ISG Provider Lens™ Sustainability and ESG - Data Platforms and Managed Services - Australia 2024

Market demand has accelerated, with solution portfolios recalibrating to key use cases

This is the first ISG Provider Lens™ Sustainability and ESG report for Australia and it highlights the rapidly evolving market for digital solutions that are being adopted by organisations to improve their environmental sustainability, social sustainability and/or corporate governance (digital sustainability solutions).

Since the Labor Federal Government was formed in May 2022, Australia’s policies towards sustainability topics such as climate change and diversity, equity and inclusion (DE&I) have increasingly aligned with most Western nations and accelerated investments in more sustainable businesses.

For example, regulations now require the disclosure of climate-related risks, in line with the International Sustainability Standards Board recommendations, with incentives for renewable energy transition. However, with a federal election due in 2025 and ongoing pressure from the Coalition party, it is unclear how long the relative political stability of the last two years will continue.

Australian consumers and society, in general, are becoming increasingly aware of greenwashing, with local investors and shareholders focusing on ESG factors, leading to the creation of new sustainability indices such as the S&P/ASX 200 ESG Index and triggering significant growth in the volume and diversity of sustainability-focused investments for products such as green bonds.

As organisations in Australia increasingly invest in digital solutions to meet these sustainability requirements, competition to supply them has intensified. According to ISG’s research, the global digital sustainability market is valued at around $21 billion in 2024, with a CAGR of approximately 16 percent expected to drive this up to $34 billion by 2027. This is roughly three times the growth rate of the overall digital transformation market. Consequently,
numerous providers from different backgrounds have entered the market with heavy investments, eager to capture market share with diverse offerings.

However, after last year’s deluge of new solutions, ISG is beginning to see some consolidation and recalibration of provider portfolios to better align with what is in demand and where they can win. To this end, 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; at the same  time, several generative AI (GenAI)-powered solutions introduced this year have become differentiators for a few of the notable Leaders.

Key trends in demand have been categorised under the following quadrants:

• Strategy and Enablement Services: Australian organisations prefer technology partners with significant  experience in the sustainability regulations and frameworks relevant to their industry. Buyers increasingly consider the supply chain in risk mitigation and opportunity creation. More mature organisations are leveraging in-house capability and seeking to reduce consulting spend.

• OT and Industry-specific Solutions and Services: Solutions leveraging AI, ML and IoT for asset-intensive industries such as power and utilities, mining, manufacturing and financial services continue to be most common.

• IT Solutions and Services: Investment growth in this area continues to be the slowest among the four quadrants as IT’s sustainability footprint is too small in relation to an overall enterprise to attract significant investments.

• Data Platforms and Managed Services: It is the fastest-growing quadrant with the most competitive supply-side, driven by domestic and global regulations. Market leaders offer complete solutions of advisory, integration and managed services that utilize both proprietary tools and top-tier third-party platforms for ESG data throughout the value chain. Increasingly, buyers are understanding that a universal solution doee not exist and that operating models play a significant role in how data capabilities are obtained and utilized.

The Australian market continues to be highly aware of environmental and social topics. Climate change remains the most common top priority amongst ESG factors due to the frequency and severity of extreme weather events and investor knowledge about consideration of the effect that physical and transitional climate risks have on a company’s
financial values. Complying with the Modern Slavery Act, improving gender equality and raising opportunities for First Nations people are all highly relevant for Australian businesses.

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

Market demand overview

In this first edition of the ISG Provider Lens™ Sustainability and ESG report for Australia, ISG examines the macro and micro forces shaping the demand and supply of digital sustainability solutions and services for Australian
organisations and providers.

The macro-environment has been reshaped significantly in the last four years. Extreme weather events have been the focus areas for business leaders across Australia, with their families, friends and employees struggling to adapt to climate changes and high cost of living.

ISG has noted a significant shift in environmental, social and economic policies since the Labor government took office in May 2022, with state and federal governments now pulling in a more similar direction on sustainability-related policies. This has sent positive signals to the market that Australia’s sustainability is important to the Federal
government and encouraged broader corporate adoption/ambition. However, there remain some mixed signals as Labor seeks to balance the policy demands of The Greens and the Coalition parties, with net zero targets and funding for renewables while simultaneously extending the life of coal mines.

The Australian energy system has accelerated its transition to renewable energy, with solar and wind dominating generation in the middle of the day, with Tasmania and South Australia among the most advanced states. Together  with investments in large batteries, new renewable energy zones, transmission and distribution network upgrades and green hydrogen, the outlook for Australia to become a renewable energy powerhouse is more realistic than it was three years ago.

