Climate Confident

Using Finance To Drive Down Low Carbon Costs - A Chat With Carbon Chain CEO Adam Hearne

October 05, 2022 Tom Raftery / Adam Hearne Season 1 Episode 90
Climate Confident
Using Finance To Drive Down Low Carbon Costs - A Chat With Carbon Chain CEO Adam Hearne
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Show Notes Transcript

Banks and financial institutions are looking to invest in projects which reduce emissions, but to avoid the greenwashing label, these projects need hihi quality data. That's where CarbonChain comes in.

CarbonChain is a carbon accounting platform that supplies high fidelity data so organisations can prove emissions reductions. I invited Adam Hearne, CarbonChain's co-founder and CEO to come on the podcast to tell me more.

We had an excellent discussion talking about how CarbonChain calculates emissions for their customers, the kinds of industries CarbonChain works in (the really heavy emitters), and where to next for the company.

This was a truly fascinating episode of the podcast and I learned loads as always, and I hope you do too.

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Music credit - Intro and Outro music for this podcast was composed, played, and produced by my daughter Luna Juniper

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Credits
Music credits - Intro by Joseph McDade, and Outro music for this podcast was composed, played, and produced by my daughter Luna Juniper

Adam Hearne:

We are seeing that there is a positive reinforcement loop emerging. So we have some customers that have decided to source greener materials and their banks have given them very good interest rate reductions for that greener sourcing, and it's been able to avoid this green premium dilemma where things that are naturally lower carbon tend to be more expensive

Tom Raftery:

Good morning, good afternoon, or good evening, wherever you are in the world. This is the climate 21 podcast. The number one podcast, showcasing best practices in climate emission reductions. And I'm your host, Tom Raftery. Don't forget to click follow on this podcast in your podcast app of choice, to be sure you don't miss any episodes. Hi everyone. Welcome to the Climate 21 Podcast. My name is Tom Raftery, and with me on the podcast today I have my special guest, Adam. Adam, welcome to the podcast. Thanks a million for joining us. Would you like to introduce yourself?

Adam Hearne:

Thanks Tom. Pleasure to be here. Yes, uh, I'll introduce myself. I'm Adam Hearne, the co-founder and CEO of Carbon Chain. We help companies in the most polluting sectors track their emissions so that they can monitor and reduce those emissions and enable green finance to accelerate their ambition if they otherwise hadn't tracked so closely.

Tom Raftery:

How does that work?

Adam Hearne:

If I can paint a picture for a moment of visualizing the most carbon intensive sources of emissions in the world, your oil and gas areas, agriculture, metals, and minerals. We have actually mapped out all of those sources down to asset level or a majority of the world sources, and we give customers the visibility of their end to end supply chains. So when they're making sourcing decisions, purchasing decisions, and when they're importantly enabling finance to do those purchases, we can help measure those emissions, and put them on a trajectory so that they can increase their ambition and reduce over over time.

Tom Raftery:

Okay. And how does that work? How do they, I mean, are you just exposing the emissions to them and they go, Okay, this is high emissions, this is low emissions. If I have a choice between the two, I'll go for the low emissions one. Or you know, how does it work within your customers?

Adam Hearne:

Yeah, so a customer has to share with us their activity data, and sometimes they're in the middle of very complex supply chains, so they have quite a long upstream supply of goods to them, which is often opaque and hard to tra trace back. We can help unlock that visibility because we have traced emissions back to Mother Nature in a lot of cases. So back to the primary sector, and they can now get this unprecedented visibility of the goods of the materials that they make, and compare that to global averages so that they can start to see can they be on the greener side or lower carbon side of, the market, and therefore move the market towards demanding greener products.

Tom Raftery:

Okay. And. Why, why did you decide to pursue this? What, what? What was the trigger for going after this?

