In 2020, sustainable funds in Europe brought in €233 billion of inflows, almost double that of 20191. With a combination of the coronavirus pandemic, social issues and the ongoing climate crisis, investors’ interest in the Environmental, Social and Governance (ESG) sector grew significantly, and that growth isn’t going to slow down any time soon.
Recognising that this sector growth was also encouraging growth in ESG related technology solutions, we made the move to add ESG as a top-level category to our RegTech market research and taxonomy. We quickly collected around 4,000 data points from over 100 RegTechs offering solutions in this space. Our research shows that the vendor market for ESG products is relatively immature and is dominated by larger, more established providers. These include Bloomberg, MSCI and Nasdaq, or those who provide ESG related data and analytics like Moody’s, S&P and Factset. Data we have collected also shows that these products cover a number of different use cases, providing solutions that:
- integrate ESG data into the entire investment lifecycle;
- perform emission monitoring;
- aid in reporting and disclosure requirements; and
- focus on specific topic areas like Socially Responsible Investing or Corporate Social Responsibility.
Sustainability and climate change have a global and cross-industry impact. Like the annual World Economic Forum (WEF) Global Risks Report 2020 notes “for the first time in the history of the Global Risks Perception Survey, environmental concerns dominate the top long-term risks by likelihood among members of the World Economic Forum’s multistakeholder community”. Financial Services and other regulated industries such as healthcare, telecoms, energy, aviation and manufacturing all look to more sustainable practices to help minimise the disruption that climate change brings, and RegTech solutions could offer a helping hand.
If 2020 gave the sustainable funds market the kick it needed, over the last four years the ESG tech market has been slowly growing. One clear trend in this market is big players buying up the smaller vendors, indicating that they clearly see growth opportunities here. Notable deals include:
- In 2016, S&P acquired a controlling stake in TruCost; and then deployed it to their customers in 2019; Wolters Kluwer acquired Enablon
- In 2019, Solactive completed a strategic investment in Minerva; MSCI acquired data analytics firm Carbon Delta; Moody’s acquired a majority stake in 427 and Vigeo Eiris
- 2020 saw Morningstar acquire Sustainalytics
We’ve also seen significant venture funding over the last few years, including:
- 2018 – Owl Analytics with a $2.5M Series A investment; TruValue Labs saw a $13.6M investment led by Katalyst Ventures; Carbon Delta secured CHF1.7M, before being acquired by MSCI
- 2019 – Ravenpack gained £10M in funding led by Bullhound; Spark Cognition secured $100M Series C investment led by March Capital and Temasek Holdings; Arabesque S-ray, part of Arabesque group saw $20M in Series A investment by Allianz Group
- 2020 – Solactive invested in Right. Based on science (undisclosed, seed)
Fragmentation, early mover advantage and plenty more to come
From the conversations we are having with the industry, more often than not we see larger financial institutions using a variety of tech vendors to meet their ESG needs across both the front and back office. In one example, MSCI might be the primary source of ESG ratings used in the construction and monitoring of portfolios, but carbon-specific data is sourced from suppliers like Trucost. Other products, like ISS ESG, are used for ‘thought leadership’ data provision in line with the governance and engagement principles of the United Nations Global Compact. And then there may be proprietary ESG ratings that incorporate analysts’ views alongside available data. We see this as an opportunity for tech vendors to develop full-service solutions.
With the increasing set of new regulations coming into force, we believe we will see new entrants into the market from multiple angles. Those who are in ESG pure-play data, like Nossa Data, DataESG, EthicsGrade, Metrio and Lookthrough, and companies focused on making it easier for consumers to make sustainable choices, like GoKind and BuyVerde, are already making waves in the industry. There are also big opportunities for RegTechs who operate in other sectors, for example, those in:
- Regulatory change management;
- Data management (Workiva);
- Regulatory reporting (Verisk, Vermeg, BearingPoint, AxiomSL, Cappitech/IHS Markit);
- Marketing compliance (Redmarker, LOTJ); and
- IFRS reporting and software that overlaps with financial reporting.
What’s to come
ESG isn’t going to lose it’s momentum as we continue into 2021. The steps made in 2020 will only fuel ESG uptake in most facets of life, not only in how we invest our money. Environmental awareness and the ongoing climate-crisis, societal issues such as the Black Live Matter Movement and the increasing awareness of mental health, general good governance, and the regulation horizon are all compelling factors in this sector’s continued acceleration.
Are you on the market for an ESG solution? Get in touch, we can help you navigate the different products on offer and find the right one for you. If you’re interested in knowing more about our insights in the ESG market, have a look at our premium content to see the products we are currently tracking in this sector or our previous blogs on this topic.