Isobel Wild [00:00:07]:
This is the state of sustainability podcast brought to you by altruistic. What's in store for today? So in today's episode, we're actually going to lean into the economics behind sustainability mainly through two ways. One, we're going to look to the headlines and actually dig into the viability of circularity, specifically looking at the recent clothing resale market surge and how initiatives like this can actually be set up to deliver on profits. We'll then go into a topic deep dive and focus on carbon pricing, looking at how to set one, especially when you have varying levels of data availability. Saif. Hey. How are you doing?
Saif Hameed [00:00:49]:
I'm good, thanks, Izzy. It's been busy. It's a hectic time for us generally, because there's a lot happening in our market. And so we've been doing a lot this week, which has been fun, but also tiring.
Isobel Wild [00:01:01]:
Yeah, but it's always a good sign when you're busy in sustainability, because it means something good must be happening.
Saif Hameed [00:01:08]:
Yeah, I think also we tend to come in mostly not midway into a company's sustainability journey, but usually we're coming in at an inflection point. So if a company is speaking with us about bringing in better data management systems, then it's usually that. We're usually not the first system a company gets, actually. They've either used consultants or they've had something in house, or they've used another provider. In some cases, actually, they've gone through two or three providers and we're now the third. And so if they're coming to us, there's usually some need for more granularity, there's some need for more actionability, there's some step change that they're making, and that's always quite exciting then to come into a company where that's the case. So it's fun times, definitely.
Isobel Wild [00:02:02]:
And on the note of something that's exciting, I think before we get into the body of the podcast, it would be amiss. Not to mention the case that was brought by 2000 swiss women this week to the European Court of Human Rights. For those who didn't pick it up, these women were arguing that Switzerland actually failed to protect their citizens from the adverse effects of climate change. Why is this headline news? It's the first time an international court has made a ruling on legal obligations of governments in the face of the climate crisis, which is super cool. And I think this puts a lot of pressure on other EU countries to revise their targets. So they are aligned to 1.5. Saif, what do you reckon the aftershocks, if any of this will be.
Saif Hameed [00:02:52]:
I think it's really interesting and really exciting from the perspective of an environmentalist. So if you just think about how legal systems work, the most important thing here is, of course, the precedent. It's not actually anything about the swiss case itself. It's not about these women who made a massive step forward for all of us, but it's actually just about the precedent that this sort of a case can go forward and can win. And I think that's going to have huge implications, certainly across Europe. But I would also expect around the world. One thing is, of course, and I'm kind of waiting to read through the fine print of this, but I think one thing is whether it's the government that's liable, but also whether the door is open, maybe to individuals within the government also being liable at some point. I think that could be really interesting.
Saif Hameed [00:03:44]:
I'm not suggesting that's the direction it should go in, but that would be an interesting one to see, because if you look at, for instance, the UK government, where we are, the UK government has very noticeably backtracked on its climate change program and its climate change actions. I think the first big step was the backtracking on electrification of transport targets and expectations. And I think that for a message to go out, that it is now open season, legally speaking, for governments to be held to task for what they're doing towards mitigating climate change, I think that's something that would potentially cause individuals in government to think twice, I would imagine. But I think part of it depends on whether the liability is individual or collective. If it's a liability on governments as a whole, then there could be a significant lag. Actually, the government of the day in the UK may not be the government of next year, may not be the government of after, may not be the one that's having to sort of pay the piper for this. So I'm waiting to see a little how that kind of plays out. I think it reminds me a bit of the french ruling.
Saif Hameed [00:04:53]:
Sorry, the french legislation recently, that directors of companies could also be held liable for their personal action. So I think this is all exciting space and. Sorry, just finally, I think it really has. It really reminds you of big tobacco, actually, and kind of reminds you of actions in the legal space around the late eighties, early nineties in the tobacco territory. So watch this space. Really?
Isobel Wild [00:05:19]:
Yeah. I think what you said there around France is really interesting because they also recently banned adverts from fast fashion companies like Sheen and others. And it's interesting how political groups as well, they're starting to use more nuanced arguments for climate change in their agenda to like push through to get more votes, to get more support behind them. It's going to be an interesting, interesting focus for us.
