Welcome back to another episode of the State of Sustainability. I'm your host, Sef Hamid, founder and CEO of Ultruistic. Today we're going to talk about the Iran War and its impact on the sustainability environment. But before we get into that, I'd just like to remind you that we're hosting the State of Sustainability Summit in Chicago on the 15th of April. So if you would love to meet us in person, meet me in person, have a chat, tell me what you like and don't like about the podcast, please drop me a note on ceph at altruistic.com. My email will be in the show notes. We would love to see you in person on the 15th of April in Chicago. But in the meantime, this episode is going to highlight the four big themes that we see coming out of the Iran War that are of relevance and impact to every sustainability team, certainly across the global consumer space. We're going to also share some tools, some suggested approaches for how to navigate this and how to make sure that your sustainability strategy safely navigates its way through the Strait of Hormuz. We would be remiss if we did not talk about the Iran War and its impact on sustainability and the state of sustainability. This is the main event in the global market right now. This is what everyone's talking about. It seems everyone's talking about this and AI. We've talked about AI a bit. Let's talk about the Iran War. And one of the commitments that we've made to ourselves and our listeners on this podcast is to always take the big picture, the holistic picture, not just talk about software, which is our bread and butter, but also what is it that impacts your careers, your lives, and the work you do every day as sustainability professionals. So this is also a little sentimental for me because about a hundred years ago, my ancestors made the big migration from Shiraz and Isfahan in Iran over to Calcutta eventually in modern day India. And from there, eventually, my family made it to Pakistan. So I have a little bit of Iran in me that is empathetic and sympathetic to what's going on in that part of the world right now. Obviously, a massive tragedy for the people of Iran, whatever happens. But here we're going to talk about what is the impact on your businesses as listeners, the sustainability environment, the companies that you work with. I have four. So there are four impacts that I thought through as particularly consequential. And we're going to go through each one and we're going to reflect a little on what it means for this environment. So the first is oil prices. Now, obviously, this is the sort of first-order impact. The Gulf is still a major source of global crude, global fossil fuels, global petrochem. And so what we expect and what we're seeing is that the Iran war is inflationary for oil prices and oil its derivatives. I suspect that this is going to accelerate net net, the transition towards sustainability on two fronts. So one of the impacts is that we're seeing the price of Brent crude rise significantly as a result of the war. That is going to make the transition to renewable energy more case positive. What I mean by that is as fossil fuels become more expensive, renewable energy becomes a little cheaper, on-site renewables become a little cheaper. So actually, we expect an acceleration potentially in the business cases that rely on this renewable energy transition. Interestingly enough, and I think we've talked about this in a previous episode, if you look at countries like Pakistan, where I'm from, we're seeing a massive boost towards solar energy and solar power rollout driven by the expense of heavy furnace oil-based power and fossil fuel-based power and the grid system. I expect that sort of transition to just accelerate and also have an impact on Europe. On the other side, we're seeing derivatives of oil are likely also going to get more expensive. The main one of interest and relevance to our listeners is going to be plastic packaging. Plastic packaging is one of the sort of most prevalent derivatives from the petrochemical industry. And you would expect that as the prices for the raw material become more expensive, the price of virgin plastic should also become more expensive. This should, in theory, lead to recycled content becoming a little cheaper, potentially also lead to alternative substrates like maybe pulp and paper also becoming cheaper versus the comparable of virgin plastic packaging. So if you think about the business case for your initiatives related to virgin plastic packaging transition or anything away from fossil fuel energy transition, those net net should benefit from the volatility that we're seeing in the oil market as a result of the Iran war. There's another big fuel source. So if you think of the big shifts, there's another big raw material source, rather, that is going to be disrupted as a result of the Iran war, and that is fertilizer inputs. Two fertilizer inputs in particular. One is going to be ammonia, and the other is going to be phosphate. So if you think about the most common fertilizers used in the food industry, two of them are going to be phosphate-based fertilizers and ammonium-based fertilizers, ammonium nitrate, for instance. In both those cases, you're seeing major sources of the raw material face disruption. So take Egypt and Jordan as major sources of phosphate, and take, let's say, Qatar and other Gulf countries as major sources of ammonia and natural gas. I would expect that as we see the impact of this play out, and my analysis suggests that urea prices jumped about 32% in the week following the war's entrance, you would expect some of this start to trickle through to food and beverage, FMCG, CPG companies as well. The bad news and the good news, I guess it's kind of all good news from some angle, and all bad news from another angle. On the one hand, the increase in fertilizer prices is unlikely to have a massive impact, I would say, on the branded food side. And the reason for that is that fertilizer costs, depending on where you sit in the value chain, might be something like 25% of the food input costs. Fertilizer is a big expense from anyone in the farming business. But by the time that