Financing climate protection

00:00:06:

00:00:07: Welcome to a new episode of the sound-of-finance podcast by ZDB Consulting.

00:00:13: In today's episode, it is once again about one of the most pressing topics of our time climate protection and in particular the role financial services can play in driving credible and measurable impact.

00:00:29: Apparently these days the question how to do so in a way that is both effective and defensible.

00:00:41: This exactly where today's topic comes-in being the role of high quality carbon credits, I guess we have much to talk about, it's gonna be the start-up you founded.

00:01:03: About European emission trading system ETS versus voluntary carbon market.

00:01:09: his business is about greenwashing and science based targets.

00:01:16: And finally obviously concrete examples for financial services institutions.

00:01:23: so welcome to podcast.

00:01:26: Thanks so much Johannes.

00:01:27: It is quite an international market, right?

00:01:30: Because most of the projects so far they come from the global south but obviously especially for the global north that's a really important instrument to achieve their climate goal.

00:01:41: But yeah thanks so much for having me

00:01:43: Yeah absolutely So talking about the importance let me maybe start with a broader question.

00:01:51: Maybe it's just my gut feeling.

00:01:52: correct me if i'm wrong but climate protection somehow feels like, has become more difficult in recent years politically economically i mean given the reason geopolitical developments and the u.s with there let's call it designs hostile policy.

00:02:10: i am actually wondering at these Movements are slowing things down with respect to climate protection or perhaps even acting as an additional trigger for action elsewhere in Europe, for instance.

00:02:23: Or South Africa where you're based?

00:02:25: so from your perspective how much genuine willingness is still out there today when it comes to net zero ambitions compared to say six seven years ago and the days of Fridays For Future movement?

00:02:39: And so on.

00:02:41: Yeah, so very good question.

00:02:42: So first of all we have to say climate protection and market-based instruments around Climate Protection.

00:02:50: actually nothing new right?

00:02:52: They started in nineteen nineteen seven with the Kyoto protocol.

00:02:56: where should your first kind of Market around carbon credits?

00:03:00: you two certificates and climate protection started.

00:03:03: And I would definitely say that markets is a pretty much a roller coaster ride with ups and downs.

00:03:12: And I think especially beginning, twenty-twenty one we actually were quite on a up all the way up at the roller coaster.

00:03:23: so i think there was a lot of hope.

00:03:26: that was also maybe little bit of hype Especially around climate neutral labels.

00:03:32: but then also in general sustainability wasn't really big topic right?

00:03:37: Also global topics.

00:03:40: From that hype all the way at top of the roller coaster, we went down again.

00:03:49: Where do you stand today?

00:03:50: I think especially with US and a lot right movement globally... We definitely lost some of the pace or momentum specially with the US exiting Paris Agreement which try to also figure out carbon markets on a global level, especially the trade between countries or especially for countries that maybe will not be able create enough carbon sinks within their own country.

00:04:24: That they can then buy carbon sinks of carbon credits from other countries that may overproduce especially countries in the Global South.

00:04:32: so They am exited the Paris agreement.

00:04:37: And that means one of the big players is not in a market anymore, but and here's a bit about Europe still stands quite strong.

00:04:46: I would say okay so it's part of almost European identity of corporates that they actually especially around climate protection, I still see this as a really important topic and also one of the only tools to achieve net zero.

00:05:05: Obviously there's a couple of tools in.

00:05:08: the biggest one is reducing your own footprint.

00:05:10: but i think after the whole hype around sustainability now has a lot of clarity that they understand where better how much it can reduce And for that they need to use carbon credits.

00:05:27: and then obviously we have the EU ETS.

00:05:29: It was over the last weeks a lot of talks around changing the EU ETFs, but there's actually.

00:05:37: it has been confirmed That the US will be one off the big instruments end gonna talk about later.

00:05:45: There is a big correlation or not correlation as a bit overlap coming probably between voluntary markets or the COII certificates that you mostly heard about.