Adam Hearne:

I think I'd seen a lot of the systematic issues around global supply chains and knowing that scope three emissions, which is the indirect emissions, mostly in supply chains, knowing that they are the hardest to measure and responsible for nearly 80% of the world's emissions depending on what study you look at. I saw that as an incredible opportunity to apply my experience to that domain. So previously I'd worked at Amazon. Looking after the European supply chain. And before that I had been at Rio Tinto for 12 years working across various commodity sectors and knowing how the metals and minerals world is responsible for a significant portion of emissions, but also part of the solution to transition to a greener economy and not rely on fossil fuel energy sources as much was quite a good problem to dig into. And carbon chain is the embodiment of that experience that myself and my co-founder have from. Uh, so Roheet is, uh, co-founder. He has some experience in oil and gas and um we're able to look at it from an industry perspective and offer solutions to that industry directly. So, that we get seen as partners and we help them save a lot of time and expense in tracking these emissions. And we thought that that was, quite a good service that companies needed. It's often such a challenge for them to scale up their internal teams and find where all these hotspots are on their supply chains that we wanted to use our experience in supply chains to unlock that and make it more efficient for clients.

Tom Raftery:

Nice. Nice. It's a nice coming together. It's a nice coming together of the two podcasts I have actually this one and the, the digital supply chain podcast. So this is interesting. and could, could you give me, for example, without naming names, would give me a, a, a use case. Let's say I am a supply chain manager of a mining milling company or an oil and gas company. How are a, another, customer? What, do I do to utilize your product? Or what am I using your product for? Is it for when I'm buying office equipment? Is it for when I'm buying a new drilling, derrick, is it for, you know, somewhere in the middle or all of the above?

Adam Hearne:

Yeah, it, it can be all of the above and especially when it's in metals and minerals or oil and gas, those purchases in maybe some upstream raw material is incredibly carbon intensive and puts the rest of the office emissions into, um, A really small portion of that picture. So we still do those, emissions on smaller purchases like stationary for completeness. But the real use case is when a desk or a trading desk has to see what their end to end picture is. And the CEO might be thinking in that company that there's a lot of stakeholder interest in sustainability. At the moment, there's some regulations that are coming. There's carbon taxes looming, carbon border adjustment mechanisms, and at the same time, the banks that finance them are under increasingly centralized pressure to show that they can know what the emissions are in their financed portfolio. So then they need to get some visibility on those emissions quite quickly. So when they call carbon chain, they're at a point where they need to manage multiple demands and they're getting a lot of requests from various stakeholders, and they just want a single version of the truth that can answer all of these stakeholders. So then carbon chain comes in. And the ideal partnership is where we also liaise with their banks. So it's a three party meeting where we speak to their main finances, and the trading desk and ourselves, and we set up a sustainability linked loan or some other KPIs that can link financial, debt instruments to actual decarbonization goals. And then we sign off on a contract, and make sure that everybody's signed up to the mission. And these have been some of the most inspiring moments at Carbon Chain when you have these parties signing off on very ambitious carbon reduction goals. And then we create this, greener financial, uh, mechanism to incentivize those companies to reduce emissions. So, um, we look at it beyond the step of just compliance. We look at it as these customers need a financial reason to, to do this and to measure and reduce, and we're creating that for our clients.

Tom Raftery:

Okay, Cuz that was gonna be my next question was, you know, is this just so that they can get visibility of their emissions? But what you're saying is No, what you're saying is they're using that visibility to access capital. Is that the right way to look at it?

Adam Hearne:

Exactly. Yeah. It helps them with liquidity. It helps them with interest rate discounts, which is a once in a generational movement that I think companies should move on quickly because these offers won't be around forever. It'll be a normal way of doing business in future. But in this next year or two, we're seeing some very proactive measures from banks to incentivize not only the reporting, but the stated ambition.

Tom Raftery:

Okay, Now I can imagine, I mean, I work in the technology. industry in, in, in software primarily. The last company I worked for SAP was reducing its emissions roughly 10% year on year. That used to amount to around 30,000 tons, CO2 reduction per annum. I imagine if you were to get one of your customers to reduce their emissions, 1%, it would be orders of magnitude more. Then that 30,000 that, uh, SAP reduces theirs, . Uh, so it, it's a, it's an incredible lever you have, no?