this reaches the branded goods side or the FMCG or the CPG or the retailer, this fertilizer cost component ends up being relatively small because you layer on all the logistics, the transportation, the value addition, the packaging, the marketing and distribution costs and all of that, fertilizer ends up becoming quite small. So the end hit when you think of consumer prices may actually not be so significant. However, procurement teams are going to feel it. The other stakeholder group that is definitely going to feel it is going to be farmers, because again, if it's about 25% of your input costs, uh often you're actually going to be buying this using debt from intermediaries in the farming value chain. The rise in fertilizer prices is a real thing. From a sustainability transition perspective, if you look at your Mac curve, your marginal abatement cost curve, or however you look at the initiatives that you're deploying to drive sustainability in your business, you might well see that any transition away from fertilizer starts to look much better. Very similar to what we've just discussed on the price of crude influencing the shift towards renewables and the shift away from plastic, virgin plastic packaging. In this case, what you might see is a shift towards non-ammonia-based fertilizers, biofertilizers, potentially also a shift towards anything that reduces the need for fertilizer. Good initiatives are soil conditioners, for instance, composting, optimizing the amount of fertilizer that goes in. Many farms over-fertilize out of a certain level of risk aversion and often poor advice. And so all these things actually start to look much more attractive for farms looking to transition because actually they're much more in the money. On the other hand, what you might find is that farms are much less receptive and ready to have the conversation with you around the sustainability programs that you're running, just because they've got so much noise now coming their way around fertilizer costs rising, which again are a key input that they really don't have the uh the margin space to absorb themselves. I think that anything though, if just to summarize, if you think about these sort of key commodity price volatilities, it is a really good time to start revisiting your Mac curve, revisiting your initiatives, and revisiting the internal rate of return that you would expect from these or the ROI that you would expect from these. Because anything like precision ag, green ammonia, composting, fertilizer reduction, shifts to renewable energy, shifts away from virgin plastic packaging, these are all likely to start looking really attractive. So that was the first one around the disruption to commodity prices. That's one of the big themes that we're seeing coming out of the Iran war, which is going to really disrupt the sustainability landscape. Let's move on to the second big theme, and I'm calling this the sort of financial markets theme. Anyone who follows the global stock markets as obsessively as I do will notice that they have all taken a hit. Pretty much every stock market I could find has taken a hit. And as a result, there is more pressure on individual companies' share prices. What does that mean? So if you think about a share price on a stock market, it is a result of two things. One is earnings, how much your business makes, how much your business makes, let's say, net of all costs, et cetera. And the second is market expectation. Does the market expect that this share price is really going to rise fast because it's a really, it's a really hot sector or the geography is really great? So for instance, if you look at the US, the US typically trades at a higher multiple of earnings versus Pakistan, which surprisingly trades at a really low multiple of earnings. Uh the difference, I think, is something like a 25x uh multiple in the US on average versus a 5x multiple on average in Pakistan. Anyway, Pakistan insecurity aside, what that means is that you're likely as a result of the Iran war to see a lot more pressure on your share price as a company because global stock markets are in decline as a result of the war, which means that that expectation value has gone down. The only thing that companies can do to try and boost the share price in this environment becomes boost earnings. The thing that the companies can do to boost earnings is cut costs. That ends up being the only lever that they have real control over to try and boost earnings and recover whatever ground they can on the share price. So within sustainability teams, sorry, I know this is always bad news and hard to hear, I would expect more pressure now on cost cutting than ever before. And the other kicker to throw into this is that in general, what the Iran war has signaled to CEOs around the world is an increase in volatility. Volatility actually has an index of its own called the VIX, which is also subtitled the fear index, or not subtitled, but colloquially known as the fear index. Basically, you can actually buy an instrument that tracks this. So you can, in effect, short or hedge against volatility. So anytime that something bad is happening in the world, the VIX rises, basically. The fear index rises. Anytime that the world looks a little more stable, the VIX falls. So right now the VIX is actually pretty high. I believe it's somewhere between 24 and 27. And that is not the highest that it has been in recent memory. It was higher during COVID, but it is pretty high. Which means, again, if you think about the fear index hitting CEOs, the best thing that they can do is try and take risk out of their business. The best way to take risk out of any business is to bring cash into the business. And in an environment where they can't do that by selling shares because shares are depressed, they can only do that really by cutting costs. So I would expect more pressure on costs until this environment stabilizes a little. The impact on financial markets is therefore going to be something that unfortunately sustainability teams will start to feel radiated onto them from other parts of the business. That is the second big theme that we're talking about