The Sustainability sector continued to attract interest from venture capital, private equity and corporate buyers during 2023, despite difficult economic and financing conditions.
Deal volumes declined, but demand for market-leading assets remained strong. Regulation, net-zero commitments, ESG reporting requirements and the need for new environmental technologies continued to create opportunities across the sector.
Polestar CF’s Sustainability Sector Review 2023 examines the six sustainability subsectors it tracks, alongside valuation trends, M&A activity, active investors and selected transactions.
Food and agriculture includes sustainable food production, agricultural services, scientific research and technologies supporting the agricultural sector. This covers areas such as agricultural equipment, biosciences, crop production and sustainable farming.
Clean technology includes low-carbon construction and technologies designed to reduce the environmental impact of human activities or decrease the use of natural resources. Examples include waste management, recycling, water management and sustainable transport.
Climate technology encompasses software and technology developed to mitigate or adapt to climate change. This includes emissions-reduction processes, electric vehicles, battery technology and hydrogen solutions.
This subsector includes sustainability consultancy, engineering services, ESG measurement and related software. Businesses support organisations with sustainability assessment, strategy, reporting and implementation.
Green energy covers the development, production and distribution of low-carbon energy sources and supporting services. It includes renewable-energy generation, storage, manufacturing, certification and energy consultancy.
Wellbeing includes software and services supporting human resources, employee management, reward and recognition, training, engagement and career development.
Inflation and higher interest rates placed downward pressure on valuations and investment during 2023. UK CPI inflation fell from 11.1% in October 2022 to 4.6% in October 2023, but remained above the Bank of England’s 2% target.
These conditions contributed to lower public and private valuations and reduced dealmaking across the wider economy. High-quality Sustainability businesses nevertheless continued to attract interest and achieve strong valuations.
Regulation remained an important driver of investment and development across the sector as governments sought to improve the consistency and transparency of sustainability information.
The EU’s Corporate Sustainability Reporting Directive introduced more detailed reporting requirements for EU companies and qualifying non-EU businesses. The rules were due to be phased in from January 2024 and apply to all organisations within scope by January 2028.
The International Sustainability Standards Board also introduced its first reporting guidelines for public companies, private businesses and government organisations. Standardised reporting was intended to make sustainability information easier for investors and other stakeholders to compare.
ESG ratings were becoming increasingly important to investors, institutions, customers and providers of green finance.
Ratings assess environmental, social and governance performance. Environmental measures can include carbon emissions, water consumption and waste management. Social factors cover areas such as employment practices, diversity and customer treatment, while governance considers board structure, executive remuneration and shareholder rights.
Investors could use these ratings and associated indexes to identify companies aligned with specific environmental or social objectives.
National net-zero targets covered 91% of global GDP, creating opportunities for companies providing the services, software and technology needed to support their delivery.
An estimated $9.2 trillion of annual investment would be required over the following 30 years to support the transition to net zero. Approximately $6.5 trillion of this spending would be directed towards low-emission assets, with mobility, power and buildings accounting for around 75% of investment in physical assets.
These commitments were expected to influence demand for energy, transport, buildings and other lower-carbon products and services.
Reduced debt availability and concerns surrounding interest rates caused revenue and EBITDA multiples to fall from their 2020 levels across the Sustainability sector.
However, continued interest in sustainability assets was supported by increasing familiarity with emerging technologies among both investors and consumers. Valuation performance varied considerably between individual subsectors.
Listed Green Energy businesses were trading at average multiples of approximately 3.5 times revenue and 16.2 times EBITDA.
The subsector faced some short-term policy uncertainty following changes to UK environmental targets, including the postponement of the ban on new petrol and diesel cars from 2030 to 2035 and the proposed phase-out of gas boilers from 2026 to 2035.
High and volatile energy prices had also resulted in record profits for oil and gas companies, affecting the relative momentum of lower-carbon alternatives.
ESG and sustainability services continued to command premium valuations, with listed businesses trading at approximately 2.8 times revenue and 14.5 times EBITDA.
Trade buyers and private equity investors continued to show strong interest in the subsector. Demand was expected to increase as sustainability policies and reporting requirements became more integrated into company operations.
Meaningful listed valuation multiples were not available for Climate Technology because of the early-stage nature of the subsector.
Policy changes affecting electric vehicles, combined with pressure on household finances, were expected to affect the speed at which consumers adopted technologies carrying a green premium.
Listed Clean Technology companies were trading at approximately 2.3 times revenue and 34.8 times EBITDA.
Clean Technology was the most established of Polestar’s Sustainability subsectors and recorded the most varied mix of venture capital, private equity and corporate transactions during 2023.
Listed Agricultural Technology companies were trading at approximately 0.8 times revenue and 6.5 times EBITDA.
The subsector continued to face challenges around technology adoption. Only 39% of farms globally were using farming technology, demonstrating the scale of the potential market but also the work required to increase adoption.
Listed Wellbeing businesses were trading at approximately 0.5 times revenue and 7.9 times EBITDA.
Demand increased during the pandemic as businesses sought ways to engage employees working remotely. Wellbeing subsequently became an established element of workplace culture as employers reconsidered how to support flexible working.
