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Sustainability SmartPod episode featuring Deloitte’s John Mennel
Environmental liability (E-liability) introduces a simple, accurate, and verifiable calculation for the total cradle-to-gate emissions of any product or service. Karthik Ramanna is the Co-founder and Principal Investigator at the E-liability Institute . He’s also the Professor of Business & Public Policy and Director of the Master of Public Policy Program at the University of Oxford’s Blavatnik School of Government. (3:17) Karthik explains the basics of E-liability and makes the case for why companies, standards setters and regulators all around the world should be familiarizing themselves with the concept of E-liability.
Few companies produce as many household products as Colgate-Palmolive. Vance Merolla is the Senior Vice President of Global Sustainability at Colgate-Palmolive and he joins the show (28:28) to discuss how the company tackles sustainability across all its products and brands. The initiatives Vance outlines include advancements in recyclable toothpaste tubes, what the company learned from getting certain aspects of its Sustainability and Social Impact Strategy approved by the Science-Based Targets initiative and how Colgate-Palmolive recently went about signing a virtual power purchase agreement to help Colgate-Palmolive power its operations.
More resources about E-liability
Harvard Business Review: Accounting for Climate Change
Harvard Business Review: Getting a Clearer View of Your Company’s Carbon Footprint
Highlights from Karthik
What is E-liability? – (3:26)
Mobile phones as an example of how E-liability would work – (5:27)
The impact E-liability could have on supply chains – (9:33)
Pilot program with Giti Tire – (11:34)
How E-liability is better than standard carbon measurement approaches – (14:24)
Bringing more supply chain companies into the process – (15:51)
Eliminating “inspirational disclosure” for Scope 1-3 reporting – (20:34)
What’s preventing wider adoption of E-liability – (22:21)
How many companies will adopt E-liability in 3-6 years – (25:52)
Highlights from Vance
The details of Colgate-Palmolive’s VPPA – (28:40)
Key points in the VPPA decision-making process – (32:43)
Collborating with other market participants – (34:42)
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Transcript
Note: This transcript was created using artificial intelligence. It has not been edited verbatim)
Sean McMahon 00:00
This episode of the Renewable Energy SmartPod is brought to you by Deloitte. The way we power the world is changing and Deloitte is helping leaders amplify innovation, inspire, change, and illuminate a cleaner, brighter future of energy. Explore how Deloitte can help your company create a more sustainable net-zero future. To learn more, click on the Deloitte links in the show notes.
What’s up everyone and welcome to the Renewable Energy SmartPod. I’m your host Sean McMahon, and we’re gonna be doing something different with today’s show. This episode is going to feature not one, but two interviews. First up, we’re going to do a deep dive into the accounting concept of environmental liability, or what’s also known as e-liability. If you’ve never heard of E-liability, that’s okay because Karthik Ramanna is here to explain it. Karthik is the co founder and principal investigator for the e-liability Institute. And he also just happens to be the Professor of Business and Public Policy and Director of the Master of Public Policy Program at the University of Oxford’s Blavatnik School of Government as kop 28 approaches, we’re all going to be hearing more about carbon markets and greenhouse gas emissions. Ie-liability introduces a simple, accurate and verifiable calculation for the total cradle to gate emissions of any product or service. In a world where how to go about disclosing emissions is a hot and complicated topic. Karthik makes a very clear case for why companies standard setters and regulators from around the world should be familiarizing themselves with the concept of reliability as soon as possible.
After we hear from Karthik, we’re gonna pivot to a quick interview I did with Vance Merolla, the Senior Vice President of Global Sustainability at Colgate-Palmolive. We’ve talked a lot on this show about power purchase agreements and the crucial role they’ve played in the growth of renewables. Colgate-Palmolive, recently worked with Scout clean energy to sign a virtual power purchase agreement to power some of its operations. I actually had a longer conversation with Vance for an episode of the sustainability smart pod. So if you want to learn more about Colgate-Palmolive overall sustainability efforts, you can check out that show, but I thought it would be cool to share the VPPA portion of our conversation with the audience of this podcast. So you all can hear what that process is like from the buyers perspective. So be sure to stick around for that conversation with Vance Merolla.
