ISG Provider Lens™ Sustainability and ESG (Environmental, Social, Governance) - Technology Solutions and Implementation Services - OT - U.S. 2023

Supply of solutions currently exceeds demand, yet significant market growth is anticipated

Following the inaugural Environmental, Social & Governance (ESG) quadrant featured in the Digital Business Solutions IPL in 2022, ISG is excited to introduce an expanded and dedicated IPL to reflect the rapidly evolving digital sustainability and ESG services market. The scope of this IPL report is one of the largest ISG has performed, with new grids, criteria and assessed provider lists.

Although the demand for digital sustainability and ESG services in the U.S. is lower than in Europe, it is influenced by similar factors, including global geopolitics, investor preferences, government regulations and 
incentive packages, climate and energy crises, and consumer buying behaviors. Depending on the industry, different risk levels exist for brand and reputation, high capital costs, physical asset damage caused by extreme weather conditions and impending regulations.

These risks require mitigation strategies, investments and action. Consequently, many U.S. organizations need to clearly understand, report and improve their sustainability and ESG performance. Unsurprisingly, the highest demand for digital sustainability and ESG services is observed among established multinational enterprises that must navigate complex transformational journeys.

However, there is also an opportunity — a growing number of enterprises have been able to convert validated sustainability progress into incremental brand value, increasing profit margins and revenue. Often, the  actions undertaken to improve sustainability are similar to those implemented for reducing costs, such as optimizing resource consumption and minimizing operational waste.

Due to this broad-impact range of macro drivers, the global digital sustainability and ESG services market will probably grow from approximately $50 billion in 2022 to over $100 billion by 2030. Many U.S. firms have already established their presence in this market.

Sustainability and ESG are more than a moral matter; they can affect companies’ bottom lines and  shareholders’ portfolios positively or negatively. However, it is also clear that contrary views are held, and the legal challenge to including ESG principles by financial institutions when selecting investments could serve as a potential counterweight to the demand for the solutions outlined in this report.

At the geopolitical level, the ongoing Russia–Ukraine conflict has created an energy crisis with significant repercussions for the U.S. As a net energy exporter, the U.S. profits from high global energy prices. However, consumers and companies in the U.S. bear the burden of these high prices, which, in turn, contribute to increased inflation and reduced economic growth. Gasoline prices have more than doubled since the conflict’s inception, reaching unprecedented highs in June 2022. The surge in energy prices, including natural gas, has
also caused an increase in electricity prices. The inflation rate — the highest in the last four decades — has led to the U.S. Federal Reserve increasing interest rates to mitigate the situation, potentially slowing the U.S. economy and raising recession risks. Economic impacts and the record heatwaves and wildfires burning in Hawaii, California and Canada highlight the corporate and consumer imperatives for more action. Considering the scale and complexity of these challenges, it is unsurprising that digital technologies and sustainable practices are rising.

In response, the Biden Administration’s Inflation Reduction Act of 2022, which included an investment of $369 billion into clean energy and climate change mitigation measures, marks the most significant climate action investment in U.S. history. In addition to its goal of reducing energy costs and strengthening energy sovereignty, this additional stimulus should benefit technology companies servicing electric vehicle  manufacturers, solar and battery manufacturers, and other energyintensive industries. Specifically,  operational technologies such as digital twins powered by AI and IoT can optimize manufacturing processes to reduce energy and better harness renewable energy sources.

The demand for ESG solutions also comes from investors and financial services that have played a pivotal part in creating macro demand for more sustainable businesses. With greater interest and appreciation of the positive relationship between mitigating ESG risks and enhancing companies’ overall market value, the demand for transparency for ESG risks and opportunities and analysis of more sustainable and circular business models have increased. All of these factors necessitate significant business transformation, for  which digital services are essential.