today. So the first one was commodity prices and how that's going to impact sustainability. The second one was financial markets and how that's going to increase pressure within the business. The third one is emerging markets and an increased sovereign risk to emerging markets. What do I mean by that? So emerging markets typically get hit by something like the Iran War on two fronts. One is that most of them trade in dollars. I think all of them trade in dollars, basically. In a crisis like this, the dollar becomes more expensive. Why does the dollar become more expensive? Because there is a flight to safety in a crisis like this. People start buying dollars because dollars look safe versus other things that you could buy. And so, in that flight to dollars, as people buy more dollars, the dollar becomes more expensive, which means that if I'm Vietnam or Bangladesh or Egypt or Pakistan, it starts to become a lot more expensive for me to trade because I have to buy dollars to go and buy stuff with, and the dollars became more expensive. The other thing that became more expensive, flashback to what we said about commodity prices, is crude, petroleum, oil, petrochem derivatives, et cetera. Most emerging markets are heavy importers of these goods because they needed to keep their energy systems running and to keep their industry going, because they actually do value addition on top of what they import, often from the GCC, the Gulf, basically. In an environment where dollars are becoming more expensive and energy imports are becoming more expensive, these countries have very scarce foreign reserves to go out and buy stuff with. In the case of, again, you know, if you look at like Pakistan, I think Pakistan has basically 30 days of foreign exchange reserves in the tank, 30 days, which means if the war continues for 30 days, the country basically goes insolvent from a trade perspective. And I think that was actually six days ago, so 24 days now. Uh and Pakistan's not the only one, right? Like again, I named a bunch of countries, but pretty much most of your trade partners in the global south are going to be impacted for this. What happens when a country runs out of dollars to buy stuff with for imports? Lots of bad things happen. If there are countries like Vietnam, for instance, they are probably importing a lot of their cotton to do value addition and then to export them to you guys as t-shirts. If there are countries, let's say, um, processing, you know, maybe food goods, they're probably importing fertilizer and they're gonna use that fertilizer to plant seed and export grain to you, but actually the fertilizer is now suddenly more expensive again. See not just the dollar impact, but also the commodity price impact, which means that you start to expect a lot of disruption. This disruption is gonna be handled by procurement teams in a few different ways, but the primary mechanism that procurement teams have is to try and shift towards other sources of supply, sources that might look stable. Now, procurement teams will be ready to give a bit of grace and to say, let's ride this out for a few months and see what happens. But if the Iran war looks like it might be protracted and it seems no one is expecting this war to end within a few months, then actually procurement teams start to look at longer-term alternatives as resource uh suppliers or source materials for their for their goods. What that means for sustainability teams is you can expect really unprecedented, I would say, in some ways, and also um, well, unprecedented is a bit tough to say in a in a time when we have COVID and tariffs and so on, but you know, here we go again, types of changes basically on your supply chain, which is going to shift your scope three radically in ways that you're not prepared for, in ways that you don't quite understand yet, and in ways that will be quite seismic. In some cases, you might find your scope three actually goes down because your procurement teams are having to source from more expensive geographies, uh, which are maybe more decarbonized, but they're doing it because the disruption risk is so high. And in some cases, your scope three might go up because actually you're trying to find long circuitous routes to get material to you, because also transport routes have been disrupted and the Strait of Hormuz is in a tailspin. So, this third risk area of emerging markets, sovereign risk, I think is another one that we're gonna see start to play out over the next, I would say, few months. And so wait for it coming to a place near you. The fourth big theme, I would say, is gonna be disruption to consumer buying habits. This one I would say is a little harder to really pinpoint and a little harder to uh predict how this is gonna play out. But the commodity price shifts that we've just outlined, the financial market shifts that we've just outlined, not to mention the emerging uh market sovereign risk, is gonna impact consumer wallets. Consumers are gonna see the value of their savings decline as stock markets go down. Consumers are gonna see their energy bills in most cases go up as energy generally becomes more expensive, their fuel costs go up as driving their car becomes more expensive. That means that they're gonna have less discretionary income. I would expect that this puts a lot more pressure on sustainability teams to justify the initiatives that they're pitching for. On the plus side, I would say that any disruption is a good opportunity to re-articulate or rebuild a narrative. What I mean by that is you can take this in two directions. Either you can say, oh crap, this is another headwind on sustainability. Everything has become more expensive to buy and it's become a lot harder to sell. How are we ever going to get our initiatives through the door? Or you can say, actually, this is a massive disruption that has shifted the economy, really. And as a result, we have an opportunity to re-articulate what sustainability could do for the consumer value proposition. And I would say you could link this either to saying, let's go even harder on the discretionary income of a higher income bracket, which tends to care more