Why Climate Software is Transforming M&A: Boost Valuations & ESG Performance

Want to know why climate software is becoming increasingly important in the M&A world? Here’s the answer: Companies that focus on ESG performance and climate tech consistently achieve higher valuations—exit multiples can increase by up to 200%. This is due to the growing importance of ESG due diligence, regulatory requirements like the CSRD, and the ability to accurately assess climate risks. According to a 2023 McKinsey report, companies that proactively address climate risks and sustainability issues are not only more resilient but also attract a broader pool of investors, with 83% of institutional investors stating that ESG factors are a key consideration in their investment decisions (source).

Key Takeaways at a Glance:

• Higher Valuations: Companies using climate software achieve EV/Revenue multiples of up to 7.6x—without software, often only 5.5x.
• ESG as a Driver: 98% of investors consider ESG, 72% assess it systematically.
• Regulatory Pressure: The CSRD expands reporting requirements to 15,000 companies.
• Efficiency Through Technology: Climate software automates ESG analyses, reduces risks, and accelerates transactions.

Climate software is the key not just to keeping up in a changing market, but to profiting in the long term. Want to learn more? Read on!

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Climate Software Improves ESG Performance in M&A

This section demonstrates how climate software sustainably optimizes ESG performance in mergers and acquisitions (M&A). Companies leveraging such technologies have consistently achieved higher exit multiples. The software fundamentally changes the assessment of ESG risks and automates ESG evaluations, speeding up the entire transaction process. The importance of this development is highlighted by current market data: In 2024, deal values in North America reached $1.7 trillion, and 75% of respondents reported identifying significant ESG findings in their transactions over the past three years (source).

ESG Due Diligence and Risk Assessment

With the help of artificial intelligence, climate software is revolutionizing ESG due diligence. It analyzes ESG reports and regulatory information, comprehensively covering environmental, social, and governance aspects. This enables early identification of risks and opportunities. According to a Deloitte survey, 65% of dealmakers believe that advanced analytics and AI-driven ESG tools will be critical for future M&A success (source).

In practice, companies can secure up to 10% of the transaction value by incorporating ESG insights into negotiations. M&A teams benefit from detailed analyses, ranging from carbon emissions data to comprehensive performance reports. The software ensures that transactions not only meet ethical standards but also comply with regulatory requirements such as CSRD reforms. These precise analyses create a solid foundation for strategic decisions.

Core Functions of Climate Software

The ability to accurately measure and predict ESG data makes climate software an essential tool for sustainable investing. It not only increases company value but also supports strategic decisions by directing capital into assets that reduce environmental impact.

A prime example of successful ESG integration comes from CVC Capital Partners: When acquiring a convenience store chain in 2017, they implemented comprehensive ESG measures. These included replacing carbon-intensive refrigerants, reducing packaging weight, and setting annual emissions targets. These actions improved brand perception in areas such as customer health, environmental friendliness, and animal welfare.

With climate software, companies can precisely assess the environmental impact of their investments, integrate environmental management and CSR data into holistic management, and analyze climate-related financial risks as well as the market impact of transitioning to low-carbon technologies. The market for such solutions is growing rapidly: By 2026, spending on EHS software is expected to reach $2.5 billion, with an annual growth rate of 11.5% (source).

Climate Software Increases Valuations and Exit Multiples

The use of climate software in M&A transactions brings clear advantages: It improves operational processes and thereby increases exit multiples. Those who invest early in decarbonization secure not only competitive advantages but also valuation premiums. Notably, a 2023 Bain & Company analysis found that companies with strong ESG credentials were 25% more likely to be acquired at a premium (source).

How Climate Software Creates Value

Climate software contributes to value creation on multiple levels: through more efficient processes, a stronger market position, and reduced risk. Investments in decarbonization lower operating costs (OPEX), reduce capital costs, and open up new revenue opportunities.

Andrew Radcliff, Global Head of M&A Advisory at ERM, describes the approach as follows:

"This guidance provides a practical series of steps that show how decarbonization value creation potential can be quantified prior to making an investment then implemented throughout the investment hold period, with value being created through top- and bottom-line improvements as well as through exit multiples."