But right now, let’s talk e-liability with Karthik Ramanna as a bit of additional background information in late 2021, Karthik and co author Robert Kaplan from Harvard Business School pen to paper entitled accounting for climate change, that paper really got momentum going for the conversation around e-liability. So we are including a link to that paper in today’s show notes as well as a link to an update the team provided earlier this year. So if you care about climate change, dive on into those links and enjoy this conversation. Hello, everyone, and thank you for joining me today. My guest is Karthik Ramanna, from Oxford. Karthik, how’re you doing today?
Karthik Ramanna 03:24
Doing? Well? Thank you for having me.
Sean McMahon 03:26
Yeah, I appreciate you taking the time. And what I guess is the afternoon over in your timezone. It’s still early morning over here. We’re here to talk about e-liability. You’re a part of the organization. That’s the driving force behind this potential new concept in accounting. So walk us through it, what is the-liability?
Karthik Ramanna 03:43
Yeah, so e-liability is stands for E stands for environmental. So environmental liability, it’s an approach of measuring the carbon footprint embedded in any product or service anywhere in the economy. So as you think about sort of the standard approaches to GHG measurements, most people might be familiar with the GHG Protocol and the various scopes, these attempt to measure emissions at the levels of entities or even products, but from a top down perspective, they start with say approaches which look at estimates for particular regions or particular industries. And then you know, try to imagine who are the suppliers and the suppliers suppliers and likewise, the customers and so forth, for any given entity and then from that, they try to sort of assume what might be the emissions of a particular entity or indeed a product. Ie-liability, on the other hand takes a very bottom up approach to this problem. It’s uses the same logic as say value added taxes, or uses the same logic as the financial accounting system to construct carbon footprints of any product or service from the bottom up. What that means is, in practice, we measure emissions at the level of individual transactions in the economy, rather than at the level of End. At ease, and as you measure emissions at individual transactions, then you can aggregate them up to entity level emissions reports, you can aggregate them up to emissions at the level of entire economies for that matter. And so in that sense, an e-liability system can become a system that runs in parallel to GDP as a way to measure the environmental performance of economies in parallel to the economic performance of economies.
Sean McMahon 05:27
Okay, so let’s give an example here for the listeners, like pick a product, and how would it change as it moves through its supply chain? And how would be accounting for its emissions change from the systems already in place?
Karthik Ramanna 05:39
Sure. So you know, take your smartphone, most of you probably have a smartphone on your desk or in your pocket. And that smartphone, let’s say it’s an Apple phone has 1000s of components in it. And those components have probably sourced across dozens, if not hundreds of layers of supply chain. And if you’re trying to say, well, what is the total emissions footprint of that smartphone, when you bought it from the store? You might think that that is like a problem of insurmountable complexity that you will never be able to understand what is that emissions footprint at a level of accuracy that would be needed to get what we call a full scope audit of that statement. And yet, somehow, we are able to figure out what is the cost associated with that iPhone, although the figuring out what the cost of that iPhone is, involves the same level of complexity, right, so now let’s just take the process involved in assembling an iPhone. So let’s just say, you know, in an iPhone, you’ve got a certain amount of steel. And that steel in turn is sourced from some metallurgical coal, and that metallurgical coal is mined in a factory somewhere, let’s say in Australia, now and the process of mining that coal is emitting a certain amount of emissions into the atmosphere, let’s say on a given day in a mine in Australia, I’m mining one tonne of metallurgical coal, and that one tonne of metallurgical coal is associated with, say, one tonne of co2 emissions, then what the system would do is that at every such direct source of emissions anywhere in the value chain, it would capture that and tokenize it. So for instance, that one tonne of co2 emitted would be tokenized into something like 1 billion tokens of emissions. Now, why do we tokenize it into these atomistic units? It’s because as