply complying with regulation.

Acquirers who understand the important of culture, purpose, and impact to prospective target companies stand the best chance of building trusted founder relationships and transaction success.

For more insight and guidance on the sector, get in touch with Nigel Le Bas or Lewis Jowett.