Sustainability deal volumes fell by 21%, from 645 transactions during the first three quarters of 2022 to 530 during the equivalent period in 2023.
Venture capital continued to account for most Sustainability transactions, reflecting the early-stage nature of many companies and their need for funding to develop technology, skills and capabilities.
Private equity activity declined, partly because fewer Sustainability businesses had reached the level of maturity typically required by PE investors. Activity was expected to increase as market conditions improved and more companies began to mature and consolidate.
ESG and sustainability services represented the largest proportion of Sustainability deal activity during the first three quarters of 2023.
The subsector attracted particularly strong venture capital interest as businesses looked for services and technology that could help them understand, measure and work towards their sustainability objectives.
Clean Technology represented 12.45% of Sustainability transactions during the period.
Activity was divided relatively evenly between buyers and investor types:
This balanced mix reflected the relative maturity of Clean Technology compared with other Sustainability subsectors.
A growing focus on climate and social issues was influencing investment strategies. More private equity firms were establishing impact funds, while pressure from their own investors encouraged greater attention to sustainability performance.
Sustainability remained a relatively immature sector. Early-stage businesses required capital to fund research and technology development, while more established companies needed additional investment, expertise and capabilities to support their next stage of growth.
Venture capital firms represented 67% of the most active Sustainability investors during the preceding 12 months. Active investors included:
The fragmented nature of the sector provided Sustainability founders with several strategic options, including acquiring other companies, raising external investment or selling their businesses.
Private equity and corporate buyers were expected to target companies capable of adding new technologies, services or geographical coverage to their existing operations.
Phenna Group, for example, acquired Trident Water Solutions, Evolution Water Services and Sayvol Environmental & Building Services to expand its built-environment operations with complementary specialist services.
Nurture Landscapes Group also completed its largest acquisition in five years through the purchase of CGM Group, strengthening its presence in the East of England.
Ceres Agritech participated in a £2.8 million funding round for FruitCast, which uses AI-enabled data analytics to forecast strawberry yields.
GEA Group acquired Venture Dairy Services to consolidate its presence in South West England and strengthen its offering to dairy producers.
Energy Capital Partners completed a £1.7 billion takeover of waste-management business Biffa, supporting its focus on the circular economy.
Greenback Recycling Technologies and Enval combined their operations to develop technology-led recycling solutions for plastic and aluminium packaging.
Energy Impact Partners invested in smart-home energy technology manufacturer Myenergi to support its growth and international expansion.
Drax Group acquired BMM Energy Solutions, a specialist installer and maintenance provider for electric-vehicle charging points. The acquisition strengthened Drax’s charging proposition for UK businesses.
Climate-risk analytics provider Climate X secured funding to meet growing customer demand and expand its product range.
Abatable acquired nature-based carbon-credit provider Ecosphere+. The transaction combined Abatable’s technology and access to carbon-project developers with Ecosphere+’s procurement expertise and corporate buyer relationships.
3i Infrastructure acquired Future Biogas, a UK biomethane producer and operator of anaerobic digestion plants. The investment was intended to support the development of bioenergy with carbon capture and storage.
Severn Trent acquired Andigestion, which converts food waste into renewable energy and fertiliser. The acquisition added 45 GWh of annual energy-generation capacity and extended Severn Trent’s operations into South West England.
Workplace engagement platform Trickle secured investment to grow its team, expand within the private sector and add new features to its platform.
LMS365 acquired employee performance and engagement platform Weekly10, expanding its ability to support employee development across different working environments.
Sustainability remained an important global M&A theme despite the more difficult economic conditions experienced during 2023.
Investment appetite was supported by regulatory change, net-zero commitments, the growth of impact funds and increasing demand for sustainability measurement and reporting. Market-leading assets continued to attract strong valuations, while venture capital provided much of the funding required by earlier-stage companies.
As the fragmented market matured, private equity and trade buyers were expected to become more active in acquiring businesses that could add technology, specialist skills, services or geographical reach.
Polestar tracks six Sustainability subsectors: Food and Agriculture, Clean Technology, Climate Technology, ESG and Sustainability Services, Green Energy and Wellbeing.
Sustainability deal volumes fell by 21%, from 645 transactions during the first three quarters of 2022 to 530 during the same period in 2023.
ESG and sustainability services accounted for the largest proportion of transactions during the first three quarters of 2023. Demand was supported by businesses seeking help to understand, measure and work towards sustainability objectives.
Many Sustainability companies remained at an early stage and required investment to fund research, technology development, skills and operational capabilities. These characteristics made them particularly suitable for venture capital investment.
Private equity activity declined during the period. This reflected the difficult economic environment and the relatively small number of mature Sustainability companies meeting typical PE investment criteria.
Higher interest rates and reduced debt availability placed pressure on revenue and EBITDA multiples. Performance varied between subsectors, with ESG and sustainability services continuing to attract premium valuations and strong investor interest.
Regulatory change, sustainability reporting requirements, ESG ratings and corporate net-zero objectives increased the need for measurement, consultancy, software and implementation support.
The activity covered in the review shows corporate and private equity buyers seeking businesses that could add technology, specialist services, new capabilities or geographical coverage.
