ESG Software & Tech: 2022 Valuation Multiples

Since the end of the last decade ESG (Environmental, Social & Governance) has become a buzz-word in the start-up world, especially as during Covid several analyses linked ESG companies to stronger financial performance, raising investors’ interest.

As more and more companies have started positioning themselves as ESG over the last few years—some genuinely integrating conscious practices in their business model, making visible positive impact, some others seeing their motives questioned by the public for greenwashing, or for trying to cover for their poor performance by setting ESG goals.

As a response to this, both the European Union and the SEC in the US have announced new reporting requirements for companies in order to standardise the definition of ESG and limit greenwashing practices, giving investors more transparency over what they are really buying into.

Of course, these new requirements created a need for a whole new ESG data collection and analysis function that many companies have had to create from scratch. On the other hand, businesses that are trying to transition towards more sustainable practices need frameworks, consultancy and software tools.

As a result, ESG has become an industry sector in its own right, with B2B software companies developing tools to measure and evaluate environmental impact, employee health and safety as well as carrying out risk analyses of many kinds. Consultancy companies have started popping up offering exclusively offer ESG advice, and new players in the tech space are now supplying hardware to companies who are looking to adhere to more ambitious sustainability standards.

Acumen Research & Consulting estimates that the market for Investor ESG Software accounted for $0.5bn in 2021, and is looking to grow to over 2bn by 2030, and this is only counting solutions that are specifically marketed to investors.

M&A Consultancy firm Hampleton Partners released their latest report on ESG Tech, showing some interesting M&A and valuation trends.

Firstly, Hampleton Partners reported as much as 93 M&A deals involving ESG companies in the first half of 2022 alone. That’s over 60% higher than the previous 6 months and over double H1 2021.

They found that the median revenue multiple for M&A targets over this period was 2.7x, while the EBITDA multiple was 13.6x. It has to be noted that these multiples were calculated on a five-year trailing median basis, in order to obtain a larger sample despite most deals within the sample being undisclosed.

These numbers, however, are extremely relevant to start-ups and scale-ups as they reflect the valuation metrics of private companies at the time of acquisition, which can be otherwise very hard to find.

What’s more interesting about Hampleton Partners’ report is that more than half of the deals they found in the first 6 months of 2022 involved specifically ESG Enterprise Software and SaaS companies. With 52 recorded M&A events, the space looks like it’s ripe for consolidation. The software sub-category of the ESG cohort shown drastically higher multiples for revenue (6x median), and lower EBITDA multiples (10.3x median), reflecting multiples that are compatible with B2B SaaS, but higher.

Finally, another trend emerged from their analysis is the rise of ESG Outsourced Services and Consulting companies, which were the targets of as much as 25 acquisitions in the first half of the year, with large global players like Accenture carrying out aggressive M&A strategies to strengthen their ESG portfolios.