We are on the cusp of the largest capital reallocation in recent history, driven by the increasingly urgent transition towards a climate-neutral, sustainable economy. The tech ecosystem is at the forefront of this transformation, and in this report we deep-dive into the dynamics and tremendous opportunities this represents for the sector.
In this report, we list the sectors within technology that can most help accelerate the climate transition and chart the progress of tech impact investing and M&A. We also zoom in on two verticals that have played a big role in enabling and accelerating the development of sustainability: data analytics and resource-efficient consumption.
At GP Bullhound we are convinced that the tech ecosystem can play a major part in making our planet greener, fairer and safer, and we hope this report conveys our enthusiasm.
Economists Randy Barber and Jeremy Rifkin, among others, have spoken of responsible investment since the 1950s, considering the impact on society and the environment. The publication of the Brundtland Report in 1987, also known as Our Common Future, is considered by most as the watershed moment when the imperative of reducing the impact of economic activities on the environment became known and understood in political, regulatory, societal and economic spheres globally. As all climate indicators turn red, the rhythm of awareness spread is accelerating.
GLOBAL LAND AND OCEAN SURFACE TEMPERATURE CHANGE VERSUS 1951-1980 AVERAGE (°C)
The change in global surface temperature versus the long-term average is apparent since 1960 and shows no signs of abating.
In the past 7,000 years, this was stable with a decline of 0.01°C per century.
Since 1970, the surface temperature has risen by 0.17°C per decade.
Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. Acknowledgement that
1) economic development has come at the cost of resources
2) a shift is needed that is intrinsically correlated with social development.
The economic and social transformation required to usher economies towards
1) climate neutrality e.g., limiting global warming to below 2°C, and
2) environmental sustainability e.g., sustainable use of natural resources and biodiversity.
Investment in companies with attention to the Environmental, Social and Governance (ESG) performance of their processes, governance and operations.
An investment made to alleviate negative impacts and risks.
Investment in companies with core businesses or products that contribute to sustainability goals and meet minimum ESG requirements.
An investment made with the intention to produce a positive impact.
DIRECTOR OF THE SMITH SCHOOL OF ENTERPRISE AND THE ENVIRONMENT
The key challenges of climate change and natural resource consumption share some similarities, but important differences as well. At the core, we are not going to get where we need to be by asking people to stop enjoying the lives that they enjoy. We are going to get there by innovating our way towards solutions that enable us to live well, happily, and prosperously, while not damaging the environment.
One way economists think about climate change is that there is a finite amount of greenhouse gases that we can put into the atmosphere and avoid dangerous climate change. But this need not be a limit on human growth and development – we have vast amounts of incoming clean energy and only use a tiny fraction of what is possible. Fast forward a few years and grids will be cleaner as we add more renewables, and as we can clean up our electricity grids, we can increase EVs (electric vehicles) in parallel.
The transition to clean energy will create an enormous number of jobs. There are more jobs per unit of energy in a clean energy system than in a fossil system. However, as there will be structural disruptions during the transition, the challenge is to identify adjacencies and better manage the societal change.
The geopolitical consequences of the transition are potentially significant. Can the big fossil fuel exporters produce the terajoules the world needs, in a clean way, and transition their economies? Will solar in Northern Africa or Saudi Arabia be transmitted into Europe, or shipped around the world in molecular form as either hydrogen or ammonia? Overall, there is a lot of opportunity here, as there always is when you have big structural breaks/disruptions.
Economists have long viewed carbon pricing, be it taxes or trading schemes, as an answer to improving corporates’ impact. For example, 5-6 years after the UK placed a carbon price floor as a top-up on the European emissions trading scheme, coal fell from 50% to c.5% of the grid. If market instruments do not work, governments can intervene to make the change quickly.
New technologies are tools – they are not intrinsically good or bad – rather it is how they are used that determines a good or bad outcome. We solve and create problems with renewable energy and we need new tech to effectively manage those problems, such as enabling solar and wind customers to trade amongst themselves. Grids with a lot of renewable energy need to be operated differently, and software is needed to anticipate the shifts in load and frequency and to solve various other challenges. There are also new technologies within the industrial sectors that will be needed to manage the processes that we are putting into place that reduce emissions.
