Policy is Spurring Innovation

Brian: [00:01:28] Hello [00:01:20] and welcome to Future Commerce, the podcast about next-generation commerce. I'm Brian.

Phillip: [00:01:34] I'm Phillip. I'm actually coming to you remote in a not very quiet room and not [00:01:40] on a podcast mic, so apologies to those who usually like my very good audio quality. But you don't want to hear from me today. Actually, we have a special guest with us, Gaida from SustainaBase. Welcome back to Future Commerce.

Gaida: [00:01:54] Hi. Thanks for having me again.

Phillip: [00:01:55] Some big news, Brian, that we need to cover here.

Brian: [00:01:58] Yes, big [00:02:00] news for sure. And just for those that haven't heard our last episode with Gaida, Gaida Zirkelbach is the CEO and Co-Founder of SustainaBase, and we're super excited to get her take on the recent SEC news. So Gaida, maybe you could give us a recap.

Gaida: [00:02:19] Yes, [00:02:20] sure. So on Monday, the Securities and Exchange Commission issued proposed climate-related disclosures. So for publicly traded companies that report to the SEC, they're proposing these rules to protect investors because they felt like the current rules did not adequately protect investors [00:02:40] when it comes to climate-related risks. So they decided to propose these rules. And the reason they thought it didn't adequately protect investors is because there isn't much consistency right now when it comes to companies making different climate disclosures. So it's hard for investors to compare one versus [00:03:00] the other and what one might include or not include. Also, they don't know how reliable these disclosures are. So they might be big estimates or they might be very accurate and they don't really know how certain they can be about numbers being provided or claims being made or progress being made towards goals. [00:03:20] And also the SEC noted that right now, and I've said this before, there's an alphabet soup of different reporting frameworks out there. So companies are dealing with things like CDP, GRI, SaaS, TCFD, and so they wanted to bring less fragmentation [00:03:40] into the way that you report and how they report. And so that's another reason for these rules. And for the people that are very involved in this, these acronyms will make sense to them. But they ended up going with the TCFD and what we call the greenhouse gas protocol, which is kind of the great standard. So at SustainaBase everything [00:04:00] we calculate and do is pursuant to this greenhouse gas protocol, which is kind of the gold standard of how you calculate carbon emissions for a company.

Phillip: [00:04:10] And for some background, SustainaBase provides a climate accounting platform for brands, software companies, and governments. [00:04:20] And so this is something that you've probably been tracking for some time. Is this something that was on the horizon that we could all see coming, or is this a little bit of a shock?

Gaida: [00:04:31] It's not a shock for me, and I don't think it's a shock for a lot of the people in the industry. I might be odd in that years ago we were [00:04:40] thinking, man, this stuff needs to be tracked the way we track dollars, right? And I'm so thankful to see that the world is seeing it that way now. And I think that's good for everybody. And hopefully, we can do it in such a way that's not too onerous on companies. That's what we're trying to do is make it easier for them to get all this information. I [00:05:00] guess to say that the data that you have to collect to show your carbon emissions in the correct way can be very messy. And so we wanted to figure out a way to make it easy for them or easier to really automate, make a repeatable process, make it protocol compliant so that when a company has to disclose these things, which now they will, [00:05:20] they can focus, have confidence in the numbers that they're sharing, and then they can use this repeatable process to keep doing it year over year. And then they're able to have confidence in what they're doing and what they're reporting. So I think everyone's realizing that it's become very important. [00:05:40] And [00:05:40] what's really cool about the proposal is that it's basically making it a part of the financial statements. So these climate disclosures are going to be tied to a line item in a financial statement. So you're going to have a footnote that explains, "Hey, this dollar number here in the financial statement is affected by climate in this way." [00:06:00] And that's really a great thing for investors to be able to see so that they can assess a company based on how they're planning for this transition in the world, and how they're planning for climate risks. Investors need to know that so they can assess their risk tolerance and make good decisions. [00:06:19]

Brian: [00:06:20] That [00:06:20] makes a lot of sense. Yeah. And actually, I've been kind of reading articles about it that sounds like some people are like, "Oh, this isn't going to take effect for a while." There's like a 60-day sort of public comment period. And then the final rule would take effect in December. The biggest companies would have to start reporting in 2024, but in my head, I'm like, [00:06:40] actually, that's not far away.

Phillip: [00:06:42] It's not.

Brian: [00:06:43] Because not only will the biggest companies need to start adhering to the proposed rules. But the impact, the downstream impact could actually be quite large because this  [00:07:00]is not just those companies, but their vendors as well, correct?