Kurt Björklund, Executive Chairman at Permira, also emphasizes the importance of climate risks:

"Our business is delivering long term value to our investors. In the transition to a low carbon economy, quantifying climate risks and opportunities helps us focus on what really matters. This publication offers practical considerations for private equity firms."

Companies that leverage climate finance strengthen their sustainability and become more attractive acquisition targets. This often leads to higher valuations. These effects are directly reflected in valuation metrics.

Valuation Metrics: With vs. Without Climate Software

Companies with a clear climate strategy and robust ESG practices are seen as more attractive investment targets. They achieve higher valuations and benefit from better deal terms. A survey by Datasite of around 400 dealmakers shows that more than half view ESG risks as a potential deal-breaker (source).

In Q4 2024, companies with gross margins above 80% achieved a median EV/TTM revenue multiple of 7.6x. In contrast, those with margins below 80% saw only 5.5x. This difference shows how much operational efficiency—often enabled by climate software—impacts valuation.

Sustainability-oriented business models and ESG-focused companies also benefit from valuation premiums. The growing demand for sustainable solutions is driving M&A activity and is reflected in valuations. Buyers are specifically seeking companies that offer stability and balanced growth—qualities that can be measured with climate software.

Furthermore, consistent decarbonization during the holding period can lead to a better exit multiple. Demand for low-carbon assets remains high, while companies without a climate strategy often face valuation discounts due to future liabilities and climate costs.

Using Climate Software in M&A Transactions

Targeted use of climate software can make the entire M&A process more efficient and effective. ESG aspects (environmental, social, and governance) now play a central role in every phase of M&A transactions. Systematic integration of appropriate tools can be crucial for minimizing risks and ensuring transaction success. Below, we look at the main types of software and their use in different deal phases.

Types of Climate Software and Their Applications

Climate software can be broadly divided into three categories, each offering specific functions and benefits in the M&A process:

• Due Diligence Platforms: These tools capture and analyze emissions data, assess climate risks, and create ESG profiles of potential target companies. They help build a comprehensive picture of a company’s sustainability status.
• Decarbonization Modeling Tools: This software supports companies in strategic planning and assessment of climate strategies. It simulates various CO₂ reduction scenarios and calculates the financial impact of each measure. These tools are especially useful for evaluating long-term value creation potential.
• Compliance and Reporting Systems: These systems ensure companies comply with regulations such as the CSRD or EU taxonomy. They automate data collection and preparation for sustainability reports, significantly reducing the risk of violations.

The choice of software depends on the complexity of the transaction and specific ESG requirements. A solid understanding of ESG risks is essential to avoid costly mistakes and potential reputational damage.

After reviewing the software categories, the question arises: how can these tools be used in the different phases of an M&A deal to maximize value?

Climate Software in the Deal Phases

The M&A process can be roughly divided into three main phases, with climate software playing a key role in each.

1. Pre-Deal Analysis
In the early stage of a transaction, specialized climate software provides valuable support. Through ESG due diligence, potential risks can be identified and analyzed early. The tools assess historical emissions data, examine climate-related risks, and uncover possible optimization opportunities. These analyses lay a solid foundation for informed investment decisions and minimize uncertainties.

2. Deal Negotiations
During negotiations, climate software provides objective data that serves as a basis for valuation and pricing. Sustainability initiatives can be precisely quantified to support new business opportunities, market potential, and improved reputation. These advantages can be directly integrated into negotiation strategies, strengthening the parties’ positions.

3. Post-Merger Integration
After the transaction closes, the focus shifts to integrating the companies. Here, climate software plays a key role in harmonizing systems and implementing unified ESG standards. Especially in the German SME sector, where operational continuity and relationships are crucial, smooth integration is essential. The success of an M&A transaction largely depends on how well post-merger integration is managed.

Digital tools not only boost the efficiency of the M&A process, but also ensure compliance and data security standards are met. German companies traditionally place great value on quality and regulatory compliance, so the integration of climate software must meet the highest standards while taking local specifics into account.

