Can Watershed corner the carbon accounting market?

Jhe is the hottest thing in business depends on where you are. San Francisco bars tend to be buzzing with discussions about enterprise software. Pub-goers in the City of London can discuss sustainable investing, and in particular environmental, social and governance concerns (esg) The factors. Combine the two topics and you have a winner, both as a topic of conversation and, hopes Watershed, a fast-growing climate software startup, as a business proposition.

The watershed seems an unlikely topic of heated discussion. It helps companies measure and report their carbon emissions. It is, in other words, a firm of carbon accountants, which is not usually a profession to beat the pulse. What makes it exciting is its potentially large market. More than a third of the world’s investable assets, some $35,000,000, are in the esg umbrella, and a lot of that is mostly about the e. Someone has to count the emissions from all these assets. And Watershed could be someone, counts a group of Silicon Valley personalities (John Doerr of Kleiner Perkins and Michael Moritz of Sequoia Capital, veteran venture capitalists, co-led its latest funding round) and beyond (Mark Carney, former Governor of the Bank of England turned climate warrior, is an adviser). In January, the company raised $70 million at a $1 billion valuation.

Companies emit carbon directly (by operating a fleet of vehicles, for example). Most also buy electricity from the grid, which can come from fossil fuels. And they are at least partly responsible for the emissions produced upstream and downstream of their value chain. This particular indirect type, known as ‘scope three’, makes up the bulk of most companies’ carbon footprint. It is also extremely difficult to measure, especially across a complex web of suppliers and customers. Watershed’s algorithms ingest information about line items in its customers’ books and combine it with data on the carbon cost of those activities. The result is a granular picture of a company’s carbon footprint, says company co-founder Taylor Francis.

The market for carbon accounting technology could benefit from a regulatory boost. In the United States, the Securities and Exchange Commission has proposed a rule that would require certain companies to report their scope three emissions. The European Union has released broader rules that, when implemented, could subject nearly 50,000 companies to reporting obligations. Some companies will try to do this on their own. Many will use specialists like Watershed.

The company is already facing competition. Persefoni have, an Arizona-based startup, is popular with finance companies. Enterprise software giants like Salesforce and ibm can get in on the action. As for the demand, regulators could get cold feet or, in America, be forced to relax disclosure rules by the Supreme Court, whose conservative majority spy on executive branch climate excesses. For now, however, Europe is going full steam ahead and US investors are demanding more detail on companies’ carbon footprints, no matter what the judges think. Mr Francis says Watershed’s client list includes big names in tech (eg Stripe and Spotify) and, more recently, retail (Walmart). How’s that for a conversation starter?

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