Amidst concerns over data quality and information gaps for investors, the U.S. Securities Exchange Commission (SEC) has proposed new rules that, if adopted, would require public and private companies to provide detailed reporting of their climate-related risks, emissions and decarbonization plans. The proposed regulation is expected to be enforced on U.S. companies filing 10-K forms and foreign private entities submitting 20-F forms to the SEC. Large corporations would be required to disclose most of this information in FY23, which implies that they would commence filing forms beginning 2024. However, the rules are subject to opposition from sections of public companies and politics, contesting the compliance cost and implications
from consequential diverted capital flows. Meanwhile, in California, two major climate disclosure laws have been enacted (SB 253, Climate Corporate Data Accountability Act and SB 261, Climate-Related Financial Risk
Act), requiring similar data as proposed by the SEC to be disclosed. California — which would be the fifth-largest economy worldwide and is the largest subnational economy — has made SB 253 and SB 261 applicable to any business operating in the state with annual revenue over $1 billion and $0.5 billion, respectively. As many as 10,000 firms will be required to report in some form by 2026, and fines of up to $500,000 may apply for noncompliance.

Organizations subject to the directives will need to report hundreds of ESG data points annually — many of which are either not recorded today or exist in disparate systems.

While these organizations must find a way to report these data points accurately, it is even more critical for them to focus on the key 25–50 metrics that are most significant for their specific businesses.

While the uncertain landscape has dampened enterprise demand growth in the U.S., service providers have forged ahead with new and expanded digital sustainability and ESG services. Notably, providers from non-IT
backgrounds have demonstrated impressive adaptability in entering this market. Key players have entered the industrial, engineering, and environmental markets, with each becoming increasingly digitized, and the overlap with the digital sustainability and ESG markets has grown significantly. While many partnerships
exist among players, if revenues do not quickly rise as mainstream demand escalates in the next two to five years, it is possible that the market would probably have too many solutions and providers will need to rationalize their portfolios. Currently, there is not enough demand in the market to sustain all the available solutions. If this continues, it would trigger market exits or mergers.

AI plays a pivotal role in understanding how leading organizations distinguish valuable insights from extraneous information. By refining ESG materiality assessments, organizations better understand how external risks (such as extreme weather) affect their business and how their businesses impact the world (such as deforestation) — a concept known as double materiality. This approach enables an in-depth focus on mitigating risks and turning them into advantages. It implies that more complex scenarios must be
considered, requiring more relevant data with highly tailored AI and efficient compute to plot optimal pathways for sustainable and circular business. For instance, insurers should simulate global weather patterns and resulting risks to insured assets to best estimate appropriate premiums; this involves extracting insights from varied sources, including weather and geospatial data, satellite imagery, urban environments and asset construction.

The significant expansion of this market is reflected in this IPL report, which is divided into four regional quadrants and an additional global quadrant:

1. Strategy and Enablement Services
2. Tech Solutions and Implementation
Services - Information Technology (IT)
3. Tech Solutions and Implementation
Services - Operational Technology (OT)
4. Data Platforms and Managed Services
5. Rating and Benchmarking Services (Global)

Because most providers offer global solution portfolios, the supply side of the U.S. market is very similar to Europe.

Across all quadrants, there is a higher-than-average ratio of Leaders to the other segments compared to other Provider Lens reports. This reflects the competition and relative market penetration that most  established providers have achieved. Traditional IT service providers predominantly occupy the Leader segments.

However, the increasing presence of strong-providers from the non-IT markets is clear.

Beyond the Leaders, we observe many organizations offering a broad range of solutions, hence the high number of Product Challengers. However, these providers appear to be either at an early stage in their
business development or face challenges in differentiating themselves, resulting in them not achieving the same level of success as the Leaders.

The scarcity of Market Challengers reflects the low maturity of market depth. Essentially, the existing demand has been orientated toward the established players that have developed holistic portfolios and have been able to either utilize their existing client relationships for expansion or demonstrate relevant and impactful case studies.

Further observations are provided at the beginning of each quadrant.

As these markets continue to evolve, ISG will expand and enhance the depth of market analysis available. Please contact ISG to discuss any specific areas of interest.

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