Successful implementation requires close collaboration between technical and strategic teams. German sellers often prefer buyers who respect a company’s legacy and can guarantee stability for employees and customers. Climate software can help demonstrate this stability while simultaneously achieving progress in sustainability performance.

Key Decisions for Business Leaders

Executives face the challenge of making strategic investments in climate software during M&A transactions. Choosing the right ESG software is much more than a technical decision—it significantly impacts the company’s reputation and regulatory standing. To maximize the benefits of such an investment, several key factors must be considered.

Prerequisites for Successful Implementation

Successful adoption of climate software is based on three key pillars: data quality, involvement of all relevant stakeholders, and internal expertise. Reliable ESG data forms the foundation for any successful implementation.

First, executives should clearly define their company’s specific requirements. The main goals of the sustainability program must be determined and understood. This strategic clarity forms the basis for all further decisions.

Software selection should be based on clear criteria, such as improving reporting accuracy, optimizing portfolio performance, and creating long-term value. Especially important features include:

• Efficient data management and accurate reporting
• Support for regulatory compliance
• Integration with existing systems
• User-friendliness and data security
• Comprehensive vendor support

In Germany, where operational excellence and seamless processes are traditionally a focus, it’s particularly important that the software integrates smoothly into the existing IT landscape. Once these basics are in place, companies should proactively address potential obstacles.

Common Challenges and Solutions

Implementing climate software often brings typical challenges, but these can be overcome with targeted measures. An EY study shows that 55% of finance professionals still rely on spreadsheets and manual processes for ESG data management. These outdated methods pose significant risks to data quality and consistency (source).

Another major obstacle is complexity and the associated costs. The EU’s Corporate Sustainability Reporting Directive (CSRD) includes 86 disclosure requirements and over 1,000 data points that companies must collect and report. According to a Workiva survey, 87% of ESG managers find adapting their reporting processes to new regulations challenging (source).

A proven approach is to evaluate different ESG software solutions using consistent criteria tailored to the company’s specific needs. It’s important that the software is scalable and can adapt to dynamic ESG requirements.

Data security also plays a central role. Measures such as data encryption and role-based access controls are essential. Especially in Germany, where data protection is highly valued, these aspects must be considered from the outset.

Expert Support for Tailored ESG Solutions

External expertise can be crucial for overcoming these challenges. 42% of global CEOs report difficulties in communicating a compelling ESG strategy to their stakeholders (source). This highlights the importance of professional advice.

Fiegenbaum Solutions offers ESG and climate tech strategies tailored specifically to M&A transactions. Services include identifying areas for improvement, developing strategies for more efficient resource management, and fostering a sustainable corporate culture.

Support with ESG-specific due diligence is particularly valuable. It’s recommended to outsource these reviews to specialists, as they have the expertise needed to assess complex sustainability risks.

Ongoing vendor support is also essential to ensure the long-term success of the investment. In a constantly changing regulatory environment, continuous support ensures the software is used optimally and adapted to new requirements.

By working with experienced consultants, companies can benefit from best practices and industry knowledge. Sustainability is not just a goal, but a central driver of innovation and business growth. With solid expertise and tailored solutions, these potentials can be fully realized.

The Future of Climate Tech in Corporate M&A

The rapid development of the climate tech sector is fundamentally changing strategies in mergers and acquisitions (M&A). Between 2021 and 2024, this sector saw M&A deals worth a total of $170 billion across more than 750 transactions (source). This momentum will only accelerate with further regulatory changes and technological advances. Below, we look at the key regulatory frameworks and technological developments shaping the market.

Regulatory and Investor-Driven Changes

Increasing complexity in ESG, antitrust law, and foreign direct investment presents new challenges for companies in M&A deals. German companies and private equity firms are expected to take a leading role in 2025, as they increasingly focus on sustainable growth and long-term value creation. Two-thirds of German organizations plan to minimize risks and use resources efficiently through joint ventures or strategic alliances (source).

The EU Foreign Subsidies Regulation (FSR) gives the European Commission the authority to review subsidies that could distort competition—a factor that directly affects M&A transactions. In addition, the European Economic Security Package proposed in January 2024 aims to further harmonize rules for foreign direct investment within the EU. Investors are increasingly focusing on companies with a solid track record, strong management, and clear growth plans. At the same time, the market is shifting from a seller’s to a buyer’s market.