Another big sector that seems likely to me to move quickly is food-related technology. The food and agriculture sector is c.26% of global emissions, depending on how you count, and of that c.60% is due to animal-related products. There is a lot of innovation around the production of alternative proteins, and I expect many clever ways of producing foods that have less of an impact. In the EV space, a multi-billion-dollar industry, tech has a big role to play in vehicle fleet management and autonomous driving, and we have seen significant valuations on companies that managed to control cars without humans.
The more awareness by consumers, and the more willing consumers are to put their money where their values are, means that initiatives such as Tech for Good can be used as a tool to significantly shift consumer behaviour. Tech and data are required to enable the labelling and deliver the information to the consumer in a frictionless safe way.
We are seeing a tsunami of interest from the financial sector in the vision of the environmental agenda. In addition to the regulatory interventions that force appropriate accounting, auditing, and pricing of externalities, increasingly the data are available across multiple supply chains to enable us to account and price for the environment properly. Companies that can have a high-quality offering here are going to be highly valued. The Ecovadis transaction shows the good momentum in this domain and that a lot of data will be needed.
ESG is mainstream, with over one-third1 of estimated assets under management globally applying ESG criteria to drive investment decisions as of 2019.
Now that it has become mainstream, the pressure is on ESG investing to become more meaningful and impactful, and a more efficient contributor to the climate transition.
INCREASING REGULATOR PRESSURE: EU TAXONOMY FOR SUSTAINABLE ACTIVITIES, 2020
The sustainable finance revolution is still in its infancy and we expect the shift towards low carbon and sustainable investing to accelerate.
The US and the EU are moving towards mandatory reporting on carbon emissions.
The availability of data is largely enabled by tech. We explore this in our segment focus on data analytics later in this report.
CHIEF RESPONSIBLE INVESTMENT OFFICER AT PRI; CHAIRPERSON AT EUROPEAN PLATFORM ON SUSTAINABLE FINANCE
We are going to go through a period of disruption because of ecological constraints that will exacerbate or crystallise, or bring to life, a number of inequalities that we have in our societies.
The climate, biodiversity and resource use crises are all negative consequences of industrialisation and growth of consumption. We are coming to planetary thresholds in each of these areas, so we need fundamental changes in the way our economies relate to the natural world; for example, on emissions and natural capital, for which we need circular economy and reuse of resources. These are the main ecological challenges. Because of these, there are going to be pressures on society that disrupt employment patterns and change accessibility to goods and services, which potentially means that some inequities that we have in the system, for example, access to technology, are going to worsen.
For the problem, we must judge everything relative to our planetary thresholds. We are moving to a way of working that is environmentally goal aligned, where our activities are judged based on their contribution to harming or improving our relationship with planetary thresholds.
To effect changes in the system, you need to use a lot of tools. You need to have international agreements that translate science into agreements between countries. You need to have targets for individual countries, regulations, tools, and analysis that can be used by markets. You need a common language to help determine what is green and what is not. Mandatory disclosures are this common language that is being created. The EU taxonomy adapts performance criteria, economic activity by economic activity, that should be met to be consistent with the environmental goal.
I think we all believe tech is critical. We have such urgency on some of the ecological goals that we need technological innovation in manufacturing, agriculture, transport, in buildings…everywhere. When it comes to things like physical, ecological challenges, climate adaptation and natural capital, our ability to track and report the health of these systems, obtain company exposure and performance data on their interaction with these systems, and turn all of this into actionable strategies is becoming a major issue. We will need new languages, new platforms, database development, and satellite use.
The fast-evolving Tech sector is considered a driving force for innovation, offering concrete responses to challenges, and prone to embrace new technologies and set best practices.
It is no surprise that it is often seen as an enabler and accelerator of the climate transition.
On many issues, from environmental to social, the sector is prompting change with increased transparency, data collection and analysis, and promoting equality and entrepreneurship by breaking social barriers and increasing access to education, medicine, and finance.
Tech’s positive perception has been dented in recent years. The industry has found itself at the centre of controversies such as user privacy, cybersecurity, labour conditions, gender equality, political implications, and resource waste and environmental impact.
