ISG Provider Lens™ Sustainability and ESG - IT Solutions and Services - U.S. 2024

Despite uncertainty and headwinds, the U.S. digital sustainability market continues to accelerate

This year’s IPL highlights the rapidly evolving market in the U.S. for digital solutions, which are intentionally applied to improve an organization’s environmental sustainability, social sustainability and/or corporate governance (digital sustainability solutions).

Despite the uncertainty stemming from economic conditions, the U.S. Presidential Election and anti-ESG movements in 2024, most U.S. enterprises remain driven to increase transparency and demonstrate verifiable progress due to the following factors:

● Regulatory developments led by the State of California and the Securities and Exchange Commission (SEC),

● Incentives such as the Inflation Reduction Act (IRA), and

● Broader investor expectations of risk management and growth in the sustainability market.

As a result, and in anticipation of the Federal Reserve cutting interest rates, enterprises are investing more, and the competition to supply digital solutions for these challenges intensifies. ISG’s research estimates the global digital sustainability market at around $21 billion in 2024 with a CAGR of around 16 percent, reaching $34 billion by 2027 — roughly three times the growth rate of the overall digital transformation market. As a result, numerous providers from various sectors have entered the space, investing heavily and offering diverse solutions to capture market share.

Following last year’s flood of providers and new solutions hitting the market, ISG is beginning to see some consolidation and recalibration of provider portfolios to better align with market demand and areas where they can succeed. More strategic partnerships have been announced and acquisitions have continued at a pace similar to that of 2023. The application of AI and ML to accelerate and enhance the quality of solutions has become foundational
rather than exceptional; however, several GenAI-powered solutions emerged this year, differentiating a few of the notable Leaders.

Key trends in demand include the following:

● Strategy and Enablement Services – U.S. enterprises prefer technology partners with significant experience in the relevant sustainability regulations and frameworks for their industry. Buyers increasingly prioritize mitigating risk and unlocking opportunities from the supply chain. As enterprises mature and consulting expertise becomes more
stretched, more are performing certain strategic tasks in-house.

● OT and Industry-specific Solutions and Services – Solutions leveraging AI, ML and IoT for asset-intensive industries such as power and utilities, manufacturing, transportation and eMobility continue to be most common.

● IT Solutions and Services – Investments in this area continue to be growing at a rate slower than the other three quadrants, with IT’s sustainability footprint generally being too small compared to the enterprise overall to attract significant investment.

● Data Platforms and Managed Services – The fastest-growing quadrant with the most competitive supply side, driven by global regulation. The market is led by service providers with advisory, integration and managed services that leverage proprietary and best-in-class third-party platforms for ESG data across the value chain. More buyers are recognizing that there is no ‘one size fits all’ solution and operating models heavily influence how data capabilities are
acquired and consumed.

Generally, the U.S. market continues to show more demand for environmental sustainability solutions than those aimed at social sustainability or corporate governance. Climate change remains in the spotlight as extreme weather events become more frequent and severe and investors increasingly consider the impact of the physical and transitional climate risks on company financial values.

ISG’s database now monitors over 300 providers of digital sustainability solutions, with 124 featured in 2024 IPLs for Australia, Brazil, Europe and the U.S.— up from 105 last year. This surge highlights that even appearing on an IPL positions a provider among the top market players, often within the top 25 percent.

Market Demand Overview

As with previous years, pressure on enterprises is being applied from many angles, such as investors, board  members, customers and employees. This section highlights the key shift within U.S. firms and the 2024 digital
sustainability market, focusing on how the regulatory and geopolitical landscape is driving demand for digital sustainability solutions and shaping business cases for sustainability and ESG investments.

Regulatory and geopolitical landscape

Despite the profound uncertainty surrounding the Presidential election and its implications, U.S. firms increasingly recognize that mandatory ESG data reporting is a matter of when, not if and that achieving accurate reporting will require both investment and time.

There is also a strong recognition that digital solutions must be used efficiently to achieve the scale and audibility requirements. Lastly, irrespective of whether reporting is voluntary or mandatory, collecting environmental data
unlocks new and sizeable opportunities to optimize business value chains.

While the SEC’s regulations face lengthy court challenges, California’s new bill, SB 219, was signed into effect on October 1, 2024 and introduces very similar obligations as the SEC’s proposed rules. Since most large U.S. firms operate in California and several other states, including New York, Illinois, Minnesota and Washington, are considering adopting the same rules, mandatory corporate regulatory disclosures are close to becoming confirmed. These disclosures focus on reporting climaterelated risk and greenhouse gas (GHG) emissions data across an enterprise’s value chain, including Scopes 1, 2 and 3. The first group of large organizations operating in California will have to report initial data sets and disclosures from 2026.

