BRIAN KENNY: One sage piece of recommendation I heard way back, is to fret solely about what I can management, which works nice till you’re chargeable for an consequence that includes others over whom you don’t have any management. Such because the conundrum of corporations all over the place, together with 96% of the World 250 who’ve dedicated to lowering their carbon footprint. There are issues you may management in your bodily plant, like vitality and waste discount. Corporations go to nice lengths to get workers to undertake sustainability measures of their day-to-day work. However fairly rapidly, you notice that many of the significant measures contain services and products outdoors your sphere of management, which might make it almost inconceivable to seek out dependable information to precisely measure and report your progress. It’s a problem that some take into account to be the holy grail of sustainability reporting. At the moment on Chilly Name, we’ve invited Professor Bob Kaplan and Shirley Lu to debate the case titled, “Harvard College and City Mining Industries: Decarbonizing the Provide Chain.” I’m your host Brian Kenny, and also you’re listening to Chilly Name on the HBR Podcast Community. Shirley Lu’s analysis seems to be at company social accountability with a give attention to matters associated to local weather change and gender variety. Bob Kaplan co-developed activity-based costing, and the Balanced Scorecard, which he applies to issues on the intersection of enterprise and society. They each are co-authors of as we speak’s case. Thanks each for becoming a member of me.
SHIRLEY LU: Thanks for having us.
BRIAN KENNY: Nice to have you ever again, Shirley. Bob, you’re a first-time visitor right here on, however a legend right here at Harvard Enterprise Faculty, so we’re actually honored to have you ever on the present. I assumed this case was actually fascinating, and it takes place in our personal yard right here at Harvard. Shirley, let me begin with you and ask you, what’s the central difficulty within the case, and what’s your chilly name whenever you begin this dialogue within the classroom?
SHIRLEY LU: We would like college students to consider the function of measurement when firms make selections about decarbonizing their provide chain. So, we begin the category by asking, “How can Harvard’s Chief Sustainability Officer, Heather Henriksen, encourage Harvard’s new building buildings to make use of a brand new materials to exchange cement?” By the best way, cement contributes to eight% of world emissions, so quite a bit. This new materials is known as Pozzotive, and it’s invented by this entrepreneurial firm referred to as City Mining Industries. They declare that this materials has a 95% decrease carbon content material than cement. So now, how can Henriksen present this all to the College’s many, many stakeholders. There are the scholars, college, workers, alumni, even town of Cambridge and Boston, and that is the place she wants dependable and verified emissions numbers from the provision chain. Primarily, this case lets college students to debate the challenges with measuring provide chain emissions, lots of them are 4 or 5 tiers down the provision chain, and discover numerous methodologies together with one which’s referred to as E-liability, which is launched by Professor Bob Kaplan right here and Professor Karthik Ramanna of their 2021 HBR article.
BRIAN KENNY: We’re going to dive into extra of that a bit bit later. However first, I’d wish to know, Bob, why don’t I flip to you and ask, how did you hear about this case? How did you hear about Pozzotive, and what Harvard’s doing right here?
ROBERT KAPLAN: Karthik and I printed the article November 2021 in HBR. A few college on the college stated, “This might be of curiosity to the college,” as a result of Harvard is making an attempt to decarbonize, and its personal emissions are pretty small. Sometimes, one in every of us goes on a aircraft and that aircraft emits, so we get charged in impact for these emissions. However many of the emissions that Harvard may need some management over, to get, Brian, to your opening remark, are actually embedded within the buildings that it builds. Because the Chief Sustainability Officer, Heather, advised me, “We construct plenty of buildings. These buildings include cement, they include metal, they include glass, they include copper, all of which generate a big amount of emissions of their extraction, processing, and distribution.” Harvard was on the lookout for a option to work higher with its suppliers to decrease the footprint of the supplies that it’s buying and embedding in its buildings.
BRIAN KENNY: Maybe not surprisingly, Harvard has some very aggressive targets that they’ve set for lowering their carbon footprint. However what you’re describing on this article are issues that stay approach upstream and approach downstream of the place the College is.