As the industry has grown, its carbon footprint has increased. Digital technologies represent 4% of global emissions1 and are growing much faster than global emissions.
In the past few years, controversies have shown the role of social networks, and concerns around health, user privacy, and environmental impact.
2021: US Capitol riots – role of social networks identified (6)
2020: 5G protest – concerns around health, user privacy, and environmental impact (6)
2018: M. Zuckerberg at the US Senate during Cambridge Analytica controversy
Zalando stands out from other consumption marketplaces by committing to work with only sustainable brands.
In Fintech, digital bank Aspiration stands out with its ESG product offering versus competitors that lack policy on how customer money is invested.
Impact technology companies are receiving a fast-increasing amount of private equity investment. As the sector matures, those raises are becoming larger and focused on later-stage companies.We have analysed more than 10,000 fundraise transactions and 3,000 M&A transactions, starting in 2015.
Notable mega-rounds in key impact sectors in 2020, with a range of $100m+ rounds raised by impact companies. Ecovadis and Back Market $100m+ rounds stand out as large rounds in fast-growing ESG analytics and refurbishing sectors.
Using GP Bullhound’s nomenclature of tech sectors, the Marketplaces, Software and Fintech impact sectors have benefitted most from the investment activity. Software investments tend to be larger and Digital Media is growing fast, driven by consumer apps in e.g. healthtech.
Generalist funds are competing fiercely with ESG/impact funds for the best Impact Tech assets.
After relative stability in recent years, 2020 saw an increase in buyer appetite for impact assets. We expect this increased liquidity for impact-driven companies to continue, making the space more attractive to investors.
When looking at the M&A trends, we need to differentiate the impact sectors:
Notable exits in key impact sectors in 2019-2020. Large M&A transactions took place in healthtech and wellness in 2020, whereas the 2019 impact world was marked by the IPO of Beyond Meat, the largest plant-based proteins company.
Corporate buyers represent the majority of the exits in the space. Tech companies such as Google and Siemens are particularly active, as well as healthcare specialists.
Top 40 buyers – across sectors – of companies within our impact sector scope.
For strategic buyers among the top 40, 80% are in a sector we consider impact.
Measurement and assessment are at the heart of sustainability decision making, but sustainability data has long been hard to find, cumbersome to extract, and expensive to aggregate and process. Thanks to numerous innovations, new, directly actionable data can be tracked, extracted and analysed, for a limited cost.
The adoption of monitoring software continues to grow across all sectors. Energy efficiency software is moving quickly, at a 2020-2025 CAGR of 16%1.
Innovative practices have emerged that combine information on product and company sustainability with transactional data. For instance, the aggregated consumer footprint through banking transactions using open banking APIs, or per product footprint directly in marketplaces using payment APIs. The recent partnership between Tink and Greenly is a good example.
Blockchain protocols and IoT are revolutionising supply chain control by automating assessment and verification of product and process information over a long distance. Gartner expects 20% of the top global grocers to use blockchain for food safety and traceability by 2025. Companies such as Minespider or ClimateTrade are good examples of using blockchain technology for responsible mineral sourcing and offsetting carbon footprint.
CO-FOUNDER AND CO-CEO OF ECOVADIS
Tech for impact is rising all over the world. Making sure that IT solutions are green is becoming very big. Even more important is the contribution of tech solutions to decarbonise; for example, supply chains.
For big cloud providers such as Microsoft and Amazon, the positive impact of cloud decarbonisation is a major differentiator in RFPs. If you are a startup today, whatever your vertical is, you need to think about what your impact contribution could be, because it is something that your customers will ask.
Some of our customers have a defensive approach, making sure they avoid reputational risks or are compliant with regulation. However, we have customers that are in a positive impact approach, using Ecovadis to identify suppliers with innovative practices on circular economy, carbon, or materials for new product development. They see sustainability as a way to develop new products and tap into new markets.
There are three main challenges on top of the ESG agenda: diversity, carbon, and biodiversity. Regarding carbon, the urgency for government is such that this submarket is probably as large as the entire ESG market.
Ecovadis is launching a new carbon impact module to help our customers decarbonise their supply chain – 80% of large companies’ carbon impact is not within the operations but upstream in the supply chain.