Gaida: [00:07:04] That's right. So technically, the rule doesn't apply to the vendors, but the impact is going to be down the supply chain for sure. We have discussions with companies every day about this, and what everybody's realizing is that they need to start now. [00:07:20] They need to start now because there's so much data that they need to automate and transform and have a process to be ready to do this. And when it comes to Scope 3 emissions up and down their supply chain, they need to start prepping their supply chain for this and figuring out how they're going to deal [00:07:40] with it, how are they going to get this information from suppliers? And if you are a supplier to a large, publicly-traded company that's going to be reporting on this, you may be pushed into it. Because it might be a requirement of theirs going forward. "To be a supplier you have to give me these types of numbers, your emissions, etc..." I [00:08:00] see there's also a huge opportunity for the ones that are able to get this together now and say, "Hey, we've got this, we can easily report this to you. We're here for you." I think that's going to be a great opportunity for them.

Brian: [00:08:15] Yeah.

Phillip: [00:08:15] Let's talk a little bit. I need a refresher for myself, but there's a [00:08:20] pretty big difference between Scope 2 and Scope 3. Could you define those for us so that we would understand maybe what maybe even a software vendor that has a large global CPG company that is a publicly-traded company that they happen to service what their impacts might be and how they could quantify it?

Gaida: [00:08:39] Sure. So [00:08:40] I guess it's a little bit of climate science primer and I'm going to be super general here. So for the scientists listening out there, you know, I'm not getting really deep and detailed. So Scope 1 is basically all of the emissions that happen that are controlled by your operations. So your owned and operated facilities, things that you control. So if a [00:09:00] company owns its own building and it has activities from that building, for example, that result in emissions, that is Scope 1. But when that same company facility, for example, uses electricity, the emissions are actually you're using the electricity at the operations, but the emissions are actually being created at [00:09:20] the power plant. So that is Scope 2 because it's not being created at your facility. So that's the difference between 1 and 2. [00:09:28] Scopes 1 and 2 are required to be disclosed. Then when you get into Scope 3, you're talking about your downstream supply chain and you're upstream supply chain. So everything that you're doing to [00:09:40] get, let's say you're making a product, to create the product and then have the product, and then when you sell the product, everything that you're doing to get that product out to the consumer. So there's going to be a lot of actions that are happening on the downstream and then on the upstream, and that's Scope 3. And now Scope 3 not everyone may need to [00:10:00] disclose right away, but if it's material to a company's operations, which in many cases it will be, they would need to disclose their Scope 3 emissions. And if also they've made reduction claims already or they've set targets related to Scope 3, then they're also going to have to explain those. So is that clear? [00:10:18]

Phillip: [00:10:19] Oh, [00:10:20] it's very clear. It's also pretty enlightening. The challenge is that it looks like we will probably experience, even in the services industry, services sector, we are beholden to the rules of the road for the kinds of companies [00:10:40] for which we deliver services. We have to adhere to Sarbanes-Oxley for the companies that have compliance. And I anticipate the next couple of years are going to be really exciting for a company like yours that's trying to solve these problems in an easy-to-use fashion for teams that aren't climate scientists at brands. Technology [00:11:00] companies. What are some of the things, which switching perspectives, if you're an investor and you're looking for transparency in data, what's the impact for the investor and the perspective of the investor who is looking to maybe make more apples to apples comparisons, and is this going to help maybe grow the market, to some degree, for greater transparency?

Gaida: [00:11:19] Yeah. [00:11:20] So I can't speak to every investor, but generally what I would say is that we all know that if there are severe and more frequent natural disasters, that's going to affect certain assets. And you're going to want to know that, right? It's going to affect certain assets. It's also probably going to cause disruption in operations [00:11:40] and it might cause disruption in operations in the supply chain as well. And so if I'm an investor, I want to know those things. I want a disclosure of those things so that I can evaluate whether this company that I'm evaluating has prepared enough to deal with these issues as they come up. But there are things beyond the immediate [00:12:00] physical effects of climate change. You see banks starting to make financing decisions based on climate risk assessments. And so as an investor, if I'm seeing that this particular company may not obtain the financing or the right terms, etc., if they do not have a good plan in place for climate [00:12:20] risks, that might also come into play in my evaluation. And then the other thing that you realize I think is an investor is that the world is changing. There's increased regulation in this space, consumer demand and perception of what they want. They want more sustainable practices. They want different business [00:12:40] models that are more sustainable, more climate-friendly. And so when you see this shift, you're going to want to look for companies that are ready for it, that are shifting, transitioning their business models in a way that is going to be profitable in the future and sustainable, for lack of a better word, in the future, because the [00:13:00] companies that are aren't disclosing this and showing how they're doing that are going to look less favorable, in my opinion, to an investor.

