Enterprise Climate Software

In the latter half of the last decade, companies have faced mounting pressure from investors, activists, and regulators to set ambitious climate goals and execute accordingly. Climate programs are becoming mission-critical to company operations regardless of industry and size. This trend will require enterprise software solutions to provide detailed analytics about emissions, supply chain, and product manufacturing. Startups in the B2B Climate SaaS space will provide services that become essential to company operations and unlock recurring revenues with unprecedented efficiency.

Background and Context

B2B Climate SaaS is a subset of ClimateTech that covers the horizontal of enterprise software products built to handle various climate-related processes for their customers. Users leverage these platforms to quantify, analyze, predict, and reduce climate factors such as emissions. Best-in-class companies in this industry tend to offer platforms that serve as a single source of truth and are mission-critical systems of records for their employees. For instance, accountants might heavily rely on carbon accounting software, embedding it into their daily workflows.

Carbon accounting, climate analytics, marketplace, investing, and operations platforms for climate-oriented processes will mirror their counterparts for traditional business operations. Consequently, operators with experience building enterprise products can find success in climate SaaS even without domain knowledge.

Industry dynamics illustrate the demand for general enterprise climate software. BCG finds that 85% of companies want to reduce emissions, but only 9% of companies can quantify their total emissions comprehensively. Moreover, 86% of companies still record and report their emissions manually using spreadsheets. On a business and compliance level, emissions tracking is becoming increasingly mission-critical for organizations ranging from SMBs to large-cap blue-chip companies. Startups that can unbundle manual tracking processes from traditional spreadsheets will generate recurring revenues with best-in-class efficiency.

I’ve personally developed an interest in this space from my experience in venture capital and climate policy. I’ve spent a portion of my Summer sourcing for a ~$10 billion AUM venture capital firm specializing in software investments. I’m focused on finding and evaluating mission-critical enterprise SaaS companies. In the past, I’ve founded a biomimicry engineering team that prototyped energy-efficient buildings and vehicles inspired by naturally occurring structures found in nature. I also lead a team to secure the first-ever carbon tax endorsement from my town council for H.R. 763 and architected a memo concerning emissions data collection best practices for the state of Wisconsin. My interest in B2B Climate SaaS stems from the intersection of these two experiences. I believe that enterprise SaaS is an incredibly efficient business model due to the stickiness of its products and the revenue efficiencies from low gross margins and high customer lifetime values through recurring revenues. At the same time, I recognize the importance of digital infrastructure to facilitate CleanTech adoption and make climate initiatives actionable. I’ve previously written about digital twins and the importance of real-time process tracking to align outcomes with strategy, and I think that B2B Climate SaaS is integral for introducing the technology to climate-aligned companies.

Industry Trends

There are four tailwinds I’ve identified that make B2B Climate SaaS a promising investment area in 2022 and beyond—increasing regulatory actions and investment demand drive top-down pressure for companies to implement long-term climate policies. Decreasing costs and corporate engagement compounds these factors to necessitate software for these services. The elephant in the room is consumer demand, but I leave it out because it’s a second-order driver. The main forces propelling growth in B2B Climate SaaS directly correlate to the relationship between companies and climate software vendors.

Regulatory Action

In 2021, the EU launched the Corporate Sustainability Reporting Directive which mandates certain companies to publish environmental and social data. The 49,000+ European companies that suddenly find themselves responsible for providing accurate environmental data present a nascent market for first-movers in enterprise climate software to build market share.

Concurrently, the [SEC announced proposals mandating companies to disclose climate-related details such as emissions in conjunction with annual financial reports](https://www.npr.org/2022/03/21/1087832674/the-s-e-c-climate-change-disclosures-companies#:~:text=5 %2C 2021.-,The SEC unveiled new proposals on Monday,to disclose climate-related risks.&text=Every year%2C public companies in,and the risks they face.). Specific states, like California, already have enacted emissions laws and offered corporate climate incentives such as carbon offsets to drive the shift towards more sustainable service providers. This has led to companies like Tesla selling $679 million of regulatory credits in Q1 of 2022 alone.