Outside of the U.S., Europe’s regulatory landscape continues to push the boundaries of breadth and depth of sustainability reporting. This remains highly relevant to U.S. firms operating in Europe or trading with European
companies, as several regulations require U.S. firms to disclose sustainability data (e.g., the Corporate Sustainability Reporting Directive) and potentially pay carbon taxes (e.g., the Carbon Border Adjustment Mechanism).

Regarding incentives, the Biden Administration’s Inflation Reduction Act is generally considered to have accelerated
investments in renewable energy and electric vehicles, which has had a broadly positive indirect impact on the demand and adoption of digital sustainability solutions. For example, the increase in renewable energy and the
associated intermittency requires more sophisticated AI- and IoT-powered energy management solutions to safely  and efficiently incorporate the two-way flow of electricity within the grid. This year’s OT and Industry-Specific  Solutions quadrant assessed several of these offerings.

However, with President Donald Trump returning to the White House, many of the existing environmental policies are likely to be amended, delayed or even repealed and the Environmental Protection Agency’s ability to restrict greenhouse gas emission growth weakened. As a result, the growth in digital sustainability solutions in the U.S. is expected to grow less quickly in 2025 than in other regions. Despite this, Trump’s economic growth policies will have indirect benefits for digital spend, and large multinational U.S. firms will remain subject to the relevant regulations of
U.S. State Governments – including California and its emissions and climate-risk disclosure rules – as well as Europe and other international markets. Therefore, the demand for ESG data platforms will be the most resilient segment of
this market.

Investors are closely watching the election’s impact on market demand. The anti-ESG movement from a group of investors in the U.S. has partially suppressed large-scale announcements and proxy votes that aim to force publicly listed companies to adopt more sustainable practices. However, surveys report that the progress in driving more sustainable firms is continuing more discretely, without as many public announcements – a concept dubbed greenhushing. In addition, there is much greater recognition that sustainability and ESG are not the same – a KPMG survey of 520 directors and public companies recently reported that only 7 percent of directors considered sustainability and ESG equivalent. There is growing awareness, even among sceptics, that the public reporting of ESG
data is a matter of when, and not if. Similarly, answers will be needed to the broader question of how ESG data influences businesses’ sustainability and financial value. This is true for U.S. companies operating in Europe, where EU
regulations are in effect, making data collection an essential risk mitigation strategy.

With respect to AI and its implications for social rights, the U.S. Blueprint for an AI Bill of Rights offers five principles and associated practices to guide the development, use and deployment of automated systems. It was released in October 2022 by the White House Office of Science and Technology Policy (OSTP) to protect the American public from potential harm and ensure they fully enjoy the benefits of these technologies. While the blueprint is not a law, it was intended to be a significant step toward establishing ethical guidelines for AI development and use in the U.S. Corporate regulators and state governments may be able to progress this agenda, potentially leveraging aspects of the EU’s AI Bill; however, the lack of global consensus on regulating AI is likely to delay meaningful progress. 

The business case for digital sustainability

While avoiding the risk of fines and brand damage from non-compliance with regulatory requirements is certainly a motivator for many investments in digital sustainability solutions, research indicates most U.S. businesses want to become more sustainable anyway – provided they can find a way to do it profitably.

As a result, many U.S. firms are asking key questions: What is the business case for sustainability and ESG-related investments? And how can the benefits be quantified?

This year, ISG found more answers and successful strategies to those questions. 

A reoccurring theme for many business cases was the integration of sustainability objectives into broader digital transformation programs, as opposed to looking at the business case of sustainability in isolation. Where integrated
with broader transformations, the incremental cost of the sustainability initiatives typically represented 5-10 percent of the overall program cost but shared the implementation cost with the broader program. Since many sustainability
initiatives also reduce costs, boost customer loyalty and increase talent retention and attraction, this integration  creates a true win-win for enterprises.

At a macro level, more indicators are leading organizations to find ways to decouple financial growth from producing emissions and other negative sustainability impacts. The World Economic Forum recently announced that its Alliance of CEO Climate Leaders, which features over 130 companies across 26 countries in 12 industries and employing 12 million people, had reduced emissions by 10 percent while achieving 18 percent revenue growth in three years.

Taking a closer look at the enterprise level, in January 2024, ISG’s in-depth survey of digital sustainability priorities, challenges and approaches brought new insights from over 254 participating global organizations. Key insights include the following:

● SME constraints persist, and the demand for green skills and solutions is rising. Seventy six percent of respondents recognize current or anticipated capability gaps within the next two years, with supply chain management and carbon emissions being the top priority areas.

● On average, the organizations represented in ISG’s survey intend to spend approximately $7-$8 million per annum on digital sustainability solutions in 2024. However, this reaches up to an average of $14 million for organizations with revenue above $20 billion and the largest organizations are spending much more. However, ISG’s research indicates that many organizations will require additional funding to achieve their stated targets, such as net zero goals.