Saif Hameed [00:05:50]:
Judicial action is also quite different to legislative action. And what I mean by that is if you look at laws being passed versus action being taken by courts with legislative action, where a new act or a new bill of parliament, for instance, is passed, there's always a significant risk, I find, of backlash, where the next government could kind of bring it repeal or bring in something different. And the shelf life of legislation can in many ways be a fair bit shorter because it can kind of. It can change government to government. With judicial action, you have a bit of that, but usually the precedent is still going to be there knocking around for a while. And so the only way you can get around that is if a subsequent court, or the same court or a superior court, and in this case, I don't think that would apply, specifically says that the precedent is no longer valid because actually the underlying law was, was misinterpreted. Or if a parliament comes in and says this judicial decision is specifically contravened by this new legislation that we're bringing in, and I think that's a little harder historically for back to. It's less likely to trigger a backlash of that magnitude, if that makes sense.
Saif Hameed [00:07:05]:
I think it's less likely that a judicial act triggers new legislation coming in to specifically override it in this territory. And so I think there's a higher chance that this endures than specific acts of legislation within individual member states. So that was a long winded way of making that point, no?
Isobel Wild [00:07:25]:
Well, it was a great point to make. I'm going to move us on to market highlights. As I mentioned in the introduction, we're going to dig into secularity. Global sales of pre owned clothes surged by 18% last year to 156 billion, meaning that secondhand fashion is on track to reach 10% of global fashion sales next year, which is epic fact. This coincides with a lot of resale movement in the market. So Selfridges recently announced that they're expanding their fashion resale service, Rhys Selfridges, to all its stores in the UK to promote circularity. They're even introducing a 3000 square foot permanent circular fashion hub at their flagship store in London. And in that, they're consolidating a lot of circular fashion initiatives like Sojo repair, her rental vintage threads, and we are cow into one location.
Isobel Wild [00:08:21]:
And that's just a few of them, so it's a really exciting space. A core challenge for the fashion industry is how to decouple consumer demand for clothing, for raw material extraction. So scaling circular models like repair, resale, recycling, offers a new way forward. But there is a lot of uncertainty about what models offer the best outcomes and how these models can actually deliver profits. Saif, I'd love your take on resell and specifically how to actually make the economics of it work.
Saif Hameed [00:08:57]:
Yeah, it's a great question. Let's first, maybe Izzy just dive into the Selfridges example for a moment. So, Selfridges is an interesting case in that, as with most retailers, Selfridges has very little control over the emissions or the environmental impact of what they're selling, because they're a retailer. They don't manufacture their own product, they don't control the design palette, they don't control the sourcing or the processes, et cetera. The other restriction for Selfridges is that while they are a retailer, in some cases, some notable cases, their suppliers are a lot bigger than they are. It's actually very rare that you have that degree of asymmetry of bargaining power. Let me give you a different example. Tesco is smaller, I think slightly smaller, maybe, or a bit more meaningfully smaller than Unilever, which would be one of its larger suppliers.
Saif Hameed [00:09:49]:
But Tesco is a large enough share of Unilever's sales that that negotiation power won't feel asymmetric in Unilever's favor. I would suggest quite the opposite. I would suggest that the negotiating power is actually still tilted a little in Tesco's favor in the case of Unilever. And this is even more true in the case of Walmart. Walmart's bargaining power, negotiation power in the US particularly, is legendary. And Walmart can, in many ways, and to a great extent, dictate terms even to its largest suppliers. In the case of Selfridges, I believe the largest supplier is LVMH, which is many times the size of selfridges, and therefore Selfridges would struggle really to get, I would imagine, serious engagement from LVMH on what's happening in the sustainability direction, whether it's sharing data, let alone collaboration on key interventions. So in the case of Selfridges, you then have a slightly more limited toolbox on what you can actually do to move the needle.