that underlying one ton of metallurgical coal makes it into hundreds of uses in an economy, so some of that coal will be used in that eventually, in that iPhone, some might be used to produce a thermos flask, some might be used to produce a set of keys, some of that coal might actually driving this, this this video call that we’re on. So as that coal makes it into 1000s of uses, then that that atomized 1 billion tokens will find itself traveling into those uses. Just like you know, you can think of the original cost associated with that coal, being atomized and traveling through various elements of the use of that coal, eventually, when you’re on the back end, or the end of that chain. So for instance, you’re actually dealing with the finished iPhone, then what you’re doing is aggregating the tokens across all of the various sources of direct emissions in that entire value chain. So justice, you can say with a level of precision, that the cost of this iPhone is say $862, or whatever it might be, you can say the emissions associated with this iPhone is 400 million tokens or something like that you can you can put a really good number, a really precise and accurate number that can be audited. And you can do this, by the way with the underlying technology with any product or service in the economy. And the beauty of this is that this system can be basically assured are verified, just like financial statements are verified. And why does that matter? That matters because then you can start writing supply chain contracts to tell your suppliers and their suppliers, what are the you might have, say, for instance, a minimum quality specification, you might have a maximum cost specification. Likewise, you can write into those performance contracts in your supply chain, a maximum emission specification, something that can be assured and audited. So then this basically helps drive decarbonisation in a value chain. So basically, if you understand how vat or value added taxes work, then immediately you understand how the-liability system works. And first and foremost, the-liability system you want to think of as a management information system that provides you real time information on emissions of any purchase product or service in your supply chain so that you can drive decarbonisation decisions. So that’s how we want people to think of it.
Sean McMahon 09:33
Okay, thank you that that even clarifies tremendously for me. I’ve been trying to wrap my mind around this concept. And one thing I want to jump into there, you talked about kind of writing the contracts for suppliers and things like that. So So I guess one approach would be you could also motivate those suppliers to drive down their emissions by saying, Hey, I know right now you’re using you know, this source of energy for your plants, but if you turn to a renewable or something like that, that’ll drive the I guess the total down Is that correct?
Karthik Ramanna 10:00
Exactly, exactly. So you can use this basically, to motivate your suppliers and their suppliers to start decarbonizing their operations. You can also use this system to motivate your own production managers to start decarbonizing their operations. So one of the things we’ve been doing, and we can talk more about the role of the institute that we found it to advance this practice, this method into practice is we’ve been working with organizations that want to actually pilot this approach. And sometimes organizations come to us with a problem. For instance, we’ve got a pilot that we’re just wrapping up with a large industrial company that makes electric generators. And one of the key components in electric generators is copper wire. And so part of the question that they were trying to figure out is, is it better to use recycled copper? Or is it better to use virgin mined copper in these electric generators? And the answer is, of course, it depends on the underlying process used to insulate the copper in its first use, and therefore, the underlying sort of incineration related emissions from recycled copper versus the processes used in the mind for Virgin copper. But if you start measuring these things, and holding basically suppliers in your chains to account for them, then you actually start driving this down. So what you might start off as initial bids on recycled versus virgin copper, you’d say, well, actually, in a dynamic situation in real time, as you drive the system into your supply chain, people start saying, Well, next time around, I can give you a lower number, because I figured out what the key sources of emissions are in my own processes. And I can cut back on those. And that’s what we do with these pilots with companies now.
Sean McMahon 11:34
Do you have example of any of those pilots or when you could walk us through?
