Climate software: Why I’m keeping my eye on Watershed

TL;DR

• Treaties and targets such as the Paris Agreement and net zero by 2050 are meaningless without an ability to accurately track and report progress, which is also critical to stamping out greenwashing practices.  

• Climate accounting is a rapidly growing segment of the sustainability market, with demand for this type of software set to hit around $65 billion by 2030.  

• Watershed is a pioneer in this field. Set up by Christian Anderson, Taylor Francis, and Avi Itskovich off the back of a whiteboard brainstorming session in 2019, its recent funding round valued the company at $1.8 billion.  

• Leveraging data and a suite of analytical tools, Watershed’s climate accounting solutions help companies such as Walmart, Airbnb, BlackRock, Shopify and General Mills to accurately track and analyse where they can cut down their emissions.  

• Climate accounting capabilities are critical in the ongoing energy transition and journey to net zero. Without them, we stand little chance of measuring progress and formulating optimised carbon reduction strategies.

The detail

I have been following the fortunes of Watershed pretty closely of late. With a simple premise centred around helping companies calculate and analyse their environmental impact, the company’s tools and services have now entered the mainstream. Only a few years ago, it felt like this sort of endeavour was on the fringes.   

Before we get into Watershed and why I believe it is one to watch, it is useful to lay out some context. By understanding the backdrop and how it has changed, it will be easier to grasp why the company has gone from zero to unicorn in rapid time.  

Treaties and targets such as the Paris Agreement and net zero by 2050 are meaningless without an ability to accurately track and report progress.  

Transparency is crucial on so many levels. Not only does it enable us to measure emissions and analyse the impact of policies and actions, but it also allows us to overcome and expose the malpractice of greenwashing.  

I’m talking about the deceptive practice of companies falsely portraying their products or services as environmentally friendly. It involves making misleading claims, using vague labels like ‘eco-friendly’, or selectively disclosing positive environmental information while omitting negative impacts.  

We must eliminate greenwashing because it undermines genuine efforts to become more sustainable – it erodes consumer trust and gives an unfair advantage to misleading organisations their customers, investors, suppliers, employees and other stakeholders.  

What’s more, greenwashing slows progress in addressing critical environmental challenges like climate change and pollution. Enabling transparency, alongside stronger regulations and consumer awareness, is crucial to crushing this malpractice and therefore driving meaningful environmental progress towards key targets such as net zero, and global agreements like those struck at COP conferences. 

Businesses and other organisations need transparent reporting capabilities to verify ESG claims and credentials, not least because these criteria are becoming increasingly important to various customers and investors. As somebody involved in the energy space and the finance that sits around it, I know all too well how important ESG has become to those seeking to invest their capital. Today, it’s not just about making a return, but a sustainable return - ‘capital for change’.    

The rise of climate accounting  

These trends have given rise to the emerging profession of climate accounting. Put simply, it involves measuring, reporting and verifying an organisation's greenhouse gas emissions and its impact on the environment.  

In a few short years, it has risen in prominence to become a crucial component of effective climate change mitigation and adaptation strategies. Climate accountants and accounting tools can analyse data related to an organisation's energy consumption, transportation, waste management, and other activities that contribute to its carbon footprint.  

The end goal is transparency – to provide accurate and transparent information to support decision-making, identify areas for improvement, and ensure compliance with environmental regulations and standards.  

In terms of the figures, the direction of travel around climate accounting is clear. It’s growing fast. One forecast estimates that the market for climate accounting software will jump from around $12.7 billion in 2022 to almost $65 billion by 2030, representing a compound annual growth rate in excess of 28%.  

The big consultancies are, not surprisingly, getting stuck in. In the summer of 2022, McKinsey launched Catalyst Zero. PwC has Carbon Ledger, while KPMG launched its blockchain-powered Climate Accounting Infrastructure in 2023.  

What is the fuss about Watershed? 

Watershed is now having to jostle in a market containing giants, but continues to gain the sort of traction that is making it very difficult to ignore.  

It had something of a first mover advantage by setting up in 2019. Today, Watershed’s global database covers every region and contains more than 500,000 emissions factors picked up from multiple years of climate data.  