Adam Hearne:

Yeah, the scale that we're seeing is amazing and we're actually tracking hundreds of millions of tons of CO2 on our platform almost in real time. And that is demand for action there. And we aggregate that on our platform. And we've also seen the power of small incentives. So there's a case for a carbon tax bringing emissions down. If you tax X percent, you might see Y percent reductions. But we've seen in this environment around debt facilities that if you just offer a small basis points, discount on the interest rate, you actually get a 20 fold or 50 fold reduction in carbon emissions. So it's good value for money for financial systems to do this. It's a great lever and I think it needs to be explored more in the coming years so that the global markets, the, the invisible hands of the markets can be directed towards these greener projects with very robust credentials behind them that show that they are on a decarbonization pathway.

Tom Raftery:

So it's fascinating that these high emissions companies can get access to cheaper capital by demonstrating their, reducing their emissions. I gotta wonder what's in it for the banks.

Adam Hearne:

Yeah, it's, it's a good intuition check there. And so the banks have slightly different pressures on them. They have up until recently lacked a lot of visibility on their financed emissions. And I think banks have in the past received a lot of criticism for financing coal mines or financing other sources of contentious energy. And there is some systematic issues there, which is bigger than the banks themselves and the governments that are supporting them need to get visibility on what they're financing and then they can start to take action and put in strategies, in place. Uh, they also need to do it for stakeholder management. So a lot of their own clients are asking the banks, can you help me finance solar panels on my, plant and other facilities? Can you advise us on other opportunities to reduce our emissions? and can we go into an incentivized loan situation because we're taking proactive, action. So, um, the banks have got those, very central reasons to do it. And also we, we see that the individuals at these organizations, there are so many hidden figures that are just doing their part for climate change cause it's the right thing to do. And we didn't realize that those individual, visionary leaders in these companies could be so powerful. But it's been great to see a lot of people stepping forward as well to drive these initiatives.

Tom Raftery:

Nice. Nice. And so the, the banks, track the reduced emissions and what happens if, for example, they agree a loan at a particular reduced rate based on emissions reductions, and if the emissions don't meet those KPIs, Are there, are there penalties or how does that work?

Adam Hearne:

Yeah, so we have seen some penalty proposals put forward to clients. So a year ago it was mostly carrot and just the positive incentive and now we're seeing a little bit of carrot and stick, so that's increasing the spread or the stakes on the table are getting a bit higher, and that was quite a brave move we thought from the banks. But they've also got a really engaged set of clients that are by and large putting in very ambitious projects themselves to reduce. So, um, we are watching our clients closely and helping them ahead of time to see what their glide path is. And they also have to make sure they're, they're doing their bit. Yeah. But it, it's a, it's a time for action and the companies that are, uh, getting this visibility that we provide them can take that action a bit more easily than other companies not reporting as well.

Tom Raftery:

Mm. And can you give us an idea of what kind of scale we're talking about? Because like I said, in the case of sap, the emissions were dropping around 30,000 tons a year. But you're talking about more than that and what kind of scale of finance are we talking about for these organizations as well?

Adam Hearne:

give a couple of examples, we calculated a single shipment of crude oil for a client last year. And they needed the accuracy of that measurement that we provide and the independent verification that we support and, and enable. And, this was over, geez, the, the amount of carbon I think was over a million tons of CO2 just on one shipment.

Tom Raftery:

Ouch.

Adam Hearne:

yeah, it's incredible and the finance behind that where in any given month we're talking billions of dollars worth of deal flow. So we are at the epicenter of that and, and seeing those billions of dollars, basically direct the world's materials that modern life needs around the world. And, that's a, a good portal for seeing where the emissions are coming from. So it's been very good for carbon chain to make impact in that. If you can access the the lens of global trade, you can access the lens of carbon emissions and see where they are.

Tom Raftery:

Yeah. Yeah. This is really the whole, If you can't measure it, you can't manage it, I guess, isn't it?