Decreasing Costs

Following increased regulatory action, companies are increasingly interested in purchasing climate services from deep-tech and CleanTech companies to round out their emissions balance sheets. Inputs for renewable energies have decreased significantly in the last two decades. The [price of lithium-ion batteries has declined by 97%](https://ourworldindata.org/battery-price-decline#:~:text=The price of lithium-ion battery cells declined by 97,halved between 2014 and 2018.) since 1991 and the solar costs have dropped by a factor of 5 in the last 10 years. While purchasing these options has become financially viable, there are a host of regulatory, accountability, and marketplace issues that must be resolved with software.

Investment Demand

In the last two years, many private equity firms and large-cap investors have announced initiatives to expand ESG efforts in their portfolio companies. For instance, Blackstone recently announced an emissions reduction program to reduce carbon emissions by 15% across all new investments where they control energy usage.

Corporate Engagement

Companies in all industries and of all sizes are ramping up corporate engagement practices. Many of these firms have programs to reach net-zero emission in the next two decades. Amazon is the world’s largest corporate purchaser of renewable energy as part of its plan to reach net-zero by 2040. Google’s decarbonizing its infrastructure to reach net-zero by 2030. And Facebook rolled out plans to completely decarbonize their supply chain, employee commuting, and business travel by 2030. Companies are increasingly finding ways to slash emissions and bolster environmental initiatives. Earlier this year, Stripe, Alphabet, Shopify, Meta, and McKinsey launched Frontier, an advance market commitment to guarantee $925 of carbon removal purchases over the next decade.

Overall, companies face investor and activist pressure to set strong climate goals and make good on their goals. At the same time, regulators around the world are increasingly moving to require emissions disclosures. Companies will need enterprise software solutions to provide detailed analytics to track direct emissions, supply chains, and the use of their products. Software needs to be built to measure, monitor, and reduce carbon emissions for corporate climate programs.

Industry Landscape and Funding Dynamics

There are five ways enterprise software can be built to drive value for corporate climate initiatives. Companies will need services to measure and track their emissions. With that data, they’ll need concrete ways to source and execute strategies to reduce emissions. This lever alone will require startups to build digital marketplaces to broker carbon offsets, compliance and accounting startups to maintain visibility and credulity, and market makers to inject liquidity into the services. McKinsey estimates that carbon offset markets alone could be worth more than $50 billion by 2030. Furthermore, companies will need to automate data collection and extrapolate it to simulate the future impact of climate strategies. Tools to customize carbon reduction strategies are also key to pivot after priors are updated. Below is a market map of early players across these key functions.

ClimateTech investments are rebounding from poor performance in the mid to late 2000s. VC fundraising increased 3x and VC investments increased more than 5x in the last six years. Overall, funding is up 2x within a year with $40 billion allocated across 600+ venture deals in 2021. Funding rose 20% sequentially each quarter of 2021.

ClimateTech is also attracting swaths of new investors. 64 climate funds were established in 2021. Of the $37 billion of fresh dry powder, $30 billion comes from just 15 new mega funds such as KKR, BlackRock, and Ares.

The Future

Among the companies building in the B2B Climate SaaS space, three stand out to me. I believe that Watershed, ClimateAI, and Pachama are well-positioned to capture significant portions of high-TAM markets.

Final Thoughts

Companies face pressure from investors, regulators, and activists to build resilient climate programs, but many lack the tools to do so efficiently. There’s a significant market opportunity to build sticky subscription-based software to simplify climate programs and make it easier to build, execute, maintain, and monitor. The industry is flush with venture capital funding, and startups in the space can command massive valuation premiums. The best-in-class startups building B2B Climate SaaS will deliver mission-critical software that helps companies measure, monitor, report, and reduce emissions.