Saif Hameed [00:10:51]:
You can nudge smaller brands or certain foods on smaller brands, but the whole stable of LVMH is a little harder to crack. One of the big levers as I understand it that Selfridges does want to push as way for it to control its own footprint, is therefore resale and reuse. That is a good way for Selfridges to manage its own emissions, much in the same way that waste reduction is a good lever. If you think about waste reduction, and we've talked about this in previous episodes, Izzy, and I'm going to come back to resale and reuse, but if you think about waste reduction, it happens right at the tail end of the chain. And so when you're reducing, let's say, in store waste, let's give the example of the flour sector, which, as you know, I used to dabble in. If you think about florists, just as a way to make the point, very simply, florists have a wastage rate of around 25 30%, which means that the flour in the shop, one in three times, one in four times gets thrown away. And the flour in the shop is at the end of the chain. It has been grown somewhere probably in, like, Kenya or Malaysia, it's been transported around the world, it's landed in the market, it's been picked up by a trader, it's been brought to the store, it's been cut and prepared and presented, and then one in three, one in four times, it's thrown away at the end of that entire lifecycle, embedding all the fertilizer, pesticide, farm work, transport, et cetera.
Saif Hameed [00:12:19]:
And the same process is true if you come back to the resale and reuse space in apparel. The same thing is true there, which is you can get another run on the entire material footprint of the product. And so it's a great way to fractionalize the environmental impact. It's a great way to just, like, have it. Not quite have it, but almost have it. If you get another turn. The more turns you can get, the more you can just drive the material impact down. And so it's a great way for Selfridges to actually drive impact.
Saif Hameed [00:12:50]:
The other thing is, it's a great way to build stickiness for customers as well, because you get the customer coming back into the store to drop off the old item, pick up the new item, etcetera, whether it's an online relationship or a physical one, it turns what is a transactional engagement from an individual customer walking in, buying something, walking out, to a repeat model, which is quite exciting commercially.
Isobel Wild [00:13:15]:
So I remember last year, there was a flurry of announcements of fashion brands announcing, like, a new resale platform. So, pretty little thing. Zara, alongside others, did it a lot. There's been quite a bit of criticism around the resale model as, like, people branding it as sustainable, when actually there's questionable, like, kind of intent behind it. Like, is it an easy fix? And especially if your operating model extracts a lot of raw materials you have. I know in Sheen's case, you have 7000 products a day or something that'll be produced like mad numbers. What do you think around the communication of your resale initiative to make sure it's not, you know, scathed or, or otherwise?
Saif Hameed [00:14:00]:
Yeah, I mean, issy, can you remind me of what the negative press was around the resale specifically? Because I know, obviously, I mean, Shein gets a lot of bad press a lot of the time for a lot of stuff, and I think in many cases, rightly so. But what specifically was the resale backlash?
Isobel Wild [00:14:17]:
I think they were saying that it's greenwashing because they're launching these initiatives, but actually the lifespan of a lot of their clothing doesn't last long enough for somebody to actually want to return it, or because it's such low cost like you're buying it, there is very marginal uplift of you returning it. So what's the point of having a resale platform if the usage is likely to be very low? Because it doesn't match your business model? Whereas in the case of Selfridges. Selfridges, you know, the stuff you buy from Selfridges, it's like a one time purchase. They're special purchases. So by bringing it back, you will get more value out of it.
Saif Hameed [00:14:54]:
Izzy, this reminds me of these socks I used to buy from CNA as a kid. And CNA shut down in the UK, so most people maybe don't know CNA, but it's big in the Netherlands. And I used to get excited as a little kid by these cartoon socks at CNA. And so I would excitedly get these, like, whatever, Simpsons or something else, you know, these socks, and I would sort of like, pull on the sock excitedly. It looked fine. And then I would wash the socks and I'd wear them again. And by the third time I was pulling on the socks still, you know, excited with the big grin. They're just ripping my hands, rip open.
