The hottest thing in business depends on where you are. Bars in San Francisco tend to be abuzz with talk of enterprise software. Regulars at City of London pubs may discuss sustainable investing, and in particular concern for environmental, social and governance (esg) factors. Combine the two subjects and you have a winner—both as a topic of conversation and, hopes Watershed, a fast-growing climate-software startup, as a business proposition.
Watershed seems an unlikely subject of animated discussion. It helps companies measure and report their carbon emissions. It is, in other words, a firm of carbon accountants—not usually a profession to set pulses racing. What makes it titillating is its potentially vast market. Over a third of the world’s investable assets, or some $35trn-worth, falls under the esg umbrella, and a large chunk of that is chiefly about the e. Someone has to count the emissions from all those assets. And Watershed could be that someone, reckons a clutch of worthies from Silicon Valley (John Doerr of Kleiner Perkins and Michael Moritz of Sequoia Capital, veteran venture capitalists, co-led its last funding round) and beyond (Mark Carney, former governor of the Bank of England turned climate warrior, is an adviser). In January the firm raised $70m at a valuation of $1bn.
Businesses spew some carbon directly (by operating a vehicle fleet, say). Most also buy some electricity from the grid, which may be fossil-fuelled. And they are at least in part responsible for the emissions produced up and down their value chain. This particular indirect kind, known as “scope three”, makes up the bulk of most firms’ carbon impact. It is also devilishly hard to measure, especially across a complex web of suppliers and customers. Watershed’s algorithms ingest information about line items in its clients’ books and match them with data on the carbon cost of those activities. The result is a granular picture of a firm’s carbon footprint, says Taylor Francis, the firm’s co-founder.
The market for carbon-accounting technology could get a regulatory boost. In America the Securities and Exchange Commission has proposed a rule that would require some firms to report their scope-three emissions. The European Union has issued broader rules that, when implemented, could make nearly 50,000 firms subject to reporting requirements. Some firms will try to do this on their own. Many will enlist specialists like Watershed.
The company is already facing competition. Persefoni ai, a startup in Arizona, is popular with finance firms. Business-software giants like Salesforce and ibm may get in on the action. As for demand, regulators could get cold feet or, in America, be forced to relax disclosure rules by the Supreme Court, whose conservative majority spies executive-branch overreach in climatic matters. For now, though, Europe is moving full-steam ahead and American investors are demanding more details on firms’ carbon footprints, whatever the justices think. Mr Francis says that Watershed’s client list includes big names in tech (for example, Stripe and Spotify) and, more recently, in retail (Walmart). How’s that for a conversation starter? ■
For more expert analysis of the biggest stories in economics, business and markets, sign up to Money Talks, our weekly newsletter.