Australia’s mixed economic landscape has suppressed some investment in 2024, with interest rates remaining higher than many expected due to the Royal Bank of Australia’s determination to bring inflation back towards the target of 2.5 - 3 percent. With interest rate cuts appearing more likely in 2025, expected GDP growth of 1 to 2 percent, strong demand for Australia’s resource sector and a growing appreciation of the opportunity to reduce operating costs, emissions and waste by deploying OT, the outlook for sustainability investments is positive.

Overall, this environment has increased the demand for digital sustainability solutions that help businesses electrify and optimise their value chains and separate business growth from emissions and resource growth. Energy management solutions are in high demand across asset-intensive industries such as mining, power and utilities, manufacturing and transport. The recent announcement by Fortescue that it would electrify its fleet of mining vehicles in a $4 billion project is a great example of this shift. Financial services firms are also focused on reducing IT’s environmental footprint, which typically represents a higher proportion of their overall footprint.

However, the majority of Australian businesses lag behind their counterparts in Europe in terms of awareness of the opportunities presented by sustainability transformations; a degree of scepticism remains about the extent to which
technology can address environmental and social challenges and simultaneously improve the bottom line.

This scepticism is connected to the larger challenge of the skills gap in Australia. As organisations seek to turn ambition into action, the shortage of employees with the required knowledge about core issues and storytelling skills to activate the organisation is hindering progress. Nonetheless, an increasing number of Australian organisations are developing the skills they need in-house, with a perception that using external consultancies does not always provide access to the required expertise. This perception has been accentuated as the fallout of the public sector of  consultancy.

The first meaningful piece of corporate sustainability disclosure legislation since the Modern Slavery Act passed in parliament in September 2024 will come into force in January 2025. Consequently, Australia’s largest organisations are urgently preparing their ESG environmental data to submit their first disclosures against the Treasury’s climaterelated reporting requirements (officially called Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024). The Australian Sustainability Reporting Standards are due to before the end of 2024, the year with a strong alignment to the International Sustainability Standards Board’s guidance and the first disclosure is due for reporting periods commencing 1st January 2025. While this legislation does not require organisations to report Scope 3 emission data initially, requirements for supply chain data are being phased according to company  size. According to PwC’s survey in 2023, Only around half of ASX200 companies are disclosing any Scope 3 data, with only 21 companies having set a Scope 3 net zero target.

While the referendum on the Indigenous Voice to Parliament in October 2023 did not gain sufficient support to pass, it elevated the need in society for more opportunities and action on reconciliation with First Nations people. NGOs, such as the Minderoo Foundation have continued to invest in partnerships and programs to increase business engagement,
with PwC’s survey finding that Only 33 percent of Australian ASX 200 businesses have a Reconciliation Action Plan  (RAP).

On AI, the debate in Australia continues to revolve around three core questions:

● Is regulation required, or can adaptation of existing regulations with clearer frameworks and principles suffice?

● If regulation is required, should it be broad (like the EU’s) or narrow to specific high-risk use cases (for example, facial recognition)?

● Who would regulate most effectively?

It is likely that Australia will closely monitor Europe and the U.S. to determine its way forward. As a result, new AI-based services may be launched by global technology companies in Australia sooner than in Europe, which presents
unique risks and opportunities. With Australians more risk-averse on personal data security and corporate trust than other regions —especially after high-profile data breaches at Optus and Medibank, among others — the pressure on
political parties to intervene is likely to increase.

Outside Australia, Europe’s regulatory landscape continues to push the boundaries of the breadth and depth of sustainability reporting. This remains highly relevant to Australian businesses operating in Europe or trading with European companies, as several regulations require entities of all regions to disclose sustainability data (for example, the Corporate Sustainability Reporting Directive) and potentially pay carbon taxes (for example, the Carbon Border Adjustment Mechanism).

The U.S. regulatory landscape is not clear, with Donald Trump’s return as U.S. President likely to result in the amendment, delay and potentially repeal of many of the Biden Administration’s Federal policies, including the Inflation Reduction Act and weaken the Environmental Protection Agency’s ability to enforce greenhouse gas emissions reductions. Meanwhile, individual State Governments will continue to determine their own paths — for example, California has adopted a position similar to Europe and Australia on corporate sustainability reporting.

The business case for sustainability

While avoiding the risk of fines and damage to brand credibility from non-compliance with regulations remains a strong motivator for many investments in digital sustainability solutions, research indicates most Australian businesses want to become more sustainable anyway — provided they can find a way to do so profitably.