about sustainability, or you could say, let's try and find even more ways to cement our value proposition in the guilt-free purchase category. If someone is going to be buying a Kit Kat or let's say a lion bar, uh snack from my childhood, uh, right at the counter before they pay the bill. And that moment of guilt, which is, you know, is this, is this something that's bad for me? Is this something that's unhealthy for me, weighs a lot more when it's also a discretionary purchase coming out of limited uh free income? How do you go that extra mile just to articulate why this purchase shouldn't make the consumer feel bad about themselves? Because actually that sentiment is going to hit a lot harder with consumers these days. I want to also just bring these four different themes to a close. So if you think about what all these themes have in common, right? Uh commodity prices rising and shifting the cost of your raw materials, shifting the business cases for transitions, often in favor of sustainability, financial markets risk, increasing pressure internally on the business, increasing the need for every team to justify what it does in the business, emerging market sovereign risk, re-architecting and redesigning supply chains globally pretty much for every business. And then this shift in consumer buying preferences as a result of more pressure on the consumer wallet. What these all mean, what these all come to a head for for a sustainability team, is you really need to revisit the plan. You need to revisit the initiatives that you're deploying because actually the costs for every one of those initiatives have changed. Some initiatives have become more expensive, some initiatives have become cheaper. We're actually going to be sharing a little piece of analysis that we've done on what are the five initiatives that we think have moved the most into the money, and what are the five initiatives that we think have moved the most out of the money. What I mean by that is we did a two by two. So we said, let's take a range of initiatives, let's sort them based on the impact that they have to the scope three of a business. These are initiatives that have a massive impact because of the nature of the material that they target and because of how emissions-intensive that material is. And on the other axis, let's say what is the delta of to what extent these have moved into the money or out of the money. And that way you can say, well, these five initiatives are impactful initiatives for me. They were always impactful initiatives for me. They've now become a lot cheaper for me to do. Makes sense for me to now move them up the stack in the priority of what I'm going to deploy. These other five initiatives were super meaningful for me from an impact perspective, but they've just become a lot more pricey. And actually, maybe I need to have a second look at them because my finance team is going to shoot them down. And so that analysis is one that we've done. We've done it obviously in a generalized way. We have access to a lot of great data for our customers and the consumer businesses that we work with. But we've done this, you know, outside in in a kind of one size fits all way. I would encourage every sustainability team to have another look, whether you're using Mac curves, marginal abatement cost curves, uh, which by the way, I hate. I've spent three years trying to sell them, flog them as a McKinsey consultant to my clients and failed almost every time. That's a story for another day. I probably shouldn't leave you with that because you need an alternative, don't you? So let's say if you're not going to be using a Mac curve, I would just use an Excel spreadsheet and just build out a set of initiatives and just have the marginal abatement cost or the abatement cost per initiative laid out. I think when you start getting into curves, that that actually cost curves that actually just overcomplicates life, frankly. Uh anyway, I would have another look at those because I think that you'll find the cost of your transition plan has radically shifted. As a side note of interest, one of the things that we've started getting into at Altruistic is we have started to see many businesses now look to understand multiple different glide paths for how their pathway to their targets plays out over the next 10 years. And those glide paths first became important to them because what they start to notice is that every time something changed with SBTI guidance or every time something changed from the business perspective, their internal stakeholders start asking them to remodel the pathway. How does it look now? What happens now? Is the pathway still relevant? Is the scenario still valid? And so they would have to go back to their tools and rerun these glide paths and rerun these pathways. And what sits underneath these glide paths and scenarios is always a big set of initiatives. And so what we've noticed is just more and more businesses trying to preempt the increased frequency of disruption by preparing tools and databases and lever libraries that can actually remain agile as things change. So I would encourage every business, whether you use an altruistic or something else, to do that, that's that's a good thing to do because the world is going to get more and more volatile. But certainly in the wake of this current global, I would say, crisis, uh certainly macro event, whether or not you call it a crisis is a question of your politics. I would say that you really want to re-examine what your glide paths look like. So uh that is our episode on the Iran War and its impact for you. I hope you found this uh instructive or helpful, or at least, at least worth writing to me about and telling me how much you disagreed with my analysis. If you're interested in finding out more and looking at our impact assessment, uh, we will have the link to our little piece of analysis in the show notes, uh and you can check it out there. I look forward to hearing from you either way. Thanks very much for listening to this edition of the State of Sustainability Podcast. Please hit follow or subscribe so you get notified as soon as our next episode drops.