Spending on sustainable services to exceed €140 bln

Global spending on environmental, social, and governance (ESG) business services will grow to €149.3 billion by 2025, according to a study released on Friday by market research company International Data Corporation (IDC).

The latest forecast for the expansion of the ESG business services market reflects a five-year compound annual growth rate (CAGR) of 32.3 per cent.

The company noted that companies, governments and other organisations are having to deal with increasing pressure to bolster their sustainability credentials, something which is monitored and implemented through ESG practices.

This has entered the focus of companies who have not had much experience in such practices in the past, meaning that high amounts of spending will be needed to catch up in this area.

ESG spending could entail anything from radically restructuring internal departments and how they operate, to redesigning administrative tasks, as well as the transforming of core business practices.

“In 2022, all enterprises are being pushed to transform and fundamentally change the way they do business to become sustainable enterprises,” ESG business services research analyst Dan Versace said.

“Owing to increased pressure from customers, investors, and regulators, organisations are beginning to understand the business cases for sustainability,” he added.

Versace also explained that the companies that develop and implement plans to better internalise and tackle their environmental and social impact will be in a much stronger position to prosper in the coming years, particularly if they see themselves as future leaders in the area of sustainability.

In terms of what qualifies as ESG business services, IDC explained this can include traditional professional services, which are now focused on realising environmental and social sustainability objectives.

Moreover, they can also encompass other services that facilitate ESG services, meaning that they are linked to such practices but are not implementing them directly.

One example of this would be service providers who can assist organisations to improve their efficiency through traditional business process revamping.

While this is not explicitly related to ESG, it still manages to reduce waste and improve productivity.

“By the end of the forecast period, IDC expects sustainability-linked business consulting services to encompass nearly two-thirds of the total business services market,” Versace stated.

“With this market being still in its infancy, opportunities for differentiation are everywhere” he added, explaining that “firms should assess their sustainability-linked business services to determine where these offerings can best be utilised and identify other end-user pain points where new offerings will be needed.”

Meanwhile, advisory firm McKinsey & Company has said that numerous studies have proven that pursuing an improvement in ESG practices is beneficial to organisations.

“The overwhelming weight of accumulated research finds that companies that pay attention to environmental, social, and governance concerns do not experience a drag on value creation—in fact, quite the opposite,” McKinsey analysts Witold Henisz, Tim Koller, and Robin Nuttall explained.

“A strong ESG proposition correlates with higher equity returns, from both a tilt and momentum perspective, while better performance in ESG also corresponds with a reduction in downside risk, as evidenced, among other ways, by lower loan and credit default swap spreads and higher credit ratings,” they concluded.