Therefore, the key questions for many Australian businesses have been the following: What is the business case for sustainability and ESG-related investments? And how should we quantify the benefits?

In the last 12 months, ISG has seen answers and successful strategies in response to these questions. A recurring theme for many business cases is the integration of sustainability objectives into broader digital transformation
programs, as opposed to looking at sustainability in isolation. When integrated with broader transformations, the incremental costs of sustainability initiatives typically represented 5 to 10 percent of the overall program cost, but the implementation cost was shared with the wider program. Given that many sustainability initiatives also reduce costs, improve customer loyalty and increase talent retention and attraction, this integration represents a true win-win for an enterprise.

At a macro level, there are several indicators that leading organisations are finding ways to decouple financial growth from emissions and other negative sustainability impacts. The World Economic Forum (WEF) recently announced that
its CEO Climate Leaders alliance, which features over 130 companies across 26 countries in 12 industries and employs 12 million people, had reduced emissions by 10 percent, while achieving 18 percent revenue growth in three years.

Research from the Climate Leaders Coalition, which comprises 50 of Australia’s largest organisations and leading consultancies, indicates that Australia’s opportunity to transition to a circular economy could be worth as much as a $23 billion increase in GDP by 2025 and $210 billion by 2048 while reducing emissions by as much as 45 percent. It also highlighted Australia’s unique challenges, including a lack of manufacturing capabilities, an export-orientated economy and a vast geography.

Taking a closer look at the enterprise level, in January 2024, ISG’s in-depth survey of digital sustainability priorities, challenges and approaches generated new insights from over 256 participating global organizations. The following key insights were included:

● SME constraints continue and demand for green skills and solutions is on the rise. Seventy-six percent of  respondents acknowledge their capability gaps either presently or expect to be present in the next two years, with supply chain and carbon emissions being the top priority areas.

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

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

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

● A survey by KPMG found that 90 percent of organisations 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 that 76 percent are planning to restructure their teams and 71 percent have or 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 that two-thirds of executives agree that data and digital technologies are accelerators for climate tech adoption.

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

● More indicators suggest that ESG reporting is increasingly being centralised in finance, where the analytical skill sets required to collate and process enterprise data sets are abundant. For example, the role of ESG controller and similar ESG reportingorientated roles are appearing under the CFO. These roles mirror the responsibilities of financial controllers for ESG data and are tasked with ensuring alignment and quality of externally reported ESG data.

● CSOs and environmental and social SMEs are stretched in more directions than ever, presenting a buy versus recruit/build dilemma.

● Increasingly, organisations 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 organisations 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 industrialise 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. This also influences the type of enterprise buyer (for example, CFO versus CSO) and their priorities.

Market supply overview

The supply of digital sustainability solutions and services is growing slightly slower than it was 12 months ago, as the market’s initial overexpansion has begun to recalibrate to the volume of demand. This effect is more pronounced in Australia, where several global service providers are yet to launch their services.

Two factors are driving this trend: First, the providers that entered the market opportunistically are now focusing on where they are seeing firm demand and second, market consolidation activity has slightly reduced the range of niche providers. However, new startups continue to enter this space, especially in the data market.

Overall, ISG has observed that in the last 12 months, a large number of providers shared a significant number of case studies with sustainability outcomes, but these case studies vary considerably in terms of volume, quality and distribution.

The release of the first GenAI solutions in this area has created a new wave of optimism on 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 a solution’s negative impact.

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

New providers have entered each quadrant, with the most found in the OT and Industry- Specific Solutions and Services quadrant. Many of these providers are not traditionally found in technology markets, however with the
digitisation of every industry, consultancies and engineering firms especially have grown their digital capabilities and now represent a threat 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, in providing strategy services, a deep understanding of the relevant sustainability regulations is now critical. The result of recalibrating the criteria and weightings is that some providers have dropped down in the Portfolio Attractiveness axis, or even out of grids. Each quadrant’s Observation section provides specific details on how the evaluation process has been modified in 2024.

● Digital sustainability markets are very dynamic and have many submarkets. ISG’s research combines some of these
submarkets into single quadrants, meaning that different types of providers are included alongside each other and, therefore, not all providers in a grid are competitors; some are 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 does not feature this year. This is because ISG observes a reduced dependence on ESG ratings by organisations 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 at pace, ISG will expand and enhance the depth of market analysis. Please contact ISG to discuss any specific areas of interest.

Access to the full report requires a subscription to ISG Research. Please contact us for subscription inquiries.