Automation of ESG is much more challenging than automating financial information because ESG is unstructured data and a very broad set of information. Still, we have seen a lot of progress in 2020 on AI and ML, and also on the amount of publicly available ESG.
We are seeing the convergence of sustainable supply chain markets and sustainable finance markets. One quickly developing area for us is supply chain finance: a new mechanism to help suppliers with a good score get a better rate in receivable finance. We are also developing in sustainable improvement loans: these are credit lines for suppliers/mid-market companies where the interest rate will go down over time as they improve their sustainability.
Being an impact company has been a plus for our fundraising. I do not think it was a differentiator four or five years ago. Today, if you have no impact strategy or at least a minimum set of ESG credentials, it might even be a deal-breaker.
CO-FOUNDER & CCO OF PLANETLY
The carbon footprint has largely been in the hands of consultants with excel sheets. Going forward, there will be much more regulation; we need a more detailed carbon footprint and actionable insights. In two or three years, reporting and talking on ESG KPIs will be as usual as talking about financial KPIs.
The main drivers for our customers to carry out carbon footprint measurement are employer branding, customer branding, attractiveness in financial markets, and the anticipation of regulation. The anticipation of regulation is the last reason for now, but we expect a boom in demand once the regulation comes into effect.
For carbon footprint, you need strong data structuring capabilities. We work with exports from customers’ systems or via API integration. We are keen on getting as much activity data as possible, as this is the more detailed data, working with the ERP system.
CEO & CO-FOUNDER OF GREENLY
Carbon footprint assessment needs to scale massively as we transition our whole economies. The order of magnitude is crucial: spotting key pain points is what matters. If you know 80% of your footprint is due to meat consumption, you can focus on that for fast, efficient action.
We created analysis repositories with 350 categories that we apply to transactional data. It helps us structure data, estimate footprint, and detect pain points. For B2C, we use customer accounts, through open-banking. For B2B, we use accounting.
As transactional data become increasingly accurate and accessible, this is now a key enabler of carbon footprint analysis. Transaction data highlight pain points; then, other data (e.g., from purchasing functions) enable deep-dive analysis. The carbon footprint is becoming a subfunction of accounting or purchasing functions; for example, SAP is currently working on merging financial and carbon accounting.
It is quite an interesting space for financial institutions that can add to carbon footprint services such as green cash back or credit for energy efficiency purchase.
Sustainable consumption is growing significantly with a range of opportunities for tech-enabled companies in consumer goods. In 2017-2020, funding volume from impact e-commerce and marketplaces grew by 35% annually1 due to increased awareness on the environmental impact of supply chain carbon emissions and resource use, controversies around social conditions, and product healthiness.
Second-hand is booming as a powerful solution for fashion and goods industry pollution.
In the US market in 2013-2018, $17bn shifted from large brands to challenger brands5.
Sustainable DNVBs appeal to sustainability savvy consumers with their fresh sustainability branding, control over the supply chain with no middlemen, and clear communication on product sustainability throughout the product lifecycle.
Allbirds, the BCorp unicorn, has built its success around environmentally friendly footwear.
The sharing economy is a key force for climate transition, identified as such by regulatory institutions.
It shifts consumption from product purchase to products-as-a-service, with a substantial positive impact on the environment (the same product is better utilised).
Blablacar, the French unicorn, has been one of the pioneers in launching car-sharing applications.
Large incumbents are vying to position on the sustainability trend.
Most suffer from their existing image: 52% of customers believe challenger brands are more trustworthy than large brands6.
Consolidation is likely to intensify.
Nestle Purina's acquisition of Lily's Kitchen or Mars's acquisition of Kind are examples of the growing appetite for sustainable brands.
New initiatives and funds focused on sustainable consumption: Credit Suisse and Lombard Odier Responsible Consumption Fund (listed), 2XM Organic (buyout), Eutopia, Blisce, Eka Ventures (VC).
CEO OF BACK MARKET
Tech is a great enabler to accelerate the ecological transition, and although we are still moving in the wrong direction when looking at global CO2 emission progression and e-waste, things can change quickly thanks to the power of tech on platforms. We see this with Back Market and other platforms or marketplaces that are performing well in the sector. It is about bringing accessible solutions to as many people as possible and making it super user-friendly.