Saif Hameed [00:15:27]:
And this, like, invariably happened, pair after pair, that I would get. And it was so frustrating that you could just never get more than three or four uses out of this. I don't know if it was me doing something wrong or my feet, but that was just the memory, the deep seated trauma that that brought out in me. There's an interesting parallel here, if I can digress for a moment, in light weighting in plastic packaging, and this seems far, far removed, but let me bring it back for a moment. If you think about the plastic bottle, let's say a mineral water bottle or a beverage bottle, for instance, the shift over the years has been towards using less and less plastic in the bottle, which means that really, there's probably like a thimbleful of pet in most plastic bottles used around the world now. As a result, the value of that bottle from a recycling or reuse perspective declines. Actually, the more mass you take out of it, because it's just less durable, less likely to survive in a reuse model, even if you could get the hygiene requirements to be high enough, and in a recycling model, the value within that is just lower. So if you think about what it would take to make a Shein product, let's say, to give it three times the lifespan, you'd also be using much more material, I would imagine, or better quality material, you'd probably have an increase in the environmental impact there as well.
Saif Hameed [00:16:50]:
I think that there's probably, I would hazard a guess to say that there are probably two business models here. One is the reuse model, which I think is probably well suited to companies like Patagonia that are going for durability and that are trying to make products that are sort of built to last or built forever. And there's a lot of brands out there that are making these sort of keepsake products that you can get a decade or more of use out of. Think about, like your doctor Martin's boots. Think about the old blue jeans, right? Or the favorite leather jacket or denim jacket, that sort of stuff. We had a conversation with Ghani. Right? Izzy, at some point you were mentioning where actually no one wanted to resell their product. So I think for those sorts of models, a resale model or a reuse model could be very effective for the products that have a lower shelf life.
Saif Hameed [00:17:44]:
I think there's still a good recycling model to be had there, which I think is worse. Like, let's. In the hierarchy, if you look at like an Ellen MacArthur foundation butterfly chart hierarchy, for those who've seen that you do want to try and reuse the product in its form as far as you can, but recycling it is still going to be better than throwing it in a mixed bin. And so I think there is still a strong case for saying, both sustainably and commercially, can you get the consumer or the customer back in to return the product and the product can then be recycled versus just having them throw the product in the bin in a mixed bag garbage format, which is probably what's happening still quite a lot of the time.
Isobel Wild [00:18:30]:
Yeah, and I think that kind of highlights the logistical issues around it and how that is a big pain point. I was speaking to Chris Allen at Decathlon, and I think decathlon have a really great circularity model. So they have launched one specifically with their bikes. Because obviously they sell a lot of bicycles for all ages, for children, for teenagers, all of that stuff. And so people grow out of their bikes very quickly. And the structure that they've set up is great, because when you return your bike, you obviously get points in the system, like the classic model, where you can then use those points to have to purchase a new bike or something else from the store. But he was mentioning that the main issue with it is that you have to have in store experts to be able to actually, like, upgrade these bikes, make sure there aren't any of those, you know, any wear or tear issues to make them look good enough to then resell. But because of Decathlon's market, who most people go to decathlon for, like, affordable sports care, this actually makes loads of sense for them.
Isobel Wild [00:19:33]:
Because they mean that. It means that when they actually resell the bike, they can do it at a lower price, which then means it's more. More accessible to other people. And obviously, there are upfront costs in terms of setting up these initiatives and making it work at scale. But I think being able to match your initiatives with your market in that, like Chris has done, that is great.
Saif Hameed [00:19:54]:
Just to dwell a little on the commercial angle for this. I think there are a few nice ways to make it work commercially as well. Like the Gathlon example is a really good one of a mainstream brand doing this at scale. But building that ongoing customer relationship and using credits to roll over to the next purchase. I think one of the brands that does this most effectively is Apple. Actually, when Apple started doing this, it was manufacturing innovation, as I understand, it was to try and get the material parts back. So you can actually reduce or limit a little your reliance on the supply chain for new materials. You also end up getting a lock in, because if you can return your iPhone and get a discount on the next iPhone by virtue of returning it a, you are less likely to switch to a Samsung Galaxy.
Saif Hameed [00:20:46]:
But also the value of the return diminishes the longer you keep the item that you're returning. Which means you're incentivized to bring back a newer iPhone. To get the newer model, as in the credit actually works in your favor, rather than waiting five years and then returning an older form and getting a smaller share of credits. I'm not suggesting anyone do that either way, but I think it's an interesting way to create a commercial loop. At the other end of the spectrum, I'm a small investor in a company called Buy Rotation, and we've had them on a previous iteration of this podcast, and I think that's quite interesting in a slightly different direction, where buy rotation creates a bit of almost like a cult like feel, where you're sort of following individual people. You can kind of use individual people's wardrobes and it creates a community vibe where you feel like you're part of an exclusive group in a way, and part of a set. And I think there's just a lot of potential for either of those two models to be quite successful. And I think we're entering a time where two trends are going to turbocharge this.