Karthik Ramanna 11:37
Yeah, sure. So one of the first companies that did a pilot in this space was a tire company in Indonesia called GT tires. And I’ll talk about GT because their results are now in the public domain. And GT tires, basically, large manufacturer of tires for very large auto companies, and so forth. And their CEO saw the paper that we wrote the underlying reliability paper that we published in Harvard Business Review, they saw it and they said, Wow, this is great, we should try this. So they got their head of quality and innovation, to call us and say, I’d like to try this out. And of course, that guy was like, you know, how do I even begin, I’ve got hundreds of suppliers, and they’ve got a hundreds of suppliers and so forth. So we said, well, you know, in the first pass, if you’re the only tire company in the world that’s doing this, you don’t need to boil the ocean. So what we did was actually, we figured out that four of their 196 suppliers accounted for about 85% of their supply chain emissions. So he said, let’s just work with those four in the first instance, that’s the low hanging fruit, if you’re the only company doing it, just work with those four. And of those four, three, we’re actually quite interested in working with this company and saying, Well, if you want to start measuring stuff at the level of individual batches that we sell to you, then we can even offer you some emission savings in the next batch. That’s exactly the kind of conversation we want to see. And then when GT finally finished this pilot, they figured out well, this is what the emissions associated with standard passenger sedan car tire that we sell, say to a large automaker is, and then they were able to take that to the automaker, and the automaker was saying, Okay, well, what would it take to bring us lower emissions tire? Right, say, Okay, well, here’s what it would cost. Additionally, here’s where, you know, you could sort of build sort of a value added marketing around this with your customers and so forth. And so that then became, again, part of this dynamic conversation in the supplier customer relationship, where emissions becomes another unit of engagement. Right? So one of the things that really excites me about this approach is it uses the competitive dynamic in companies and in supply chains to actually solve the most urgent problem on the planet, which is climate change. It says, rather than assume that companies will all come together and somehow magically hold hands and suddenly wish away the climate crisis. It says, No, what companies are really good at doing is competing with each other over the performance of their products. So let’s build a real time accounting measurement system that allows them to do just that. And as they do that, then suddenly, their competitive instinct, their killer instinct, as companies is aligned to actually solve this problem. And that’s the kind of innovation that we’re seeing in companies now, especially in the leads to companies that are paying attention to this this approach.
Sean McMahon 14:25
Yeah, I can see how you know, driving companies to compete with one another is one of the biggest appeal of this. Are there any other ways reliability is better than standard carbon measurement approaches that are in place right now?
Karthik Ramanna 14:36
So look, the approach we take is that at the end of the day, we say this is just basic accounting, financial accounting, that we’ve used for 500 years to measure inventories and in sort of, you know, market societies, we’ve applied that to the climate space. So rather than measure things in, say dollars or euros, we’re measuring them now in kilograms of co2 emitted. So in some sense without oversight Getting the point. I mean, it’s hard to imagine how else you would do this. If you wanted to do proper accounting for GHG emissions, then this is the only way to do it. Because at the end of the day, this is just basic accounting that you would learn in an accounting one on one course applied to solve or applied to be addressed to the climate problem.
Sean McMahon 15:20
We will be right back.
Building a brighter tomorrow starts with illuminating greater possibilities today. That’s why Deloitte helps organizations weave sustainability into their business decisions. Join Deloitte in creating a brighter cleaner tomorrow. To discover what sustainable, renewable and possible and the future of energy, click on the Deloitte links in the show notes.
And now back to my conversation with Karthik Ramanna, from the e-liability Institute and Oxford University. So there any issues with were going back to your coal example? There’s many, many links in that supply chain from getting into that phone? What if two or three of the companies in that process aren’t participating in this? Like how do you overcome those gaps?
Karthik Ramanna 16:11
That’s a great question. So part of the theory of change your is at this stage to work with lead steer companies. And that is to say with companies that have a competitive production process, visa vie carbon emissions, so that they are able to produce the same output, but for a lower emissions with the same quality and sometimes the same price even and to use them basically to drive the adoption of this, not just internally, but in their supply chains. But for this system to work at scale, then eventually, we do need to get to a place where standard setters and regulators start embracing this as well. I think the challenge with the current approach right now, the GHG Protocol, which is the dominant measurement approach in this space, is that it’s very well intentioned. I mean, it’s certainly the the approach of the protocol, and our approach is aligned and that we’re trying to address the climate crisis. But it has taken an approach that’s based really on what we call inspirational disclosure, rather than actual