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Global green consultancy market to hit $1 billion, but is it in a lull?

Spending on sustainability consultancy by the world's largest firms is set to hit $877 million this year, before growing to more than $1 billion in 2019. But despite solid growth, the market is struggling to live up to the expectations of some of the world's largest consultancy firms.

That is the conclusion of a major new report by independent analyst Verdantix, which suggests many corporate sustainability department budgets still require significant input from other departments to fund consultancy projects.

The report is based on an analysis of more than 5,600 blue-chip firms with revenues of over $1 billion in nine countries. It is backed by a survey of more than 260 heads of sustainability across 13 territories and interviews with 12 leading sustainability consultants.

It paints a picture of a sector in reasonable health, predicting sustainability spend by the world's largest firms will continue to grow at four percent a year through to 2020. Supply chain and resource management, energy management and risk and compliance engagements will continue to dominate consultancy spending, accounting for about two thirds of the market.

Meanwhile, a number of areas are expected to exceed the baseline growth, as companies respond to new environmental regulatory requirements and a growing number of firms seek to emulate the likes of Apple, Unilever and IKEA by adopting company-wide sustainability strategies.

Similarly, the market could see pent-up demand in China and India unleashed, given the two emerging superpowers currently account for just 19 percent of global sustainability consultancy spending.

Past, present and future

"Ten years ago, the sustainability consulting market didn't exist as a separate category of consulting work," said Yaowen Ma, Verdantix analyst and author of the report, in a statement. "That's not true anymore. In 2015, large corporations will spend $877 million on management consulting advice relating to sustainability reporting, energy efficiency, sustainability risk assessment, sustainability strategy, sustainable supply chains and product sustainability."

However, the report also highlighted a number of challenges faced by sustainability consultancies and the in-house sustainability executives who often appoint them.

"This is not the booming market that the Big Four accounting firms and other consultants expected or hoped for," Ma added, noting that four percent growth a year is below the trend growth rate for the major consulting and accounting firms. The report also reveals that spend per firm on sustainability consulting averages just $150,000 to $200,000 a year, a level that is deemed "well below ideal deal sizes for management consultants."

Departmental divides

Speaking to BusinessGreen, Ma said the main challenge faced by sustainability consultancies is that they often need to secure buy-in and budget from a host of different corporate departments if they are to proceed with a project. "The market is complex and rapidly evolving with budgets hard to find or come by," he admits, explaining how spending on green consultancy projects can be sourced from up to 10 departments in addition to the sustainability department.

The report details how heads of sustainability were responsible for $423 million of green consultancy spend last year, representing just over half of the market. The remainder of the market came from a host of different departments, including health and safety, facilities management, finance and investor relations, human resources management, IT, legal, marketing, business unit operations, procurement and supply chain and risk and compliance.

There are also no guarantees that sustainability departments represent the best first port of call for consultants. The report says that sustainability executives often influence purchasing decisions, but there is huge variation in the level of budget they control. Ma said sustainability departments' consultancy budgets varied from nothing, in four percent of cases, to more than $15 million for five percent of departments. Just under two thirds of departments occupied a middle ground with budgets of up to $2.5 million a year.

Ma also revealed there was little confidence among sustainability executives that these relatively modest consultancy budgets will increase any time soon. "Globally, 63 percent [of respondents to Venantix's survey] expected no change in sustainability consulting budgets and only 14 percent expected one to four percent increases," he said.

Sustainability slips in

However, no one in the green consultancy market is despairing just yet. Several sources BusinessGreen spoke to agreed that the "visible" sustainability consultancy market was experiencing only modest growth, but the skills offered by green business consultants are seeing significant demand from projects that are not necessarily badged as "sustainability" initiatives.

Speaking to BusinessGreen, Malcolm Preston, global leader for sustainability and climate change at PwC, said he was "not surprised that the 'visible' market does not appear to be growing." He said the sustainability consultancy market appears to be polarizing into a siloed service for the sustainability department where budgets remain "relatively small" and wider strategic program that affect an entire business and are therefore not necessarily regarded as sustainability spending.

"I would agree that the 'pure sustainability consulting market' is not booming," he said in an email. "But I would hate people to think therefore that the sustainability issue is not becoming more mainstream – that is absolutely not true. More and more organisations are taking sustainability more seriously... If you want a little anecdotal evidence, we have hired another five environmental economists since the start of the year. We wouldn't do that if we thought it was a stagnant market."

It is a view shared by Stuart McLachlan, chief executive of green consultancy specialist Anthesis Group, which this week completed its sixth acquisition of a sustainability advisory firm in the past 18 months. "Budgets are being increased but are being reallocated to business lines as sustainability becomes a mainstream business issue," he said. "Is a supply-chain risk project a sustainability project or is it a wider business transformation project? Different companies will label it differently."

The trend is identified by Verdantix's report and Ma acknowledges that the company's predictions for the size of the market could prove to be on the conservative side, once sustainability-related initiatives are included. "As firms begin to embed sustainability, we do expect projects traditionally classified elsewhere, such as enterprise risk management, to integrate sustainability factors," he said.

Where to watch for growth

There are also several parts of the conventional sustainability consulting market that are tipped for significant growth. Retail and manufacturing are expected to see growth of five percent a year, as the reputational and legislative pressures that have forced many retailers to undertake more comprehensive environmental audits of their supply chains filter through to affect manufacturers.

Similarly, the report predicts India's green consultancy market will grow at about seven percent a year, as companies respond to the country's 2013 Companies Act CSR, which requires large firms to invest two percent of their revenue on CSR initiatives. Ma said the regulations were leading to something of an arms race between leading Indian firms as they competed to deliver the most far-reaching sustainability initiatives.

Sustainability consultants and executives may face an increasingly complex landscape and budgetary pressures may be as pronounced as ever, but the long-term outlook for the green consultancy market remains encouraging. You just have to know where to look.

This article first appeared at BusinessGreen.

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