Sustainability software business found not so sustainable after all

The excitement surrounding sustainability software for carbon accounting in the United States appears to be cooling. After experiencing booming sales and seeing numerous acquisitions and investments over the last four years, industry's appetite is starting to level off. Now, software providers are evolving in new directions.

According to a recent report from consulting firm Groom Energy, investments in these software vendors have fallen by almost 75 percent over the last three years, to $15 million from $58 million. Acquisitions have mostly disappeared after a spurt of large corporations bought up software vendors from 2008 to 2011. The report -- the 2013 Buyers Guide for Enterprise Carbon Accounting and Sustainability Software -- also downgrades the expected growth rate for software sales and tops it off at 20 percent for the next year.

The slowdown in the U.S. is due to “the lack of pressing legislative changes, flat energy prices and absence of public pressure about climate change,” read the Groom report. As it has become clear that the country's carbon tax scheme isn’t going anywhere, some companies have lost the momentum to track their carbon footprints with sustainability software.

“There’s a lot of shakeout with companies going away and vendors changing their roadmaps,” said Paul Baier, Groom's vice president of sustainability consulting and research. “We’ve already seen 10 close in the last 24 months and will probably see another 10 to 15 either close or significantly move away from this space.”

Baier predicts that as things evolve, the larger companies will continue to take control of a greater share of the space and push out many of the smaller players in the already overcrowded industry.

With the lack of legislative push for corporations to decrease their carbon footprint, the 75-plus sustainability software vendors discussed in the Groom report are having to get serious about the value they're bringing to the table. Many of these companies are expanding into the lucrative field of energy management and into more data-heavy analysis.

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 Finding opportunity elsewhere

It's a natural direction for sustainability software providers to move towards energy management applications -- a field which has been attracting big money recently -- because collecting and analyzing data is already within their areas of expertise. Germany-based sustainability and consulting firm PE International, for example, has slowly moved in that direction over the past two years. Starting out in the sustainability software business in 2002, the 21-year-old company has been moving into energy management and collecting data more regularly on energy use.

For PE, though, Europe is still a better market for its sustainability software than in the U.S., said Celine Furnanz, a product marketing manager at the company. But PE still sees demand among large U.S. corporations for supply chain sustainability. With its 100,000 suppliers, Walmart is probably the most visible player in pushing for supply chain sustainability.

A shift in focus won't necessarily be seamless for all sustainability software companies. Providing software to manage supply chain sustainability requires high-level data capabilities, said Larry Goldenhersh, CEO of Enviance, an environmental compliance software company.

Much of the work Enviance performs is in environmental compliance in the oil and gas industry, where it’s finding plenty of work helping companies collect data to follow regulations. It also picked up a big contract to help the Department of Defense with the agency’s mandate to have a greener supply chain.

Goldenhersh sees a stark contrast between the software providers that are going after the corporate social responsibility market and the kind of data-heavy analysis his company is doing. There's more value in data-intensive analytics for sustainable supply chains and environmental compliance, he said.

Andrew Salzman, chief market and product officer at Hara, an energy management firm, agrees. “There is a growing recognition that there needs to be more rigorous data management practices related to sustainability,” he said. When Hara first launched in 2007, the software it sold was mostly in carbon accounting, but is now focused on energy management.

So while sustainability sales and investments may be down overall, there will still be reasons to stick around. Goldenhersh makes a case that companies like his will always be needed to prove compliance.

“There’s a big credibility problem in the sustainability world relating to the fact that without hard-nosed regulators [verifying] claims [of sustainability], the public has a difficult time believing the assertions being made,” said Goldenhersh. “And if the public has a difficult time believing, then the value of the assertion is zero.”

It also appears that a shift in the industry is in order. As sustainability moves from being the sole responsibility of the CSO to becoming wholly integrated into the bottom line, the demand for software that fits seamlessly within a company's larger reporting mechanism is likely to increase accordingly.

Scott Bolick, vice president of sustainability solutions at German software giant SAP, sees the future of sustainability reporting moving more towards integrating it more into a company’s financial and operational planning. Though recent years have seen his company's sustainability reporting software growing at a slower rate than other products in its division, its sustainability products in operational risk management, product safety and stewardship, and energy and resource management have exceeded expectations.

"Sustainability has to be embedded into the business process,” he said.