accounting, right. So now, if you give companies the choice of well, we can hold you to account for what it is you’re saying, Your the progress you’re making on climate change, versus we’ll allow you to produce some, you know, sort of fuzzy top down estimate that, by the way, no one can ever assure in a true and fair sense, because it’s a fuzzy top down estimate, then, of course, most companies will choose the easier route, I mean, unless there is really sort of an internal intrinsic, competitive differentiation, or there’s some sort of regulatory mandate, you will choose the easier route. So this is where we say that we need to really get the standard setters in this space, to recognize that if we want to make true progress on climate change, we need to take away that easy, cheap option away from companies in this space. And I think that that’s part of the long term transition that we need. Now, it can’t be very long term in the sense of, you know, we’ve got an urgent climate crisis to solve. So when I say long term, I mean, three to five year agenda. So somebody recently asked me, one of the regulators asked me if, if we were to make you king for a day, how would you implement this system. And basically, this is what I’ve suggested, by the way, no one’s offering to make me king for a day, this was just a hypothetical. But I said, Look, number one, announce as soon as possible, maybe as soon as next month, that for all fiscal years, starting after July 1 2026. So three years from now, any company in your jurisdiction that has over a billion dollars in revenue, or equivalent, will have to report under the-liability system announced further as a second point that for all fiscal year starting after July 1 2029. So three further years after that, all companies will have to get full scope audits of their reliability reports. So you’re basically giving companies three years to produce their first statement, and three further years to get a full scope audit of it. That’s the six year runway, the third step is really critical to make this work, which is that for any company to whom you are a customer, that is any company that’s supplying into you, that doesn’t happen to be using this system, then their inputs will be transferred onto your E balance sheets at the 99th percentile or the 95th percentile of that products emissions category. Now, that’s the turbo incentive to work with your high emission suppliers to make sure they’re on this system as well. You don’t need to boil the ocean and make all your suppliers comply at once. But you say, Okay, who are those four suppliers that I really need to get on board? And I give them an ultimatum and I say, Look, you may be in a jurisdiction that’s not embracing this, but if you want to conflict continue to supply to me, I’m giving you a six year window to get on this. If we’re able to create that sort of those rules of the game starting next month, then basically the competitive spirit and sort of you know, the competitive instinct that you see in companies will produce the decarbonisation incentives will produce the software that’s needed for this will produce the assurance products that’s needed for this. And in fact, we’re even already seeing a number of software providers that are producing solutions that will work for the-liability principles. So I think we’re moving in the right direction, we just now need to overcome this sort of regulatory cheat option that’s available, where you can continue to sort of, you know, make up a number under scope tree, we have to take that option off the table.
Sean McMahon 20:34
I like how that using the 99th percentile will motivate companies to close that gap, like I was talking about if they have one or two holes in their supply chain. I also love your phrase, I think it was inspirational disclosure that we said, That’s correct. Yeah. Nice and cheeky. I like that. But if we’re talking about disclosure, obviously, folks in this space, know everything about scope one, scope two, and scope three. So how does this change the game? And in terms of some of those, you know, protocols that they’re already following? Can you take this EA liability accounting practices, and just plug it right into that?
Karthik Ramanna 21:04
Absolutely. So E-liability is think of it sort of like as machine language code, right? It sits below all of these various disclosure standards, whether it’s the GHG Protocol, whether it’s tcfd, whether it’s IFRS, or the new issb, or whether it’s the new CSRD, you know, you name it, all of these, ultimately, if they, if the focus is accuracy, they need to operate on an accounting system, which is basically what the-liability principles are. So if for some reason a company says, Well, I really liked the scope, one, scope two, scope three taxonomy, that’s fine, you can run the-liability system, and then you can, you know, aggregate all of the various inputs, you get into a scope, one scope, two scope, three bucket, in fact, you can automate that process. And you can do that you can do that up to scope three upstream. Obviously, anything that happens, scope, creep downstream, is effectively what we call prospective rather than retrospective in the sense that anything that is scoped to the downstream for a company is in the future. And that’s, that’s where you leave the realm of accounting, and you move into the realm of sort of, you know, marketing, and companies can continue to sort of put that out there as part of their sort of, you know, again, aspiration or inspiration for what it is they like to do, but then that that goes out of the realm of what is accounting.
Sean McMahon 22:21
Okay, well, I gotta tell you, you sold me on this, it makes perfect sense. You know, the way you draw the analogy of we can track the cost of something the financial costs, why can we track the emissions cost? What’s preventing a wider adoption of reliability?