Adam Hearne:

Exactly. Yeah. To use that, famous Professor Drucker quote, Yeah. Once it's measured, it's manageable and we provide. Incredibly granular detail on what to manage from the asset itself to the transport that's used. A lot of companies can actually get some quick wins just by finding a greener ship on the water to transport their goods, and they can almost do it with a very low price premium. They just select a different ship, and these are not only low hanging fruits, I guess fruit on the ground moments. Early movers can be rewarded for action, and that's an early benefit that customers get when they sign up to Carbon Chain.

Tom Raftery:

Right. And do you think the shipping companies are aware of this?

Adam Hearne:

Yeah, they definitely can see that more modern ships have that efficiency and they charge accordingly. and also the market is quite dynamic as well, and I think some of the traders use that, the information they have on the market to still, uh, Get the logistics like as efficient as possible. But we are seeing traders Sorry. We are seeing ship owners move towards a deliberate strategy of creating a greener fleet so that they can market a greener fleet to their customers. Because initiatives like this are driving demand for greener ships, which is great. It's the, there's a flywheel that's slowly emerging here.

Tom Raftery:

Right. Nice, interesting, fascinating space. I knew nothing about obviously , which is, Which is amazing and what kind of discounts are we talking about in terms of, you know, I don't know, is it percentages or how do you want to report it? Let's say again, I'm this big mining company or oil and gas company. What am I looking at in terms of reduced cost of capital or, you know, Can, can you again walk me through some of that?

Adam Hearne:

Yeah, you've got some basis points reductions there. So when a trader is looking at facilities that are in the billions and you can help them save a few basis points off that facility. It can add up to, a decent amount of money and for a treasury department that's looking at the increasing cost of capital at the moment, this is a very quick lever to pull, to bring that down. And then we're also seeing other softer benefits. So we had a client that was trying to set up a new facility during Covid, and it would've been a three to six month process, but because we were doing it from a sustainability perspective, they got fast tracked through the bank's onboarding system and were given a facility in around a month, which would almost be unprecedented from start of process to end of process. So they get really good customer service. And then finally, it's the assurance of liquidity longer term. So if you are a trader and you're not doing this sort of initiative, you've got to wonder how secure your lines of credit are over the years as regulation changes and societal pressure changes, you want to future proof your lines of credit. So this is a really good way to do that, to make sure you're connected to the, uh, greater strategies of the banks that are setting very ambitious net zero goals, and they need to hit them.

Tom Raftery:

Okay. And on the prep call, you mentioned the idea of a green discount. Can you explain for people who, haven't been on the prep call what, what you meant by that?

Adam Hearne:

Yeah, so we are seeing that there is a positive reinforcement loop emerging. So we have some customers that have decided to source greener materials and their banks have given them very good interest rate reductions for that greener sourcing, and it's been able to avoid this green premium dilemma where things that are naturally lower carbon tend to be more expensive, and I think a lot of people have been wondering how that plays out like is there such a thing as a green premium? Is there demand from consumers? I think if you ask them in a survey, people might say yes, but I think there's some evidence on spend patterns that shows that people aren't willing to pay more money for things that are greener. And what we're trying to do here is create a green discount in that if you fundamentally have lower carbon products to the market, then you've had the financial platforms in place to help bring that to market for a lower price or a discounted price to norm. So in future, we imagine a world where, you are purchasing something and it's cheaper because it's actually greener because the upstream supply chain starting at the cradle have been supplemented by trade finance, or they've had supply chain finance giving them discounts. Or even in a retail environment, you can start to get discounts for purchasing greener products, and that, uh, enables an incredible positive reinforcement loop. That, we've seen our customers allocate towards taking their greener initiatives further, so the money they're saving goes into things like solar panel installations on sites, which was an incredible insight. And then that creates this further green discount because companies can then hit the more ambitious KPIs the following year. So in, in short, we're, we're seeing that the opportunity here is to create a green discount and not have systems in place that are focusing on a green premium.

Tom Raftery:

And I mean, you mentioned earlier the idea of a carbon tax and a carbon border adjustment mechanism, which is kind of the, the carbon border that's been talked about being put in place in Europe. So do you see that the combination of the kind of the green discount and a carbon tax or a carbon border adjustment mechanism or something like that would mean that things that are carbon intensive are only going to get more expensive, and things at greener are only going to get cheaper and cheaper over time.