00:05:58: COII certificate coming from climate projects and EU ETS, it is mostly run on allowances almost hundreds in the same works a little bit like attacks where companies get free allowances but then they ran out have to pay by allowances.

00:06:18: there's certain amount of allowances been given And that is then basically the revenue generated through.

00:06:26: That is funneled back to the countries and there's a big thing coming up in June, A big decision if voluntary carbon credits should be included In the UTS.

00:06:42: This at moment standing and thats reason Europe Is still quite big on climate protection side But it is a global effort.

00:06:53: So even if Europe was very strong, we need more and we see that little bit coming from China and Brazil.

00:07:01: so other big countries building their national markets.

00:07:05: but yeah the US definitely has put in lot of friction on this global market.

00:07:10: Yeah got you!

00:07:12: Even more important than your active in these realms.

00:07:16: As you mentioned.

00:07:17: we will talk about ETS later on but maybe let's focus first on the other side of a coin, the voluntary market.

00:07:27: Let us talk what are building?

00:07:30: Could you briefly explain what Zenken does in simple terms?

00:07:34: and I'm also curious if there is an idea behind the name Zenken.

00:07:40: so before the German speaking audience self-explanatory thought behind this name right and maybe also tell me what personally motivated you to start the company.

00:07:55: You know my background is like any other German engineer, I started in automotive engineering then later went into wind energy and then went into consulting.

00:08:09: And at a certain point, I didn't do anything with sustainability anymore which is why I concentrated on wind energy at the same time.

00:08:17: So i went onto big research project in to South Africa started Research Institute for German University Went to south africa and had this big task of figuring out what would incentivize farmers In the southern hemisphere to switch to regenerative agriculture.

00:08:37: And they also had money, obviously.

00:08:41: Then I asked them where does the money come from?

00:08:42: They said maybe development banks like in Germany you have the GIZ or from carbon markets.

00:08:51: but then there's that yeah, carbon market is amazing but it doesn't work to feel a little bit shady and the monies not arriving so on and so forth are not really structured.

00:09:05: That's when I then thought about like, okay.

00:09:08: If they're all saying this is one of the main tools that would finance the transition and it's not working than we need a solution for that right?

00:09:17: So i was there in South Africa actually... ...I got stranded due to COVID- and the South African Omicron variant When I couldn't fly back to Germany.

00:09:28: and what do you start a company right?

00:09:31: So that was five years ago, and then i started thinking with the aim.

00:09:38: Basically two make this market a market that companies can trust and that helps projects.

00:09:46: actually is not with climate protection.

00:09:49: And those regenerative agriculture in beginning but now basically We're helping companies to tap into that market without the greenwashing concerns.

00:10:01: So what we are doing is, basically take that concept of a market makes sense right?

00:10:06: You finance climate projects on-the-ground and it has always been like.

00:10:11: I think almost no one says that you don't need that.

00:10:15: i think its more about structure in floors at market head being transparent not knowing if money arrives knowing what is going on.

00:10:25: after my money went to the project.

00:10:27: So, we created an AI module for different kind of project types like reforestation and regenerative agriculture mangroves but also new things like direct air capture that analyzes these projects and sees which project actually doing good for the planet?

00:10:48: Which project has impact then continuously monitor them And by that we help companies to actually invest in these projects without greenwashing problems and challenges afterwards, but then also two managed at like a portfolio so they become a little bit into the finance world.

00:11:07: We don't just think you should get a pdf end of your final year like hey i supported know he should actually Manage this like a portfolio with different kind of project types, different kinds of risk profiles and also maybe you have longer term investments.

00:11:24: Um but also if the risk profile is that every project has And that's what we're doing now with little bit more than forty people With big clients like Deutsche Telecom um Vodafone for there But also in the financial industry like um DZ bank for union investment or on the market.

00:11:47: So we're quite big actually in the financial industry.

00:11:51: Gotcha, okay so you were saying that the voluntary carbon market is quite shady at the moment?