Karthik Ramanna 22:35
That’s a fantastic question. And, you know, one of the first people that hold us after we published the paper in November 2021, was the head of one of the large securities regulation agencies in the world. And he said, Hey, guys, this is a really interesting idea who’s doing this? And we had to say, well, as far as we know, no one’s doing it. We just ramped it up in our offices. And he said, Well, that’s a problem. You can’t build regulation around something no one’s ever done before. So why don’t you go get a few people to try it out, get a few companies to try it out. So that’s really what we’ve been focused on. So about six months ago, we created the e-liability Institute, as a way to actually help companies and not just for profit companies, we help not for profit organizations, so health systems around the world, small governments, etc, embrace this, our institute is, as I said, a not for profit, we give our time free to this initiative. And in return, what it is we want is to be able to publish the results of these pilot studies with organizations for wider consumption so that we can get other people to say hi, I could do this too. So now obviously, when we publish those results, we anonymize the actual emissions levels, because those might be proprietary. We have no interest in, you know, disclosing proprietary data, our goal is to get more and more people. So to sort of embrace this. So our theory of change is really to work with leads to your organization’s to drive the adoption of this, and then to be able to share the results of that with regulators with standard setters so that they feel like this is the way to go. And my sense is that in I mean, the Institute is only six months old. So the institute was basically created as a 501. C three. We are incorporated in California, mainly because our founding donor was based there and very generously gave us the support of their legal resources to incorporate it. We run on a shoestring budget. And we have hired now our first full time CEO to drive the volume of pilot requests that are coming our way. And our CEO has actually been able to triple that volume very quickly, which is good news. We also have a small research staff to support effectively our activities. Because you know, my co author and I Bob Kaplan is my co author at Harvard Business School. And I’m here at Oxford. We’re both professors. We have day jobs. And you know, I mean, we’ve said actually to all the regulators and standard setters we’ve spoken to. We have zero interest of wanting to be standard setters. We’re academic Next. So the sooner they embrace this, the better because then we can go on to write our next papers. But until they do, we’ve made this a priority for our action research, which is to get as many people into this and embracing this so that we created a critical mass. And obviously, because we are supporting the pilots pro bono, which is to say that we don’t charge the companies for the advice we give them. And the reason we don’t charge them is we want to be able to have complete integrity and publishing whatever it is, we find, rather than, you know, the company is sort of feeling like they can control what we say. So we have to find some way of paying the bills. And we’ve basically relied on philanthropy. So if you have any wealthy friends or foundations that are interested in supporting our work, then please email us. If you can go to E dash liability dot Institute, you will find out more about how to reach us.
Sean McMahon 25:52
Okay, great, we’ll be sure to put a link to that on our website as well, for the show notes. I know you mentioned that if you were what if you were king for a day, what you would do in terms of kind of setting out those three year and six year markers. I got some bad news for you, you’re not the king for the day. So I do want to ask you for like a realistic bold prediction of say, you know, three, six years out? How many companies do you think will be using a system like this? By then?
Karthik Ramanna 26:21
I mean, look, my sense is if we can sustain the momentum that we have going, it’s not unreasonable to imagine that we’ll have about 200 to 250 of the Fortune 500 companies in various stages of adoption of this in three years. That’s one theory of change. Well, that’s one path to success. If you’ve got half of the Fortune 500 embracing this, and you set up a equilibrium where high quality companies are doing this, then increasingly people will start asking investors will start asking, governments will start asking, etc. Why is it that other companies are not doing this, and then this just becomes sort of the thing that needs to be done. The other reason why I’m optimistic is that in the European Union, they’re considering what’s called the carbon border adjustment mechanism, or CBM. And if you’re going to tax the import of inputs based on their emissions intensity, then you need a taxable basis, and you contact something like scope three, because it’s not auditable, you can make up any number currently under scope three. So then what this would do is provide that taxable basis that would allow basically a CBM to operate. So if the European Union is serious about a CBM, then that’s another reason why something like this would get embraced would get adopted. So those are the two reasons why I’m most optimistic about it.
Sean McMahon 27:39
Well, Hey, Karthik, I appreciate your time. This has been eye opening for me, and I think our listeners will appreciate as well. So thank you very much.
Karthik Ramanna 27:46
Thank you so much for having me.