Adam Hearne:

Yeah, I think that's a good summary, Tom. That's the, the macro view, and we probably need to see it play out a bit further because a lot of the customers you speak to wonder who's going to absorb that cost. Will it be at the point of shipping? Is it on the buyer's side? Is it on the suppliers side? And, there'll be some market forces in effect. But you've summarized I think, what the result will be, which is a level playing field for all.

Tom Raftery:

Mm.

Adam Hearne:

Moving us towards, a higher price for those carbon intensive product.

Tom Raftery:

Okay. Cause on previous episodes, I've postulated that, when you are more sustainable, more efficient in your production processes, your, your engineering waste outta the system. And so stuff that is made in a more sustainable fashion should you would hope or you would expect. De facto be cheaper and we're not necessarily seeing that yet. So I suspect part of that is the immaturity of the space combined with the economies of scale that we need to, to get to for a lot, particularly in the manufacturing sector.

Adam Hearne:

Yeah. I think that's a fair observation. and just the prevalence of renewable energies coming into the systems a lot more. I think peak pricing still really plays a large part, and as the world's moving more towards microgrids or battery setups, then we can start to level out these peaks and I think we'll see, a few faster moving years in terms of decarbonization, but there is still a certain infrastructure overhead that we're up against here.

Tom Raftery:

Mm. And you also mentioned the idea of. Positive fly wheel where you said the wallet can be a weapon. Talk to me about that.

Adam Hearne:

Yeah. So if a customer one day is buying products, they, we actually, on a team retreat, a carbon chain, went to the Eden Project, last week, and the Eden Project described this scenario where they're saying consumers can use their wallet as a weapon. And so if they're buying more sustainable products than they're creating a voice in the supply chain and that sends a certain signal up for demand and helps those greener or more sustainable supply chains prevail. And we see that a lot at carbon chain as well, but just on a larger industrial scale with the primary sector. And if purchasing departments are able to identify greener products, then it's an incredibly good opportunity to, seize that demand and actually help some signal come in from the customers to primary producers because we still feel that the market is quite opaque from our day to day consumer view. Like you and I going into a supermarket or buying other hardware. We might not know where it's sourced from and where those materials came from, but if we could actually expose that and then the consumer can use their wallet as a weapon, they can then reinforce those more sustainable supply chains and then create that positive flywheel of low carbon demand.

Tom Raftery:

mm Yeah. Great, great. The, data that you have for calculating the emissions for shipping crude oil from A to B or whatever it is. Where does that data come from?

Adam Hearne:

We have to build that from a bottoms up perspective. So if it's shipping, we have most of the world's commercial ships in our database. Over 130,000 the last time we looked, and we then track those at great level of detail, and know what the performance is and we model that performance. And then when it comes to the assets, we have to build the asset up and look at four main inputs. So the energy that they use, the fuels that they consume, the materials that they buy, and other consumables that that asset goes through. And we have to know what the production is of that asset over a period of time to then divide the emissions by the total units of output. So it's important for us to get financially confirmed production amounts for all these assets. And once we have that, we can then back into the carbon intensity based on our models of the energy usage for that site.

Tom Raftery:

Sounds labor intensive,

Adam Hearne:

Yeah, there's a lot of, um, heavy lifting. And so we've been around for just under three years now. And I gotta say the first year was just building a lot of, models and looking at these, and now we're seeing some network effects start to take off, which is where there's common usage of a single ship. Once you know it, it gets used 50 times a year. A mine, a single mine could have 200 customers downstream. And if you speak to those 200 customers, you've just had to model it the one time. And so we get some cases where users send us their data and we analyze it, and we see that we've actually modeled a large amount of their trade before in very good detail. And so now we're making the cost of doing your carbon accounting incredibly cheap, for customers that need industrial level robustness of their figures.

Tom Raftery:

Nice. Nice, nice. So Adam, do you have any, customer examples you can talk to?