New Developments in ESG Technology

The merging of ESG reporting and carbon management software is significantly transforming the climate tech landscape. ESG reporting software providers are increasingly integrating carbon management features, while carbon management solution providers are adding ESG tools to their portfolios. This trend reflects the need for consolidated and unified systems. Such advances enable more precise ESG due diligence and expand valuation approaches discussed earlier.

Artificial intelligence and data analytics play a central role in optimizing data collection, reporting, and understanding carbon emissions. Global spending on ESG reporting software is expected to grow from $1.4 billion in 2023 to $4.3 billion in 2027 (source). Additionally, integrating EHS and ESG data enables companies to manage sustainability, employee health and safety, and environmental compliance programs more holistically. In the first half of 2024, carbon management software providers raised $175 million. These technological advances lay the groundwork for strategic decisions, which are explored further in the next section.

Steps to Competitive Advantage

Strategic M&A activities in the climate tech sector aim to acquire advanced capabilities, increase efficiency, and develop innovative solutions. Over 80% of M&A deals in this sector are conducted by strategic buyers (source). Decision-makers should closely align their M&A strategies with the company vision, including geographic presence and its impact—always with the goal of creating measurable value.

European startups dominate the climate tech market, accounting for 53% of global M&A deals, while North America represents 37%. This gives German companies a clear advantage, as they can benefit from Europe’s strong position in this sector.

Additionally, the use of generative AI offers new ways to optimize M&A outcomes, while alternative deal structures can help reduce risks and costs. Thorough regulatory due diligence is just as essential as developing integration strategies focused on employee retention and harmonizing management practices.

The transition to green energy generation—with the goal of reaching an 80% share by 2030—and ongoing digitalization under Industry 4.0 are driving investments and M&A activity in Germany and Europe. Companies that act early can benefit from the efficiency gains of the new energy system and the advantages of sector coupling (source).

FAQs

How does climate software help improve ESG performance in M&A transactions?

Climate software enables companies to manage and improve their ESG performance in a targeted way. It allows for precise collection, analysis, and optimization of environmental and social data. Typical features include CO₂ accounting, sustainability reporting, and ESG risk assessment. These tools help make due diligence processes more efficient and assess sustainability aspects more transparently. According to a Verdantix study, companies using advanced ESG software report a 30% reduction in time spent on due diligence and a 20% improvement in data accuracy (source).

With these technologies, companies can significantly increase their attractiveness to investors. At the same time, they support informed decision-making, which often leads to higher company valuations. In some cases, exit multiples can even rise by up to 200%.

What legal requirements must companies consider when using climate software in M&A transactions?

When using climate software in M&A transactions, companies must comply with all relevant data protection laws, especially the General Data Protection Regulation (GDPR). This is particularly important when processing sensitive environmental data.

In addition, the requirements of the EU Green Deal initiatives and the Corporate Sustainability Reporting Directive (CSRD) must be observed. These regulations demand greater transparency, more precise ESG reporting, and improved data quality. It is also crucial that the software algorithms used are transparent and secure to ensure both legal compliance and trust in the results. For a practical overview of CSRD compliance, see this guide.

How can companies benefit from climate software in M&A processes, especially through decarbonization models?

Decarbonization Models in Climate Software: Benefits for M&A Transactions

Integrating decarbonization models into climate software brings a wide range of benefits to companies in M&A transactions. A key advantage is the improvement of the ESG rating. By precisely analyzing the carbon footprint and promoting sustainable business practices, companies become more attractive to investors who are increasingly focused on sustainability. For example, a recent S&P Global study found that companies with robust decarbonization strategies are 40% more likely to outperform their peers in post-acquisition value creation (source).

Additionally, these models help identify risks early. Potential environmental liabilities or regulatory challenges can be identified and addressed before they become issues. At the same time, they help companies optimize their sustainability strategies. The result? Increased company value and the potential to achieve higher exit multiples—in some cases, up to 200% above average.