Sean McMahon 27:48
All right, everyone, stick around. We’re gonna bring in Vance Merolla, from Colgate-Palmolive in just a second. But first, here’s a quick word from the exclusive sponsor of today’s episode, Deloitte.
Building a brighter tomorrow starts with illuminating greater possibilities today. That’s why Deloitte helps organizations weave sustainability into their business decisions. Join Deloitte in creating a brighter cleaner tomorrow. To discover what’s sustainable, renewable and possible in the future of energy, click on the Deloitte links in the show notes.
Now it’s time to welcome Vance Merolla to the show. Vance is the Senior Vice President of Global Sustainability for Colgate-Palmolive. Vance, how’re you doing today?
Vance Merolla 28:37
Good. Sean, how are you? Thank you for thank you for having me today.
Sean McMahon 28:40
It’s great to have you here. I want to get deeper into some of coal gates, you know, overall sustainability strategies. But recently, you announced the details of a virtual power purchase agreement, and Colgate-Palmolive sign that to address where it sources of energy. So give me a favor and walk our audience through what is a VPPA and how you came about getting that deal done? And what are some of the intricacies there that other corporations out there who might be thinking about doing something similar? should keep in mind?
Vance Merolla 29:04
Sure. Now happy to do that. So yeah, as you mentioned, we signed our first virtual power purchase agreement VPPA, just a couple of weeks back, and we were lucky enough to announce it during client week, which is terrific. So for us, you know, just taking one step back. The reason why we’re doing this at all right is it’s really associated with our long standing client program. So Colgate-Palmolive, has been working on climate action for over 20 years. I’ve been with the company 26 years, so long time. And as we’ve we’ve evolved into a leadership role, we think a leadership role in climate. Renewable Energy plays a big portion of it for certainly our own facility. So we have we’ll talk about later maybe we’ll talk about our science based targets but one of the other targets we have specifically around renewable energy is to have all of our facilities around the world be 100% renewable electricity by 2030. And so we as a team and last you know, last couple of years, have kind of really taken that out as a charge and and working with our have teams around the world to do that. So to do that, there’s really four main tactics that we use. And so we use things like on site solar, and we’ve got lots of projects where you put solar panels on buildings, and we have some large factories around the world and some land to do that. And, and that’s been a long standing project, and we’re doing more and more because the availability and cost of that is getting better and better. So outside, so it was terrific, we have about 17 sites right now that that have a solar systems on the on the facilities themselves. And that’s really, really good. It’s also a visual thing for our employees. So it’s a it’s a great thing to do. We also, you know, we purchase utility green power. So in some markets, you can purchase green power from from utility and, you know, either pay a surcharge, or figure out how to, you know, get it into the normal flow, but that’s not available everywhere, where it is we try to, we try to do that. And then we you know, in some markets, it’s hard to do either one of those, and we will, you know, we’ll use instruments for climate like renewable industry certificates where we can, we’re using less and less of those over time, truthfully. And so all those first three are great, and they help us but that’s not the way to scale. And so what we’re left with really is something like a virtual power purchase agreement. And, you know, just a quick description of what that is that essentially is helping a market. In our case, it was the US this time, we’re working in Europe, and we’re looking at other places as well to to actually go out into the market and see what projects what solar and wind project viable projects are out there that we that we can sign to agree on a long term contract, 1520 years contract that we will agree to pay and by the attributes of the renewable energy project. So in our case, the project is in the interest in our press releases is a 209 megawatt Markham project solar project from from Scout, it’s in West Texas, in Waco, Texas, it’s, it’ll be a long term deal for us. And we’ve got 20 years and we hope it provides clean, renewable solar energy for that time. And the sizing of it, you know, it’s hard to know exactly, but it should cover most or all of our current US footprint in the US. So in essence, once that’s construction is done, and it’s up and running, and we’re working on that would cover our whole US footprint, which is fairly, you know, fairly large for us. So that’s that’s what that’s about. We like it because it creates additionality. The other tactics are just as relevant and useful. But the idea that we sign a contract allows a developer to go to the you know, literally to get financing because they have a customer like Colgate that’s going to buy for 20 years allows that project to happen. And so that there’s a real advantage of actually putting new solar on the grid, we think that’s an important part of our strategy. And like I said, we’re, we’re working on negotiations in Europe as well. And then as other markets around the world, we’re, you know, huge operations in Asia and Latin America and Africa as well. So we’ll be working to expand there as well.