00:12:00: Why do we see such large differences and quality between the certificates... And how can it be?

00:12:09: These questionable certificates sometimes appear to be audit compliant.

00:12:14: So what makes this business that shady and still working as well?

00:12:20: First of all, I started a company five years ago... ...I think quite some changes happened in the meantime.. ..I wouldn't say it's bad anymore but basically how i'd start is that five years there was almost no technology being used for barricade projects.

00:12:38: So you can literally imagine that someone from tooth flies to a forest in Kenya and then measures with the tape, the diameter of tree.

00:12:50: This is basically how it used to be.

00:12:53: And also standards are basic.

00:12:56: they were quite outdated.

00:12:57: They made forward where there's no digitalization.

00:13:03: Now only over time We saw that there is more and more data being used, which makes a lot of sense because if you only can measure like let's say you measured twenty trees.

00:13:13: And then you say okay for the other five million trees it probably gonna be the same.

00:13:18: It's

00:13:19: going to be pretty bad assumption.

00:13:23: So now with satellite data in leader data on other data points and AI basically making sense off their data pool obviously get way closer.

00:13:34: So this is something that we're doing.

00:13:38: And the standards, they are slowly and also doing it like to big standards or if you heard about them like gold standard of Vera and so on... They're slowly adopting today but it takes a lot time because rewriting as standard takes couple years then needs different instances on audits and so, basically from the beginning to implementing new standard can be like five years.

00:14:11: So even though all these things came up in two twenty one to twenty-two and then this claims that projects are a lot of other projects didn't have that impact than there's others writing you standards but now they're only coming out just new standards.

00:14:27: So a lot of the projects are still happening under old standards, but it doesn't mean that's bad or good project.

00:14:35: It is really shallow I would say bar to cross you know?

00:14:41: That's the problem at the moment and this reason needs like additional proof even though TOEFL is basically auditing these projects.

00:14:50: But if the requirements are so low then the TOEFS says yeah all these requirement happened But they don't say it's a good or bad project, right?

00:15:00: They only said yes.

00:15:01: This standard has been executed in this project but not...this is very good project.

00:15:08: Okay and so you are fulfilling the science based standards by combining with lot of data.

00:15:16: I guess there already a role that AI plays making better decisions here.

00:15:24: How do

00:15:24: you handle all the data?

00:15:26: AI is a big thing because look there are, I'm not sure.

00:15:31: Ten thousand projects out there and All these project have lot of data points.

00:15:38: obviously first off they're so called PDDs Project Description And These already like PDF's of like six hundred seven hundred pages against.

00:15:52: They are audited, but that's obviously still the manual work.

00:15:57: But then you have additional data maybe even public data like satellite data and so on.

00:16:01: did he can use for analysis?

00:16:06: In the beginning actually started without AI.

00:16:09: it took one of our scientists three weeks for a single project full time to go through all the data And there is still massive chunk off human error because you would still say, I check ten percent of the satellite data and trust arrest.

00:16:28: Now what we can do is build up these modules for different project types.

00:16:33: now it basically takes an hour to analyze it because like almost ninety percent that's completely optimized.

00:16:42: through AI.

00:16:43: we take satellite data all documents And then we put it into our module and that's being analyzed.

00:16:51: There will still be things coming up where all scientists have to check themselves, for instance this data can't be hundred percent analyzed.

00:17:00: or here there is no data.

00:17:02: so either you go back through the project of the N-tree also has to go in person because especially a lot of things around social and biodiversity sometimes there are no sensor data.

00:17:14: Okay, so it's part of your daily business that you colleagues go into a rainforest or

00:17:19: hundred percent.

00:17:20: Yeah

00:17:21: interesting

00:17:22: yeah That's the daily business.

00:17:23: but thing is if just think about this ten thousand project pipeline we already can say for like eighty five to ninety percent We don't even have to visit them because they will never make past our due diligence.

00:17:37: So then in the end, you only have like a small percentage of projects left that we actually look at.