Saif Hameed [00:21:56]:
One is the desire to build long term recurring relationships with customers that are more a sense of their personal identity by virtue of the longevity of the relationship and the repeatability of the interactions between brand and consumer. And I think the other is also linked to identity, where more and more people want to feel like they're part of a group of some sort, and they're part of a group with certain influencers at the core of it and certain trendsetters at the core of it. And I think that also lends itself very well into a reuse model within those closed communities, which a number of brands are also experimenting with. So I find both of those trends quite exciting for the reuse world.
Isobel Wild [00:22:38]:
So if I was a sustainability professional working in a retail parallel company, and I wanted to launch a circularity initiative, and I was making the business case, just to summarise what you've just said, and then please add on, because I would miss them. The main two kind of value props that you've got in your toolbox are the brand value that it can create in terms of customers and what you can give to your customers in terms of how they can almost virtue signal that they are a green, sustainable buyer. And then secondly, the commercial circular buying loop with your example with Apple, people will get sticky and they will come back for more because there's an incentive to stay within that business. Have I got it there or are there any others that you'd like to add?
Saif Hameed [00:23:22]:
So, Izzy, I would actually be tempted not to talk about the sustainability of it at all. Actually, if I was trying to get a circular initiative to work in a business, I would focus either on some element of the supply chain. Like actually we're reducing our reliance on a big global supply chain with supply chain risks. We're getting the product back. We can sell the product again, we have an advantage there. Or I would lean on the consumer angle. We're building lasting, lasting endurance with a particular type of customer, a particular sector, and we're going to get the customer in again and again. We're going to create huge amounts of loyalty, repeatability.
Saif Hameed [00:24:01]:
I would lean on footfall. We're going to get twice as much footfall from the same person. They'll buy other stuff once they come in to return something. I would lean on these top line, bottom line levers, and I would see sustainability as a plus. And that's partly a positioning thing because I think it will get more traction in a business that way. But it's also partly because if you want to make the economics work, actually there are additional costs to this stuff. If you're getting it sent back by a courier, there's a logistics element, however it's arriving back in the store and the retailer, there's going to be a cleaning and sorting element. And so there are additional costs involved.
Saif Hameed [00:24:40]:
And if you can make the case on the basis of some other cost reduction or some sort of a premium, or some sort of a reduced cost of acquisition or lifetime of the customer relationship angle, I think those will help make the case for those costs. And I would see sustainability as an additional sweetener. It may well be that the consumers you're targeting and on whom you're making the case, you're saying, these are sustainable buyers and therefore this will play well with them. But I wouldn't make the case from the angle of reducing the carbon footprint, because I think that for many in the business will be a distraction. And you can make the case on commercial levers, I think, well, to take.
Isobel Wild [00:25:18]:
Us on to another lever that we'll have on the toolbox, carbon pricing. I want to go into the deep dive, but before we do, let's have a quick break. Okay, welcome back, steph. So, to get straight to it, we're acutely aware that there is really not much information out there today about carbon pricing in terms of standards, norms, methodologies, comparison points. So we really wanted to use this part of the podcast to do a bit of a deep dive to solve just that, hopefully. So within the SEC's recent disclosure, which requires companies to publicly disclose any climate related risks that are material to their business. They also ask companies that calculate an internal carbon price to disclose that price, as well as how that price was set. They consider it to be a super important data point for assessing how well a company is managing its climate risks and planning for future ones.
Isobel Wild [00:26:24]:
It's not just the SEC who consider it to be a good data point. Most companies are grappling with the challenges at the moment. I mean, we know from a lot of conversations that we've had that how to actually create a carbon price that can withstand the scrutiny of the financial team in particular. So to kick things off, maybe I'll just start with running through what it is. What it's not. So what it is not. There is not a single carbon price across all companies. Whilst it can be influenced by taxation, it definitely isn't the same thing.
