Behind the Deal: Blackstone’s Investment in Sphera

In recent years, environmental, social and governance (ESG) practices have become a priority for investors and consumers alike. Money allocated to ESG-related investments has increased 25-fold from 1995-2020, and total assets under management (AUM) in the space reached $41 trillion last year. As long-term, thematic investors, we see immense opportunity to use our capital, scale and resources to advance ESG objectives that drive value for our investors—from backing renewable energy providers to launching hiring programs for untapped talent pools across our portfolio. As these efforts expand, we’re also focused on measuring our progress to help maximize efficiency and economic impact.

We doubled down on that commitment with our private equity business’ investment in Sphera, a fast-growing provider of ESG software, data and consulting services with more than 3,000 clients in over 100 countries. We sat down with Eli Nagler, a Senior Managing Director, and Martin Brand, Head of North America Private Equity and Global Co-Head of Technology Investing at Blackstone, to discuss the story behind the investment and the role Sphera is playing in helping Blackstone advance its ESG efforts.

What does the ESG landscape look like today? How have businesses and consumers’ attitudes towards ESG evolved in recent years?

Martin Brand: Companies and consumers today are dramatically more focused on ESG than they were even just a few years ago. It’s no longer a nice-to-have—it’s a must-have.

The ESG software and data market currently stands at just about $1.2 billion in total. That is orders of magnitude smaller than, for example, the market for financial software and data, but it is growing rapidly as companies, and in many cases their investors, are increasingly recognizing the importance of incorporating climate change and other ESG factors into their decision-making and reporting. This has led to huge and growing demand for services that help companies measure and track their ESG footprint.

Eli Nagler: We know from experience that ESG is an important tool to strengthen companies, and in turn deliver strong returns to our investors. But beyond good business practice, it’s also an important tool for attracting top talent and people who want to work for a mission-driven company.

Where does Sphera sit in this evolving ESG landscape?

EN: Sphera is a leading provider of software and data in the ESG and sustainability space, focusing on a few different areas. First, they offer corporate and product sustainability, giving businesses the ability to measure, analyze, and report their emissions. Second, Sphera helps companies assess their operational risk and manage, oversee and mitigate that that risk over time. Finally, they help companies with broader regulatory compliance, particularly as it relates to safety management, ensuring that goods are manufactured and produced according to the appropriate standards.

What sets Sphera apart from its competitors in the ESG data space? Why did you choose to invest in this company?

EN: What excites us so much about Sphera is that they offer emissions measurement and reporting at the product level in addition to the corporate level. They help their customers take a granular look at a given product’s components and manufacturing processes and measure its environmental footprint, down to the individual unit. This is possible not only because of the software platform they’ve developed, but also because of the trove of proprietary underlying data that the company has been able to amass over time. As a result, Sphera can serve large, enterprise clients at scale without sacrificing the level of detail needed to work through these companies’ complex, unique challenges. And that’s what really differentiates them in our view.

How did the deal come together?

EN: I sat down with Paul Marushka, Sphera’s CEO, in early 2020, long before we invested in the company. Blackstone had taken a look at what was out there in the ESG software space and concluded that there were only a very select group of companies that were scaled and high-quality enough for us to consider. We decided to move forward with Sphera because of the strength of their management team and leadership.

In those early discussions we emphasized the portfolio company network effects and portfolio operations capabilities that Blackstone can offer its companies—for example, data science—that got Paul excited about partnering with us. Focusing on those relationships with management from the start is what enabled us to announce an agreement to acquire the company before outside bids had even been made.

What’s been your experience working with Paul?

MB: Paul had a vision for Sphera’s growth from the start. Prior to our investment he had led a series of very smart strategic acquisitions in the sustainability space, combining software platforms and other complementary products. As we mentioned previously, customers’ and other stakeholders’ expectations around ESG have really evolved in recent years, and Paul has done a fantastic job of staying attuned to those changes. We’re looking forward to continuing to support his vision and strengthening the company to meet the evolving needs of this marketplace.

Where do you see opportunities for Blackstone to help strengthen the company and support the management team?

EN: We believe this is a company that benefits from long-term tailwinds, so we’ve accelerated investment in new products in 2022 – and we plan to continue that spending to make sure we remain a product-market leader. We’re also partnering with management to find acquisitions that can expand the list of services Sphera can offer its clients and further build upon its platform.

MB: In today’s environment, talent is critical, so that’s also been a top priority for us. So far, we’ve recruited two independent directors and a new chairman for Sphera’s board. We’re also helping identify several new senior executive hires to support Paul.

What role is Sphera playing in ESG initiatives at Blackstone and across its portfolio?

EN: In 2020 we announced a portfolio-wide emissions reduction target, and Sphera is well-positioned to be a software vendor and data supplier to several of our portfolio companies as we collectively work to achieve those emissions reduction goals. This is especially true for our companies whose operations are more complex – for example, those in manufacturing.

Sphera has also been able to work alongside our own internal operations team, including our Chief Sustainability Officer, Jamie Mandel, and Amisha Parekh, Head of ESG for Private Equity, to help identify the most value-add opportunities across the portfolio, enable innovation, and help establish a baseline of our current footprint as we work to achieve our target.

MB: As investors, our primary goal is always to partner with management teams to help their companies scale and become aspirational. Beyond the operational resources we’ve provided Sphera, we’ve also been able to bring them onto this huge effort that we believe will make Blackstone’s entire portfolio stronger and more sustainable. We’re looking forward to working with Paul and the entire team at Sphera as we pursue these ambitious goals.

Hear more from Sphera’s CEO, Paul Marushka, below.