Brian: [00:15:53] I [00:15:40] think about... There are things to think about here that go beyond what we typically think of as environmental [00:16:00] impact. And especially as we start to look at like, oh, yeah, this is affecting not just your manufacturing businesses, but the digital businesses as well. And I'm just thinking the environmental impact of minting an NFT right now is insane. [00:16:20] So should companies like Dine Brands, which has almost $1,000,000,000 or was about $1,000,000,000 business, they own Applebee's... Applebee's minted an NFT. We start to see so much hype about creating digital goods and digital experiences. This [00:16:40] is going to have a huge impact on whether or not someone decides to do something like that. What do you think about that?

Gaida: [00:16:51] Gosh, I think it will have an impact. And the people purchasing these digital products are going to want to know what the practices [00:17:00] behind them are. What are the emissions related to this thing that I am purchasing? And you're right, it isn't just physical assets that have that, of course, you've got these huge data centers. You've got these emissions coming. So I think consumers are very savvy now about that, of these digital products, and they're going to want to understand [00:17:20] that.

Phillip: [00:17:23] I think this is such a great opportunity. I'm looking for some sort of signal that the US is a leader in this respect, but we don't tend to lead in climate. So I'm curious if there are any analogs [00:17:40] around the world or are we following suit with what the rest of the world is already doing around rules of the road for public companies in other regions? With regard to climate transparency. Maybe you know that off the top of your head, maybe you don't. But I'm curious where we sit on the world stage as far as corporate ESG type initiatives [00:18:00] being less about press release and more about actual good and transparent information to the consumer.

Gaida: [00:18:06] Yeah. So not to bore you with legal things from around the world, but generally, we are behind, behind Europe, behind some other countries, especially Europe and places in Europe [00:18:20] when it comes to requirements of disclosures like this. But this kind of proposal is huge and it's the step in the right direction. It might actually put us more in a leadership position when it comes to this. I think the good thing about taking ownership of the issue and owning it is that then, as a country [00:18:40] and as the companies in that country, we control our destiny of what this looks like, how we want to disclose it, how we're going to deal with it. And I think that's really important.

Phillip: [00:18:49] I'm also thinking about this time that we all live in right now. There's a lot [00:19:00] of uncertainty. But one of the opportunities that we see is more global leadership from a commerce and monetary policy perspective. We're trying really hard to get Deputy Secretary Dan Graves from Commerce on this podcast and speak to some of the infrastructure improvements [00:19:20] that Build Back Better would be provided to digital companies and companies in the midst of digital transformation. There's monetary policy around Stablecoins and the US Fed potentially exploring US leadership in crypto. These all have tangential impacts  [00:19:40]on this exact ruling and the timing at which it would be rolled out. It shows to me that there are a lot of forward-thinking folks in public policy and policy wonks that are on top of it trying to keep the US in a leadership position. And climate is not necessarily an area that we have shown a lot of leadership on in [00:20:00] the past. And then, Brian, I'm curious what you think. When we reported Visions last year, one of the things that we gave some perspective on is that the US has gained leadership at the public policy perspective and is given more opportunity [00:20:20] for corporate leadership, for corporate ESG to sort of establish rules of the road. And the idea that the forces in the market and the invisible hand of the market will help us find the right path. Do you think that this is a continuation of that or is this more the [00:20:40] US is going to help corporations have some guidelines to have to follow for us to be competitive on the world stage?

Brian: [00:20:51] I think that there are some good actors out there that are leading the way in the corporate world that we're sort of showing the way in terms of being transparent and [00:21:00] reporting. But I think the reality is, and I think The Wall Street Journal covered this pretty [00:21:06] well, this is going to drive more cost for businesses. Reporting is a cost factor. And reporting at a certain standard level is going to [00:21:20] be something that businesses in general, while they might have good practices reporting on those practices at a compliant level probably wasn't going to happen for a lot of businesses without something like this in place. [00:21:38] And [00:21:40] so I think this is a little bit of leadership, governmental leadership towards next steps. And not to say that they didn't take cues from key corporations that were making good decisions around this. And I think savvy businesses would have jumped on that train ahead of time, to Gaida's point. This [00:22:00] is something that should have happened and should have been prepared for a while ago. And those businesses that did are going to be in a really good position going into this. But I think for broad market change, because of the sort of the [00:22:20] cost level is going to go up. And actually, I'm curious what you both think of this, but I actually do see this continuing the trend of rising consumer prices. Will this get passed back to the consumer or is this going to be something that corporations figure out how to do efficiently and  [00:22:40]factor into existing costs?

Phillip: [00:22:44] Compliance has a cost. Right, Gaida?