Isobel Wild [00:27:01]:
So what it actually is is it's an internal assumption informed by the company's own analysis and experience. It should represent the aggregate costs of the different decarbonization costs that you are deploying. So this price shouldn't be static, but it can change and evolve in line with your decarbonization costs. Saif, we've spoken, well, you've spoken about calling a carbon price a carbon cost, because it should represent the cost of decarbonization rather than the price you're paying to acquire it. So in that vein, how would you set, or how should you set a carbon cost?
Saif Hameed [00:27:41]:
Yeah, thanks, Izzy. I mean, you put it quite nicely. I think there's an interesting evolution in this space since we've last had these conversations, which is when we described it previously, we talked about it very much in the context of one business. If you think about your carbon price or your carbon cost, we said, look at all the different activities within the business. Look at the cost to decarbonize each of those activities, look at the emissions you have behind each of those activities, and do a weighted average, basically. And that weighted average might change over time as the cost of decarbonizing, the activity shifts, and the number of emissions associated with that activity shifts as well. And I think that that logic still holds true. What we're seeing now is more and more activity at the intersection between one organization and another.
Saif Hameed [00:28:32]:
Which means that if you're on the procurement side of organization a, let's say, and you're buying stuff from organization b, then you want to start knowing how do you work in a carbon price or a carbon cost into what you're buying? And if you're an organization b, you correspondingly need to work out how do you demonstrate that your product is either lower carbon than the competing product? And so there's an almost like an inversion of the carbon price logic there. You need to say, look, this is the discount that you're getting because my product is better than the market. Or how do you represent the cost, the carbon cost baked into your product in such a way that you can actually engage company a in helping you reduce the carbon footprint of what you're selling? And I think that we should probably talk about this maybe in a separate episode. But if I think a little bit about that, let's take two types. Let's first look at the organization b problem, which is you're a supplier, you're B. Two B, you're supplying into, let's say, a brand. And there are two versions of this story. One is where you are more sustainable than the market.
Saif Hameed [00:29:40]:
And we have some customers that fall into this gap. In that case, what you kind of need to do is you need to say, look, this is the comparable, this is the counterfactual. We are selling you making this up. We're selling you potatoes, and actually our potatoes are lower emissions than the market potatoes. And we're selling you at $3 per unit, and the market is selling it to you at $3 per unit, or even $2.90 per unit. But actually, our product has 40% lower emissions. And the value of the emissions per unit of potato works out at. Therefore, we, you know, while it seems to you that we're $3 and the market is 290, we are actually $2.70 and the market is 290.
Saif Hameed [00:30:24]:
And I think that's a really interesting territory. I actually feel like there's no wrong turns for companies that are trying to go into that vein, because maybe your assumptions are wrong. Maybe the market is higher or lower. Maybe you're the only one having this conversation. But I think it's a really interesting conversation to have, and it pulls company a into a conversation. And wherever you land with company a in that negotiation and dialogue, you can actually maybe define how company a views this for your competitors and for others in the market. And you start creating your own sort of counterfactuals that might become the benchmark for how companies start to see this. You know, the first movers can often define how perceptions work in this space.
Saif Hameed [00:31:07]:
I think that in the other instance, where you are, let's say you are not the one who is more sustainable, but you're the one who wants to become most more sustainable, you could actually say, look, our potatoes are $3 and actually we believe that the embedded carbon cost here is thirty cents. And there's a bunch of stuff that we would need to do, often sitting further back in the supply chain to take that thirty cents of carbon out of the business. And we would love to collaborate with you, dear customer, on making this happen. And here's what the journey would look like. Here's how we'll provide you with data. Here are the projects that we'll run, here's what it will cost, and here's when the carbon goes out of the product and how we demonstrate that. And I think that's also a really interesting dialogue for you to run with company a, which will play to your advantage if you're on the company a side. I think to some extent it's just the inverse of this story, which is us.
Saif Hameed [00:32:00]:
Company a should try and understand the counterfactuals and the market counterfactuals for individual purchases. I wouldn't do this for all purchases. I would do this for some purchases. And I think then there are kind of two interesting data points for you. One is what is that counterfactual? What is the embedded cost of carbon in the product that I'm buying based on what it costs to decarbonize that specific product, the potato. The other is within my business on average. Maybe this is across my other purchases. Maybe this is across my operations.
