Carbon accounting was red hot in 2021. Now it’s facing widespread consolidation, investors say.

• Carbon accounting startups peaked in 2021, raising over $5 billion from investors.
• The once red-hot sector is made up of companies helping others measure and reduce their carbon footprint.
• Now, the sector is facing widespread consolidation in the face of a funding slowdown.

Niklas Kaskeala and Antero Vartia spent the eve of Finland’s national holiday Vappu huddled in a downtown Helsinki meeting room.

The pair had just announced the closure of their carbon accounting startup Compensate at a time when the rest of the country was preparing to celebrate Labor Day on May 1.

“We were feeling very optimistic near the end. But eventually, we realized we were running out of time,” Kaskeala told Insider.

Compensate was founded by Kaskeala and Vartia, a former Finnish MP, after being spun off from its non-profit parent. It went through a difficult journey that included a legal case that was later dropped, hastening its demise.

Compensate’s demise should serve as a wake-up call to the slew of startups that have emerged in recent years promising to measure, track, and offset carbon emissions.

According to PitchBook data, investor interest in carbon accounting peaked in 2021, when venture capitalists poured a record $5 billion into startups in the sector. Last year, however, it slowed, falling by a fifth to $4.1 billion. Startups in the sector have received funding from US heavyweights Sequoia and Coatue, as well as European firms Octopus Ventures, Cherry Ventures, and Balderton Capital.

Now, the once-hot sector’s future is set to be defined by widespread consolidation, with consulting behemoths circling a slew of startups struggling to raise new capital.

Insider spoke with investors who blamed the industry’s woes on a lack of differentiation among startups, their reliance on manual labor, and an inability to scale. Meanwhile, startups that serve a specific niche, such as Vaayu, which focuses on e-commerce, or ClimateView, which focuses on local governments, may be ripe for acquisition.

“The space is really, really crowded, but I think we have a relentless market where only the top four or five, maybe, will survive,” one founder said. “That’s primarily due to the dynamics of any venture capital market.”

The rise of carbon accounting

According to Insider’s research, there are approximately 50 European carbon accounting companies, many of which did not exist prior to 2019.

Pressure from activist investors, employees, and customers urged businesses to embrace sustainability in the face of climate change, fueling the hype around carbon accounting. Europe’s mandate for emissions reporting, as well as the bloc’s commitment to net zero emissions by 2050, fueled investor interest in the sector.

They frequently use a software-as-a-service (SaaS) model and provide footprinting services, which involve measuring a customer’s emissions output. Many connect to a slew of third-party emissions databases and claim to use automation to calculate footprints on a regular, transparent, and accurate basis without the need for expensive consultants.

Carbon accounting firms are broadly classified into three types: generalists aimed at S&P 500 companies and global enterprises with complex supply chains, small and medium-sized businesses with fewer reporting requirements, and sector-specific tools with deep industry expertise.

Venture capitalists are typically bullish on SaaS because it can scale quickly with few overheads, as many carbon accounting companies promise. Despite touting automation, carbon accounting business models frequently fell short of true SaaS scalability and instead relied on employees doing tasks manually, according to investors.

According to one climate tech investor, firms “hustled” to secure land and logos before doing whatever it took to deliver on numbers behind the scenes.

“It’s still an element of tech-enabled consulting for most of these firms, and they incrementally automate more and more parts of their processes, but there’s a long way to go to be a full SaaS,” the investor explained.

According to another European climate tech investor, this results in higher overhead costs that cannot be covered by software-level pricing. “It’ll take a few years to play out, but the sector is tipped for consolidation.”

Winners and losers

According to two European investors, startups with deep industry knowledge and proprietary databases are more likely to succeed.

Though less scalable, specialized players with proprietary databases provide precise and niche footprinting. This will take time and will limit companies to specific industries, but it could provide “a potentially huge value pool,” according to one of the investors. They added that those with good data are prime acquisition targets.

Vertical players include e-commerce-focused Vaayu, which was cofounded by the former Zalando sustainability head. The startup’s system computes emissions data for every aspect of the product, from the materials used to how it is shipped and packaged.

---

According to a London-based investor, it is these types of companies that can leverage network effects down the supply chain. Vertical players gain a deep understanding of their chosen industry by positioning themselves as an industry go-to. Once a large customer has been secured, all of its suppliers must provide emissions data to the platform. The more data a carbon accounting firm has, the better its calculations, and thus the more valuable it is to others.

Consolidation is already well underway

Consolidation is taking place around the world. ClimateTrade, a blockchain-based US company, acquired Germany’s TeamClimate in April; Watershed, a US and UK dual-headquartered company, acquired VitalMetrics the same month and cited its data archive as a major competitive advantage; and Spherics, based in the UK, and Envizi, based in Australia, were acquired by IBM and Sage, respectively, last year. Ecotrek was also purchased by EcoVadis, a French startup. EcoOnline acquired Ecometrica, an ESG software firm, in July.

Meanwhile, Planetly, a German risk-management platform acquired by SoftBank-backed OneTrust in December 2021, was closed down less than a year later, laying off all 200 of its employees.

According to one European investor, these once-hot startups could become targets for KPMG and BCG, eventually becoming an arm of largely consultancy groups. Enterprise software providers such as SAP and Oracle may be interested as well.

Purchasers are not guaranteed. Many large consultancies that have existing relationships with businesses have already implemented their own emissions accounting tools.

This isn’t anything new. Another carbon accounting boom and bust occurred over a decade ago. Many early adopters failed or were acquired.

The evolution of the market

Instead of an end-to-end platform, the two founders of carbon accounting prefer an ecosystem approach, as seen in traditional accounting, where there is a standardized way of accounting for a P&L, followed by “tons and tons” of complementary services. Carbon accounting firms, for example, could specialize in automated data collection from utilities, businesses, or logistics and collaborate to serve a single customer.

According to one of the founders, this allows struggling businesses to pivot to adjacent industries.

Verifying carbon credits, biodiversity credits, and rating credits are all possible pivots. An investor suggested that there could be parallels between data aggregation and auditing. They added that the easiest thing for failing companies is to be gobbled up by a corporate and then return to the VC track with another venture at a later date.

According to one founder, there is still room to enter the market. The next generation of carbon accounting firms should be hyper-focused on a single niche, such as accounting for methane in agriculture or water use.