00:17:42: Okay so your already got seven cents to say for shady project where you're saying this is not

00:17:49: worth it?

00:17:50: Yes but I think its still shocking because between ninety and ninety five percent of our projects they don't make out due diligence.

00:18:02: it's still on the bad side.

00:18:05: It gets better year by year, I must say our quality gate is quite strict because we're from Germany and the German companies in general.

00:18:16: they are quite sensitive to auditing and then greenwashing risk especially even more so than the financial industry.

00:18:24: So that' s a reason.

00:18:26: yeah its still between ninety and ninety five but also shows you what state market.

00:18:32: In general, newer projects tend to have better outcomes.

00:18:36: Obviously it's not like software where you can go from zero-to-one... You start a project and then only four years later you get the first credit.

00:18:44: so there is big ramp up phase.

00:18:47: Maybe financial services are key words that make your business more tangible.

00:18:55: I know its cool audience of this podcast as well.

00:18:59: Let's consider if I'm a bank or an asset manager, why should i even engage in voluntary carbon markets?

00:19:10: Especially given that most of my emissions are scope three.

00:19:13: So they sit at the portfolio rather than running the building itself and so on... Wouldn't it be more effective to simply focus decarbonizing my portfolio itself,

00:19:30: like

00:19:30: adjusting lending or investment decisions.

00:19:33: So convince me why should I engage in these voluntary carbon

00:19:47: markets?

00:19:56: Two billion in German, right?

00:19:58: Billion and trillion is different.

00:20:01: So the two trillion market at the moment... And if we now look how much CO₂ we actually have to remove from the atmosphere to reach net zero We already in twenty forty will have a carbon removal that costs around hundred dollars.

00:20:24: The market in two thousand forty will also be to trillion.

00:20:27: If we now say, okay for every financial institution renewable energy markets is one of the hottest markets right?

00:20:34: Now then we know for certain that in twenty forty it would have the same size and That's already something.

00:20:43: I think this really interesting because also under Renewable Energy Market Financial Services are super interesting from financing these projects to ensure this project but then also to decarbonize my scope free right.

00:20:58: So, basically the same kind of thesis around carbon removal because we in the world will not be able reduce all.

00:21:07: our footprint is zero and for everything that's still there so they're unavoidable.

00:21:12: what a residual emissions do you need?

00:21:14: carbon remove

00:21:17: it?

00:21:18: Provocatively, isn't it a sort of surrender to say we won't be able at all to decarbonize our industry and so on?

00:21:27: So if you take this easy exit off carbon sinks.

00:21:30: I

00:21:31: think in the past... This was mainly the main topic right?

00:21:36: The main thing that we talked about.

00:21:39: but here's why there wasn't any topic In the past.

00:21:43: i think It Was Still Quite Easy To Avoid Carbon Food Brands cheap.

00:21:49: What do I mean by that is like you change from an old light bulb to a neon or something?

00:21:58: The low hanging fruits,

00:21:59: right?

00:21:59: Low-hanging fruit cost maybe let's say five euros per ton of CO₂.

00:22:04: so now we're more on the times when i talk with my customers at times where it costs twenty to thirty euros.

00:22:11: Let us play this game all the way till the end.

00:22:14: If we have a proper current management strategy within the company, then you will always look like how much would it cost me to remove or reduce this ton of CO₂.

00:22:25: And at certain point if I come towards last twenty-thirty percent depending on industry... We'll look more two hundred five thousand dollars per tonne of CO² especially when looking automotive.

00:22:41: but even with aviation

00:22:44: we

00:22:45: see okay, you can switch from normal fuel to sustainable aviation fuel but the prices for that is around two thousand to eight thousand dollars per ton of CO₂.

00:22:57: Then if you come to this point and properly manage price against ton of co₂ at a certain point We will just be where it makes no sense to reduce anymore.

00:23:08: because so much From an atmosphere perspective, it makes way more sense to rather invest in a carbon removal where you know.