Sean McMahon 32:43
Okay, and as someone, your position, obviously, is kind of in charge of the strategy that and bringing everyone together the various you know, the developers, you mentioned, scout was who you work with on that? What went through your mind and the decision making process there? For example, why did you go solar, not wind? What boxes? Did you have to check?
Vance Merolla 32:58
Yeah, no, it’s a good question. And it’s, you know, again, this was our first one, and it’s does a lot of learning and a VPPA process, I would encourage people to do it. But um, you know, going with open eyes, you really need a cross functional team. So, you know, it’s myself and our sustainability folks are important to this. But equally, when we, when we do this is having folks from the finance team, our procurement team legal. And so we created this cross functional team, even treasury, people who, you know, have to be part of this decision making, including the C suite leaders of those functions, you know, really involved with this. It’s not simply an environmental project. In fact, it isn’t, it’s really, it’s really a finance project overall, and really understanding how to do that. So a lot of the choices are made around what’s available in market with with your third party, so you typically use a third party to go to market and bring back potential projects based on our specifications and, and go through them and speak to the developers and negotiate and figure out what what’s the best fit. And so you’ve whittled down from a very large group of projects down to a handful, and then it comes down to things like viability, timing, risk price, all the things you would do on any other projects. So it’s in a lot of negotiations back and forth with force with the lawyers, but also on the commercial terms of it as well. So an exciting project, but uh, you know, it takes it takes some time. But the results because you know, VPPA, and I mentioned before, it’s a scalable, it scales, so it’s very hard, it would be impossible, I would almost say it’d be daring to say, to use on site solar to meet our entire electrical footprint in us, right, we just simply wouldn’t have enough property or land to do it. And so this is the way we scale. And so the effort you put in, even if it takes you a year or two years, is, you know, I would say is the main route, if you have an ambitious goal, like Colgate to be 100% renewable electricity by 2030.
Sean McMahon 34:42
You mentioned you’ve reached out to you know, third parties to help you go to market and kind of seek out the right projects. Were there any other folks kind of in a similar role to yours, but at other corporations, right, either CPG or not, but any other folks you kind of talked to or pick their brains for advice on how to approach this or any resources perhaps online or so? stations and things like that.
Vance Merolla 35:01
Yes, there’s lots of corporates working on this, we haven’t had to do it, we’ve been able to meet our goals tried, honestly, without a VPP. That’s why we haven’t done and not that we didn’t think it was important. But we met our prior science based target without the the VPP. But the new net zero targets in this this new 100% target, you know, something couldn’t get there. So yes, we absolutely spoke to peers, even competitors in the space, you know, this is a pre competitive thing. We’re not rolling in sustainability. You know, we often benchmark with our direct peers and competitors. And so yeah, we other companies that have been through it off alumnae, necessarily, but, but they definitely helped us because they’ve been through the process before, and also helped us identify potential third parties that really are in the market. There’s not 1000s of them. So there’s a relatively small group, but we found, you know, a third party that we really felt comfortable with who we’ve had our best interests in mind who were looking for the right projects for us and bringing them back was patient enough to wait as in parallel to this work in the US, the market was going under a lot of churn and pricing was changing. You had bans on imports of certain panels from different countries, right, you had a lot of dynamics, or there was throwing this market into a bit of a spin. And so we lived through that and having their third party advice. I went off, we could possibly do this without a company like that. Yeah. And then there’s lots of resources out there, I think, you know, there’s like rebill and other, you know, other groups, that consortium groups that you can go to that with that can help with, with these types of things, you know, with many corporates going through it.
Sean McMahon 36:26
I gotcha. Well, hey, that’s, this has been very enlightening, informative. Thank you for your insights today.
Vance Merolla 36:31
Great. Thank you, Sean. It’s been great.
Sean McMahon 36:39
Well, that’s our show for today. But before we get out of here, I want to say one final thank you to the sponsor of today’s episode, Deloitte.
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