The circular economy used to be physically peer-to-peer, but now in a few clicks you receive money for your used goods, and it is a smart move for the environment. As an example, in the more mature automobile industry, today 70% of cars sold are used and manufacturers are getting in the game.
Everyone is being pulled by the will of the customer to change the way we consume – it can only change if people want it to. While the financial world takes notice when there is an incentive to invest in some area, I believe it is the customer that decides, and that funds and funding are following where customers are going. As others have said, in the end, finance will be green because we need it to be green.
After the first movement restrictions in France due to the pandemic, with people confined to their homes and thinking more about their life and the planet, the government decided to put €100bn into the ecological transition. In my view, it adapted to the people and to the demand.
In our latest funding round, our green impact was more at the centre of attention versus simply being the cherry on the cake in past rounds. We had a lot of interest from investors that are positioned in the space.
We are also seeing a shift in our customer behaviour. Price is the biggest driver for customers; in terms of purchasing power, eco-friendly is still a luxury for many.
The second driver is the level of service, e.g., the warranty and the logistics services and safety nets that we offer that you do not get when you value a used device. Then there is the eco-friendly driver, which is gaining traction.
The first year we launched Back Market, our survey of a few thousand customers showed that only 3% chose Back Market because it was more ecologically responsible. In our survey at the end of last year, 17.5% of more than 2m customers said that they chose us because of the ecological impact of refurbished. The more that 17.5% grows, the more important it will be for everyone to match that expectation.
Back Market’s DNA is to make certain that the circular economy is greater than the new economy, so we do not need to buy green. Our growth drivers include our new products and new geographies – we want to be the leader of circular economy worldwide. Many brands and retailers once worried that selling too much refurbished inventory would cannibalise their new inventory. Ultimately, the first movers were highly rewarded. Instead of cannibalisation, brands and retailers can access a new market segment that they previously could not reach.
In terms of competition in the smartphone industry, Samsung and Apple make increasingly more revenue through the services they offer. A new or refurbished device does not matter, they will still charge for App Store, Play Store, iTunes – everything you consume through the hardware.
Manufacturers are beginning to pay more attention to recycling/recyclability, like what we have seen in the automobile industry, which I believe is 30 years ahead of the tech market. At Back Market we are doing our best to close the gap and deliver the same level of service the automobile industry provides on the used market.
This report is based on the expert insights of GP Bullhound’s worldwide team alongside detailed analysis of investment trends across the global technology.We have combined fundraising and M&A information based on keywords covering 10 main categories: edtech, healthtech, agtech, impact/ESG/CSR/GRC software, circular economy, sharing economy and smart mobility (excluding ride-hailing), energy and resource monitoring software, smart grid smart home and smart cities.We selected all companies included in GP Bullhound focus sectors: Software, E-commerce/Marketplaces, Fintech, Digital Media, Digital Services, excluding hardware. We have also included specific tech companies from all GP Bullhound sectors with specific ESG/impact positioning.We have reviewed c.13,500 fundraises from European and North American companies.
We have reviewed c.3,300 M&A transactions on European and North American companies from 2015 to 2020.
MERGERS & ACQUISITIONS
▪ No. 1 global advisor (1) to leading technology companies in competitive international sale and acquisition processes.
▪ 430 successful M&A transactions completed to date, with a total value of over $18bn.
▪ GP Bullhound’s funds provide investors with access to global category leading technology companies.
▪ Our assets under management total more than €365m and our limited partners include institutions, family offices and entrepreneurs.
▪ Leading global advisor to companies and their owners on capital transactions including venture, growth, debt, acquisition funding, secondary block trades and initial public offerings.
▪ 120 rounds of financing for technology companies completed to date, with a total value of $2bn.
INSIGHTS & EVENTS
▪ Our events bring together thousands of leading technology entrepreneurs and investors throughout the year.
▪ Our global insights team publishes thought-leading research read by decision-makers and medias, worldwide.
Sustainability and corporate responsibility are at the heart of GP Bullhound and our ESG initiatives are a continuously evolving process that we are incredibly passionate about.
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