00:23:20: So that's obviously the premise we need to know is definitely stored CO² and its safely and securely stored.

00:23:29: but if then only costs you hundred or two-hundred then it makes way more sense from an economical perspective to rather invest a hundred or two hundred dollars instead of five thousand dollars.

00:23:39: And that's when we actually come to point where, well... It make sense.

00:23:43: have these thoughts running.

00:23:45: at what point does not make sense to reduce anymore?

00:23:49: Because economically would be just not smart.

00:23:52: were I could maybe instead remove twenty tons why should i reduce one tonne ?I think alot companies are not there yet But as soon you get there, then your mindset around carbon removal will change drastically.

00:24:06: Interesting because I was indeed thinking about this economic rationality... ...I was rather supposing that what actually motivates banks to act voluntarily is maybe more driven by idealism or reputational considerations right?

00:24:23: So are we already at this point today economic rationale behind engaging in this voluntary market?

00:24:33: I think at the moment we're still quite on a beginning because, twenty-twenty one where everyone did something these credits that had not lot of impact they were really cheap.

00:24:44: Think one year or two years free euro per credit.

00:24:48: if you suddenly can say your climate neutral with spending let's say, twenty thousand euros because your footprint was twenty thousand tons and the credit is only one euro then this marketing budget you're like ah that's just it

00:25:02: whatever.

00:25:04: But if suddenly changes to the credit cost me a hundred Euro there are two million Euros.

00:25:10: A budget that jumps from twenty K to two million quickly obviously hurts right?

00:25:17: So its not a marketing budget anymore comes more compliance budget.

00:25:21: So that's, there was a moment where people then were like oh shit maybe we can't stick to the target.

00:25:28: We set ourselves anymore if suddenly have to invest into high quality projects.

00:25:34: you could still do this.

00:25:34: less than hundred euros let say portfolio costs forty or fifty but it is not two years any more.

00:25:43: so what lot of companies now did?

00:25:46: they either change their goals Or then maybe recall, they call it differently.

00:25:58: So there has been a lot of change due to that.

00:26:01: so I think what's happening at the moment is that a lot companies trying to find What goal makes sense for them?

00:26:09: That's achievable with this new cost in mind?

00:26:13: or They see this as learning journey.

00:26:16: why?

00:26:16: because everyone knows their end state.

00:26:19: Everyone knows all I know in two thousand whenever they set a goal what i know for latest In two thousand forty five or three hundred fifty depending on What's gold estate gives.

00:26:30: it's the german goal Or just general net zero?

00:26:33: then now The end state.

00:26:35: if I reduce my footprint ninety percent.

00:26:37: I will have this and this amount left And we'll have to spend us in this amount of money.

00:26:41: so for lot Of them, its also learning trying To figure out that mark because It's not easy to steer like a massive under supply of credits from the good ones and also lot of forward thinking companies already locking in ten year, fifteen-year contracts with these projects.

00:27:02: so they know that we'll get their credit for certain price when

00:27:05: needed.

00:27:07: So I think it's just between either there still have to fulfill some goals What's learning?

00:27:14: I think those are the two things.

00:27:16: We don't see that much anymore where companies just want to show we really create a front leader because it is too expensive, if not marketing budget any

00:27:27: more.".

00:27:43: Convergence between voluntary market and the regulated systems like the EU emission trading system, which we see very often in these states.

00:27:56: The convergence is what a lot of financial companies are betting on.

00:28:01: actually because I think you already seen some banks being really active with their own trading desks.

00:28:10: but also they may be seared from investments They have in the portfolio where some companies maybe you have to participate already on that market.

00:28:19: And, and the convergence is actually already happening but not in EU ETS yet?

00:28:26: Where it's happening for instance in California or South Africa and California they also an ETS.

00:28:33: I think between ten percent of their allowances they can also buy from the voluntary carbon market instead.

00:28:43: But, projects need to be in the States and same with South Africa.