Saif Hameed [00:32:30]:
What is the cost of carbon? Because actually it may be that this cost of decarbonizing the potato is much lower and much easier gains for me per unit of carbon than gains I can make elsewhere in my supply chain or in my operations. I hope that makes sense, Izzy.
Isobel Wild [00:32:47]:
Yeah, that does. That's a great way of framing it. Speaking on this framing point, I know that there's a lot of, I don't want to say fear, but maybe a bit of anxiety if you're a sustainability professional and you're bringing your carbon pricing logic to your finance team, obviously we framed it there in terms of the b two B two c spit side. But how would you go about actually framing it to your finance team in a way which comes across as like, pretty robust and that you know what you're doing?
Saif Hameed [00:33:18]:
I would let someone in finance do the heavy lifting. I would engage someone in the finance team. I would give them a sense of where I want to head to. I would convince them on the logic of why this makes sense. And I would basically say, look, we want a financial threshold to function effectively as the equivalent of IRR in our space. If you think of how the sort of IRR, the internal rate of return is used in financial modeling. Its used as your sort of your benchmark to see if a project is viable for you to invest in and go for. And I would say, look, we want the equivalent for carbon.
Saif Hameed [00:33:52]:
Can you help us create one for our business? The finance team might say, well, this sounds interesting. Ive never really heard of this. How does this work in other businesses? And then you can say, well, this is how it works in other businesses. These are the assumptions that I think are relevant. Help me out here. How would you do this? Can we work on this together? That way you get the ownership from the finance team at the ground level and at the get go, and you can then iterate and go from there. And I would not look to win the argument. I would not look to have an argument on what the number is.
Saif Hameed [00:34:24]:
I would say that the number can be anything to start with. It can be very high, it can be very low. It doesn't really matter. What's more important is to get the logic to be bought in and the system to be running, and you can then refine it from there.
Isobel Wild [00:34:36]:
We've spoken previously about financial data not being the same as environmental data and actually not treating that data as such. You're going to your finance person, your spokesperson, the finance team, who could do the heavy lifting. How do you go about communicating what your data is and what your data isn't? Especially perhaps when your carbon price is built on data, which is some high assumptions in there, and maybe you're not confident in the accuracy of your data.
Saif Hameed [00:35:11]:
Yeah, it's a great question, Izzy. I would be transparent about levels of uncertainty or levels of confidence, and also error ranges. And so I think in the best case, you can give error ranges. You can say, I have a reasonably good sense that this data could be 30% off, plus or minus. Very often you won't be able to do that. You won't have any sense of error range. And I think that's fine as well. So I would say, look, this part of our data ecosystem, we actually have no clue.
Saif Hameed [00:35:40]:
It could be ten times, it could be five times, it could be one fifth. And so let's almost just acknowledge that and put that to one side, and let's start our carbon pricing approach on the data where we have a higher level of certainty. So we can maybe start it with, let's say we're starting at just on energy related activities. We're going to say we believe that the cost of decarbonization for energy related activities within our business is x. And we have a really high level of certainty around that because we know it's easier to calculate, it's easier to understand the cost for decarbonizing it. We have a reasonably good sense now we get into a small error range that the cost for our suppliers for this activity will be. Why? Because again, the same logic applies, but we have less certainty on one variable, which is what their energy bill is or how much energy they're using, for instance. But we have some level of certainty there.
Saif Hameed [00:36:38]:
And progressively, you kind of think in slabs, for each different slab of emissions, let's say across the business and supply chain, your level of certainty might decline, but you'll have a spectrum there.
Isobel Wild [00:36:51]:
So in terms of this, like slab segmentation, how do you go about defining those slabs? Like you mentioned, energy as an example, what are other examples of what those slabs could be?