Its customer base is enormous and contains a lot of household names – Walmart, airbnb, BlackRock, shopify and General Mills, maker of Cheerios, to name but a few. Combined, Watershed clients manage a greater environmental footprint than the annual emissions of France.  

However, its ambitions don’t stop there. By 2030, Watershed wants to have reduced or removed 1% of emissions worldwide. 

I like the company and its founders – Christian Anderson, Taylor Francis, and Avi Itskovich – because they're not trying to reinvent the wheel. They are providing a real, practical and commercially focused solution to help companies make better decisions and implement decarbonisation measures. It obviously works, because all of this has happened since 2019.  

Watershed’s portfolio includes carbon accounting software, emissions tracking tools, and scenario modelling capabilities, among other things. By leveraging data analytics and machine learning algorithms, its tools enable users to accurately measure their carbon footprint, identify areas for improvement and develop strategies to reduce their environmental impact. 

Climate accounting software remains the hero product. It allows organisations of all shapes and sizes to track and manage their greenhouse gas emissions across the entire supply chain. This is critical given reporting requirements across industries are steadily expanding to include Scope 3 emissions.  

Watershed’s software provides users with real-time visibility into their emissions ecosystem, helping them identify hotspots and prioritise emission reduction efforts. By integrating with existing data sources such as energy bills, transportation records, and procurement systems, it offers a comprehensive approach to emissions tracking and reporting.  

Investors are queuing up   

As well as a France-sized customer base, Watershed is also attracting significant attention from the investment community.  

In February, it completed a $100 million Series C funding round that valued the business at $1.8 billion – remarkable for a company which is barely five years old. Household names such as Sequoia Capital, Kleiner Perkins, and Galvanize Climate Solutions participated in the round, which was led by Greenoaks.  

Watershed plans to use the investment to gain a stronger foothold in Europe, where emissions reporting regulations set by the European Union present fertile ground for it to bring tremendous value to organisations doing business in the region. The company also intends to use the investment to develop a more granular form of emissions measurement and ‘audit-ready’ sustainability reporting capabilities.  

Investors are drawn to Watershed because of its practical approach to helping companies with climate commitments and addressing the climate crisis. It does so in a way that not only fulfils ESG reporting criteria, but also makes commercial sense. All too often the debate is around cutting emissions or saving money – Watershed proves genuine sustainable progress can be more easily attainable and commercially viable.   

Set against the ever-advancing regulatory backdrop of regions around the world, it is obvious why investors are lining up to back companies like Watershed which provide real answers and solutions to ensure organisations remain compliant.  

Serious people are involved 

Being valued at $1.8 billion, for any company, is an impressive feat. What makes Watershed all the more remarkable, however, is that it started out as three friends scribbling down their ambitions on a whiteboard in Anderson’s spare bedroom in 2019.  

They all had left their jobs at Stripe to come up with a solution that could help reduce global carbon emissions – giving themselves 10 days, the trio would then commit to the best idea and form a company around it.  

That company now operates with a team of nearly 300 people working out of offices in San Francisco, New York and London.  

Alongside them is an advisory team made up of extreme and enviable pedigree. Christina Figueres is a former UN Climate Change Executive Secretary and Chief Negotiator of the very Paris Agreement I referred to at the beginning. Mark Carney is the UN Envoy on Climate Action and former Governor of the Bank of England. Mary Schapiro is the former Chair of the US Securities and Exchange Commission (SEC). I could go on. 

Climate transparency is becoming the norm 

Watershed and its founders picked a moment and ran with it. The timing was perfect, and few will have predicted how fast the company has surged to prominence.  

Their story reflects a wider trend, one which they have also contributed to driving, which is seeing organisations take emissions transparency seriously. With regulatory bodies tightening up their reporting requirements and key stakeholder groups such as customers and investors favouring sustainable entities, climate transparency is going mainstream.  

This is a positive development that I strongly support. If we are to become serious about net zero and the energy transition journey, solutions such as those provided by Watershed must become universally adopted.

— Lew 👋

As ever your feedback is important to me. Please help by letting me know what you love or what you think can improve.

The Transition’s work is provided for informational purposes only and should not be construed as advice in any capacity. Always do your own research.