● Providers are a key part of most organizations’ strategy for meeting sustainability objectives, with over 60 percent of organizations surveyed expecting to engage them across all key sustainability initiative areas. Most organizations surveyed intend to seek new providers rather than relying purely on expanding the scope of their incumbents.

Investments in digital solutions continue to be widely viewed as an essential means by which to achieve sustainability goals:

● A survey by KPMG found 90 percent of organizations plan to increase their spending on ESG reporting, including on ESG-specific software (40 percent) and AI for data collection (58 percent). The survey also found 76 percent are planning to restructure their teams and 71 percent plan to outsource ESG reporting within the next three years.

● BCG found that companies with automated digital solutions for measurement are 2.5 times more likely to measure their emissions comprehensively, for example and unlock additional efficiency gains.

● Capgemini Research Institute found twothirds of executives agree that data and digital technologies are accelerators for climate tech adoption.

Crucially, digital solutions are only part of the solution. ISG observes that progressive companies have begun to make more operating model changes as they adapt their organizations to incorporate the capabilities needed:

● More indicators suggest ESG reporting work is increasingly being centralized under Finance, where the analytical skill sets required to collate and process enterprise data sets are more abundant. A key example is the increasing popularity of the ESG controller role under the CFO, which mirrors the responsibilities of financial controllers for ESG data and is tasked with ensuring alignment and quality of externally reported ESG data.

● With increased focus on regulatory compliance whilst simultaneously trying to deliver improvements, Chief Sustainability Officers and the environmental and social subject matter experts are stretched in more directions than ever, presenting a buy vs recruit/build dilemma.

● Increasingly, organizations treat change as ‘business as usual’ and equip themselves accordingly. As knowledge becomes more democratised and accessible through AI, more of what consultants offer—such as benchmarks and frameworks—is available without them. However, some organizations will continue to want external validation of their direction and providers with sufficient expertise will continue to be in demand. All providers must avoid competence
greenwashing.

● Sustainability initiatives are being driven more centrally from within integrated transformation offices that  industrialize delivery alongside digital and other transformation agendas.

● Therefore, depending on an enterprise’s maturity and operating model, it may be more inclined to purchase  software or a service. It also influences the type of enterprise buyer (e.g., CFO vs CSO) and their priorities.

Market Supply Overview

The supply of digital sustainability solutions and services is growing slightly slower than 12 months ago as the  market’s initial overexpansion begins to recalibrate to the amount of demand.

Two main factors are driving this trend. First, opportunist providers are now focusing on areas with strong demand; second, market consolidation has narrowed the variety of niche providers – although new start-ups are still emerging, particularly in the data sector.

Overall, ISG observed that a greater number of providers shared more case studies with increased sustainability outcomes, but with wide variances in the volume, quality and distribution of these case studies.

The release of the first genuine GenAI solutions has created a new wave of optimism for how technology will meet sustainability challenges, particularly reporting. A key observation is the need for these AI solutions to be trained and
applied to specific use cases and functions, such as compiling sustainability reports, to achieve ROI and minimize the solution’s negative impact.

Similar to last year, there is an above-average ratio of Leaders to the other segments, and many highly competitive Product Challengers with broad portfolios are striving to take market share from Leaders. This year, there are more
Market Challengers, especially in the Data Platforms and Managed Services quadrant, showing that providers with well-defined solutions and strong brand propositions are starting to achieve scale.

New providers have entered each quadrant, with the most found in the OT and Industry-Specific quadrant. Many of these providers are not typically seen in technology markets. However, as every industry undergoes digitalization, consultancies and engineering firms have enhanced their digital capabilities, posing a challenge to traditional IT
service providers.

Methodology Updates

This year’s study features several important updates:

● To provide more differentiation in Portfolio Attractiveness, ISG’s methodology has increased the focus on the quantity and quality of client case studies supplied by service providers. Also, some capabilities are more important to clients than they were 12 months ago – for example, a deep understanding of relevant sustainability regulations is now critical for providing strategy services. As a result of recalibrating the criteria and weightings, some providers have dropped down the Portfolio Attractiveness axis or have been removed from the grids. Each quadrant’s  Observation section provides specific details on how the evaluation process has been modified in 2024.

● Digital sustainability markets are highly dynamic and encompass numerous submarkets. Our research combines several of these sub-markets into single quadrants, meaning that different types of providers appear together and not all providers in a grid are competitors; some act as partners within a broader ecosystem. It is important to read each quadrant’s Observation section to understand the different dynamics represented within each quadrant.

● The ESG Ratings and Benchmarks quadrant is not featured in 2024. This is because ISG observes a reduced reliance on ESG ratings by organizations as they engage more directly with the underlying data that is most relevant to them. The ESG Data Platforms and Managed Services quadrant incorporates access to underlying data and the relevant benchmark capabilities have been incorporated into the Strategy and Enablement Services quadrant.

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. Please contact ISG to discuss any specific areas of interest.

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