00:28:47: In South Africa actually have a carbon tax so I think it's like ten euros at that moment which increased this year maybe its twelve per ton of CO₂ for certain kind industries And what they are allowed to is that there buy national carbon credits from the voluntary carbon market.

00:29:11: To be tax exempt.

00:29:13: and obviously, From a financial perspective this is insanely interesting because This opens up so many arbitrage potential right?

00:29:20: If you can create A project That is Can issue credit cheaper than the tax Then You have a margin to make.

00:29:31: So this is super interesting.

00:29:32: Also, you have a floor price for any investment.

00:29:36: You know if your project or the investment it will always sell For the carbon tax price.

00:29:44: This was super interesting because the market is chronically undersupplied so you would be able to sell Your credit and that just not enough projects.

00:29:55: And the UK ETS also going to introduce something like that in two thousand twenty eight and now they European Union thinks about the same with two thousand thirty one.

00:30:08: This is super, super interesting because it's a massive flexibility mechanism and corporate actually love flexibility in me in the ETS markets.

00:30:18: so yeah I'm very curious what are you gonna integrate?

00:30:23: But they definitely need it because the EUETS has also built its deflationary.

00:30:28: So, in a way that at certain point there will be no more allowances and then we'll need to switch.

00:30:35: something else probably is carbon removal?

00:30:39: At least for me you sound quite optimistic.

00:30:42: so maybe too close this episode.

00:30:44: on personal note I guess Likely survive these crucial dates of two fifty or to forty five when this net zero goals are should be fulfilled.

00:30:59: So how optimistic are you in the long term?

00:31:02: When do think about that next twenty to thirty years, in terms of global climate progress and also their role off your business off on the voluntary carbon market?

00:31:13: so we will reach net zero in our lifetime.

00:31:18: Is it a feasible, feasible goal?

00:31:22: So I mean...I'm a startup founder.

00:31:24: I always have to be an optimist for sure that there's no other way.

00:31:29: otherwise i would not survive daily business.

00:31:31: but how do you look at the market?

00:31:35: so I am really optimistic to know what will be the end.

00:31:39: state was when we're really pessimistic at the moment is in between states why A lot of companies, they just write in their sustainability goals and reports that hey we want to achieve net zero in two thousand twenty four.

00:31:58: And then you will neutralize our unavoidable emissions with carbon removal?

00:32:04: That makes a lot sense but it actually doesn't make sense.

00:32:10: why did I say does not make sense?

00:32:12: because thats how the world operates.

00:32:14: We have a carbon budget And it's quite clear how much in this budget is left.

00:32:20: If we not scale carbon removal and carbon sink potential beforehand, then there will just be enough carbon sinks available when all the companies in the world suddenly decide to be a net zero?

00:32:35: We actually need ramp up phase also.

00:32:38: IPCC actually says exactly the same.

00:32:41: hey!

00:32:46: Now, now and we have to slowly ramp it up two net zero.

00:32:52: so that is there.

00:32:53: And the standards are not properly aligned on how this should be done.

00:32:58: if you look for instance as SBTI science-based targets initiative where a lot of companies signed up or at least looked at four net zero goals they also acknowledge that in another new version coming out where they want to make it mandatory that scale up of carbon removal.

00:33:18: But this is why I'm really pessimistic at the moment, we need some more scale-up regulation in between and yeah... That's a reason!

00:33:30: Obviously I am an optimist but there are not enough ambitions still on global level So that this carbon budget is not running out before we achieve net zero.

00:33:45: Okay, yeah!

00:33:46: That's a very important thing so let's take it with us as call for action.

00:33:50: thank you for the assessment and many thanks for your time sharing your insights.

00:33:57: This has been I think very thoughtful nuanced discussion and also to our audience.

00:34:03: Thank you for listening this episode of The Sound Of Finance, if you enjoyed the conversation feel free to subscribe share it with your colleagues and see you soon in next episode.

00:34:16: goodbye.

00:34:16: Goodbye Adrian!

00:34:17: Thanks Janis bye-bye.