Saif Hameed [00:37:03]:
Yeah, it's a good question. So let's say, what are the slabs, let's say at the start of the spectrum and what are the slabs at the end of the spectrum? And my slabs are sorted by ease off calculation and ease of decarbonization. So let's say my first slabs are likely to be power use because power use is a really easy activity. To understand the emissions contribution of and to understand the conversion rate, I'm thinking in terms of two elements. One is what is the emissions and how certain am I that this is the emissions. And with power, it's quite easy because it's basically, you know, the conversion rate is very logical, like what is the emissions of? Grid power is very easy to calculate. There's very good data around that. And then the next piece is what is the cost of decarbonization and how certain am I on that piece? Those are the two conversion rates that are important here.
Saif Hameed [00:37:55]:
And on the cost of decarbonization, it's very easy to get a quote for a renewable power supplier, for instance, to take the place of the grid power that you're getting. And so that slab, let's say that slab is now first the slab within my operations, in my own business, and there I can have super high certainty. Now maybe I say there's another slab, which is the cost of decarbonizing transport logistics, last mile logistics, for instance, in my business. And I control this because I own my own vans and I'm the one transporting my product to market, for example. And so I have a really good, you know, both those variables of what is the emissions number, the fuel that I'm using, and what is the cost of decarbonizing this? I have a really good sense of that. And you'll have other slabs that as you move out of your own business into your supply chain. So for instance, now it's the cost of decarbonizing power in my UK suppliers, in my european suppliers, in my us suppliers, in my global suppliers, you might have different slabs based on how the data change, certainty level changes. So for instance, my suppliers in India might actually be much further in the spectrum even when it comes to decarbonizing power, because I have a really weak sense of what the data looks like there.
Saif Hameed [00:39:10]:
And then at the right, at the end of the spectrum, you're going to have stuff like fertilizer swaps and pesticides swaps, etcetera, where it's much harder to get a sense of what the emissions is because you don't know what specific specifications are being used and also therefore what the decarbonization cost is because you don't know what the alternative might cost.
Isobel Wild [00:39:28]:
That's a really interesting way of framing it. I've got one more question. Have you seen any organizations who are using carbon pricing really effectively?
Saif Hameed [00:39:38]:
Actually, I think that the best organizations I've seen at setting a carbon price and using it tend to be in the oil and gas industry. They've also been some of the earliest ones to be using it. So if you think about like BP and Shell, they have Shell cert. Shell has invested quite a lot of time and money in better modeling for what decarbonization will cost for Shell and also what it will cost for its customers and users. And so Shell has institutionally a really good sense of what the marginal abatement cost is for Shell. Actually, I dont know. They actually also put out quite a lot of that data in the public space. I dont know what their carbon price is currently, but Shell certainly has really good data that theyve developed around this.
Saif Hameed [00:40:22]:
BP came out with a really high carbon price some years ago relative to other industries. I think it was around dollar 120 per ton. I could be wrong and I assume that's also backed by similar analysis to shell. And so the oil and gas industry has tended to be very good and forward leaning at carbon pricing logics. I don't see many other organizations taking a very sophisticated approach to this yet, but I believe the data is, last I checked a year or so ago, that 25% of large companies have set or are setting a carbon price and 25% of large companies in addition, are thinking about it. I think that was the data that I remember seeing.
Isobel Wild [00:41:01]:
Yeah, it seems to be a very interesting space with lots of movement in it, so we will keep tabs on it, and I'm sure it will come up in future podcast episodes. Saif, before we wrap up, is there anything you want to flag or mention that you feel like we've missed?
Saif Hameed [00:41:15]:
No. I do think we probably want to do more time at some point on carbon pricing because I know it's coming up more and more. On our last webinar, we had, what, three questions? Four questions just on that. So I think it's something worth going back to. I'm also just interested to watch the recycling reuse space. I'm interested to see also the ripples from the european human rights issue as well play out. So lots for us to pick up on in next episodes.
Isobel Wild [00:41:40]:
Well, thank you so much, Saif, for joining. And thank you, everyone, for listening. As always. We know there's a lot of noise out there, but if there's anything that isn't covered in any materials that you want to know, there are challenges that you can't figure out by yourself. Please drop us a note and we'll try and get around to them in these podcast episodes. Thank you so much, Saif.
Saif Hameed [00:42:00]:
Thanks, Izzy. Bye.