Gaida: [00:22:46] Yeah, I was just going to say, I think it's going to be just like any... Well, first of all, I'll say we're trying to make this as painless as possible for them. So that it's something we just do. But I think [00:22:57] it's going to become just like any other [00:23:00] compliance measure. So companies have to deal with health and safety regulations that they didn't have to deal with maybe 50 years ago or so. Now we don't have child labor. A long time ago we did. And that's more expensive. But at the end of the day, it's better, right? And it turns out to be better. And it just becomes a part of doing business and it's [00:23:20] a part of doing business in a better way that over time will just be the norm. And so I don't see it any differently than those kinds of regulations. [00:23:30]

Phillip: [00:23:31] There is industry regulation that has spurred innovation too, in the past 50 years. I saw a TikTok. I don't know if we'll find it for [00:23:40] the show notes because I can never find a TikTok after I've seen it. Somebody...

Brian: [00:23:44] {laughter} That's a problem. TikTok, that's a problem.

Phillip: [00:23:50] Chinese company. They're too busy spying to actually make a good product. There is a really interesting graph that I saw about [00:24:00] US auto manufacturing and sort of over the last 50 years and how the miles per gallon and fuel efficiency had a really strong impact on curb weight and horsepower. So when environmental [00:24:20] policies around miles per gallon came into effect in like the seventies and eighties, you saw vehicle sizes and weight plummet and therefore power and hauling capacity also went down. But what's interesting is that over the following 30, 40 years [00:24:40] is it's a flat line of miles per gallon across the fleet. And power has come and overtaken the miles per gallon ratio and has come back to pre-intervention, pre-regulatory guidance for those industry levels. And what's interesting is that effectively policy [00:25:00] has spurred innovation in that we've become more fuel-efficient. We found other ways in other technologies to power the same sort of mode of transportation in some ways, Brian, the last question I asked you was trying to get you to say [00:25:13] boundaries cause us to have to get creative and thrive. And it creates new industry and new demand. And I think [00:25:20] we're all seeing that right now at the pump. [00:25:21] I just bought an Ebike. The world is changing in the way that certain things in certain sectors impact the way that we buy and expect goods and services to be delivered.

Brian: [00:25:32] I mean, this is why Rad Power Bikes is that is a unicorn now. {laughter}

Phillip: [00:25:38] Yeah.

Brian: [00:25:39] Because [00:25:40] of Philip Jackson.

Phillip: [00:25:41] My grocery runs are on an Ebike. Before we give you the last word, Gaida, we do have a strategic partnership with SustainaBase. I'd love to make some introductions. If you're listening to this, FutureCommerce.fm/SustainaBase, and we can help you get connected to [00:26:00] the SustainaBase team. What are some thoughts for your customers, Gaida, and prospects that may be looking for getting a better handle on their data? What are some things that SustainaBase can help them to do to ease the sort of burden of compliance for whether they're a Fortune 500 [00:26:20] company or they service them?

Gaida: [00:26:21] Gosh, there are so many. But I think the basic is start now. We can help map your operational data from the lens of carbon, to know where things are, to know where there's opportunity to automate, to understand better how you're going to do this in the future, and also to understand that Excel [00:26:40] is not going to cut it going forward. It gets complicated. There's too much out there. And for the level of specificity that you're going to have to get to, it's not going to work well. So we'd love to have a conversation to help start thinking about, "Okay, what do I need to collect? Where does it come from? How do we automate the process? [00:27:00] How do we make this protocol compliant so that you're ready to do it?" And you can start with baby steps or you can start with the whole thing. But different companies have different sustainability journeys, they're in different places. And I think we want to make sure we allow for that. Just like with information security, some companies are much further [00:27:20] along than others. It's a journey. And so I guess you shouldn't look at it as like, "Oh, my gosh, we're so far behind. We're going to do nothing." Start with something, start with some analysis, with some steps to move towards where you need to be.

Phillip: [00:27:34] Great word of advice. Progressive enhancement and small [00:27:40] investments over time lead to great outcomes. Gaida, thank you so much for joining us on Future Commerce and thank you all for listening. You can catch our newest report. Hey, we've just been talking about the rules of the road and global eCommerce presence. Maybe you're looking to learn what the next phase of your [00:28:00] industry and business growth could be by going cross-border. We've prepared a 40-page guide where you can find out more about going cross-border at FutureCommerce.fm/Crossborder, and if you're really into compliance, cross-border taxes and duties are a great read for your weekend, so check that out and we've prepared [00:28:20] that for you for free at FutureCommerce.fm/Crossborder. That's it. Thank you for listening to Future Commerce.

Brian: [00:28:27] Thanks, everybody.

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