Adam Hearne:

Sure. So in terms of banks that we've worked with and traders, if we use that use case, we've worked with, banks like Society General and Rabobank, and we've helped, helped set up, KPI tracking programs with customers, like Concord, and many others, that I, can't name, but, um, it's quite a very good drive we've seen from the market. And they've found that using our platform was great because they could get an independent view of what their emissions are and some objective target setting, and also the advisory service that we offer. So we can help them facilitate what good looks like, what is a 2050 target and for their particular verticals, how do they see what the market looks like? So where is the greener supply chains to go through? And, the response from those leaders in the che companies has been great. they just found the price point was, really good compared to more expensive consulting options out there and the ability to do this in an automated way. So we use a lot of machine learning and other predictive analytics to speed this up. So they can now monitor it, in a week to week, month to month basis to make sure they're hitting their targets.

Tom Raftery:

Nice. Nice, nice. And where to from here? What's next for Carbon Chain?

Adam Hearne:

We'll keep focusing on the world's largest sources of emissions. So we're currently tracking just under 1% of the world's annual emissions, and we have direct visibility on that, and we'll expand that over the next couple of years to multiple percentage points. And we're also just looking to grow. So, we've, want to help companies seize these financial opportunities further and also, Grow the team. And so we're wanting to build the tech infrastructure that can help companies transition to net zero faster. And so if any people are out there who want to look at that further, then they can jump on our website carbon chain.com and ask for a demo, click the Book a Demo button. And equally, anyone interested in helping us build that infrastructure could reach out to, carbon chain's careers site or follow us on social media, LinkedIn.

Tom Raftery:

Perfect. Perfect, perfect. We're coming towards the end of the podcast now. Adam, is there any question that I have not asked that you wish I had, or any aspect of this we haven't mentioned that you think it's important for people to be aware of?

Adam Hearne:

Possibly. I think there is an aspect of are we really making impact, I think as a carbon accounting firm, are we reporting the news or are we helping influence the news? So I think that's something we ask ourselves a lot internally at Carbon Chain. And to touch on that, we are very mission led here. And the team is so focused on impact. It's, it's relentless every day. So when we are measuring emissions of these incredibly high emitters and seeing them commit to these additional reduction goals, that's been great for us. And we're seeing our customers start to trend down slightly. Based on our engagements over multiple years. And so, we're looking at how many millions of tons we've accelerated on the decarbonization journey. So I, I think you've captured everything. And, also that point, um, how we actually make sure we're making impact because I think companies like us. There's only so many chances you can have to make an impact on the world. And I think it all moves quite quickly and we're at an incredible time where the right company with the right tools can step up to this and offer the infrastructure needed to help companies. And everybody takes that, fantastic opportunity, very seriously at carbon chain. So we look forward to growing that journey, expanding it further.

Tom Raftery:

Phenomenal, phenomenal. Adam, that's been really interesting. If people want to know more about yourself or about carbon chain or about any of the things we talked about on the podcast today, where would you have me direct them?

Adam Hearne:

I would say they should head onto carbon chain.com and, look at some of our case studies there. There's some great insights on the benefits that banks have been able to achieve as well as their trading clients. And if, uh, they also go onto social media. Most of our handles at Carbon Chain and you can find me personally on LinkedIn. If you just search for Adam Hearne, then I'd love to connect and talk more about our mission.

Tom Raftery:

Super, and I'll put some of those links in the show notes as well as that people have easy access to them. So Adam, that's been really, really interesting. Thanks a million for coming on the podcast today.

Adam Hearne:

Thank you Tom. Great to be here.

Tom Raftery:

Okay, we've come to the end of the show. Thanks everyone for listening. If you'd like to know more about Climate 21, feel free to drop me an email to Tom Raftery at outlook.com, or connect with me on LinkedIn or Twitter. If you like the show, please, don't forget to click follow on it in your podcast application of choice to get new episodes as soon as they're published. Also, please don't forget to rate and review the podcast. It really does help new people to find the show Thanks. Catch you all next time.

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