ROBERT KAPLAN: As I began to speak with Heather about this, and he or she begins mentioning this product, which I had by no means heard of, and even that one of these product existed, I stated, “Properly, how can I study extra about this?” So we arrange some calls, and I obtained to fulfill the founders and the senior executives of this firm to study what that they had. I stated, “We’re on the lookout for new content material that we will educate our college students.” I assumed, “Properly, let’s get a educating case that’s proper on the reducing fringe of environmental measurement.”
BRIAN KENNY: Shirley, I don’t need to assume that our listeners… Everyone’s heard about greenhouse fuel emissions and carbon footprint. We could not all perceive it the identical approach. So possibly you may stage set for us initially of the dialog right here, what are we speaking about once we’re speaking about greenhouse fuel emissions?
SHIRLEY LU: Let me begin by truly describing Harvard’s strategy to how they consider greenhouse fuel.
BRIAN KENNY: Nice.
SHIRLEY LU: There’s two issues that make them particular. Primary, you talked about goal. So the goal Harvard has is to achieve fossil gas impartial by 2026, and fossil gas free by 2050. That goes past simply greenhouse fuel. It’s basically saying, “We are able to’t even use fossil gas,” after which use offsets to exchange them. The opposite half Harvard actually cares about, the well being penalties of fossil gas. The second specialty that Bob simply talked about is that Harvard treats the campus like a testing mattress. The thought is, we will actually use college students, researchers to discover completely different options, attempt to check it on the campus, institutionalize one of the best practices, after which amplify that to the bigger society. So this potential use of Pozzotive may be very consistent with this focus.
BRIAN KENNY: How do you measure greenhouse fuel emissions? What are the approaches that Harvard’s utilizing?
SHIRLEY LU: Harvard, like plenty of different organizations, use the greenhouse fuel protocol. To briefly describe it, they separate emissions into three classes, three scopes. The primary scope, scope one, is direct emissions. That’s something that’s popping out of the corporate’s chimney, and even vehicles owned by the corporate. Scope two is oblique emissions, however solely these referring to electrical energy, or water, or cooling. Then scope three is all the things else, all the opposite oblique emissions, comparable to worker commutes, upstream provide chain emissions, downstream use section. Harvard, like plenty of firms, their majority is scope three as a result of we don’t actually produce metal or cement, however plenty of that’s coming from, truly, building and operational buildings and labs.
BRIAN KENNY: However it’s superb, when you begin to dig into that, it’s simply this ripple impact of all these impacts that you need to take into consideration and account for. The accounting components actually tough on this, Bob. Is that proper?
ROBERT KAPLAN: It’s – as a result of provide chains are fairly complicated and numerous. So each group would know its fast suppliers, what are referred to as the tier one suppliers. Perhaps they know a few of their tier two, those who’re their provider’s suppliers, however they received’t even know nearly all of these. While you get to the provision chain for concrete, or metal, or copper, you don’t have any concept who did the mining of this. Or in the event you’re utilizing pure fuel, the place did the extraction come from? Not solely you don’t know what emissions they’re sending as much as you, you don’t even know their names or their existence. So, that’s the problem. How are you truly going to have the ability to measure, a lot much less affect the emissions of organizations that you just don’t learn about?
BRIAN KENNY: The case describes E-liability accounting, and in no way am I aware of accounting practices, usually talking. Are you able to break that down for us in a approach that possibly individuals like me can admire what E-liability accounting is?
ROBERT KAPLAN: Let me point out what the difficulty was that we addressed with E-liability accounting. Shirley described these three scopes and, particularly, scope three. The scope three customary says that each firm or group, whether or not it’s BMW, as in one in every of Shirley’s different circumstances, or Harvard, as on this case, has to estimate all of its provide chain emissions. The usual truly additionally says you need to measure all of the emissions that happen at your buyer’s areas, and your buyer’s buyer’s areas.
BRIAN KENNY: Wow.
ROBERT KAPLAN: You may need some concept, once more, of your suppliers and have some affect on that. However to know who’re your buyer’s buyer’s looks as if an inconceivable process.
BRIAN KENNY: It does.
ROBERT KAPLAN: So, what occurs now, these two issues, one is that the measurements are usually not going to be very correct of your suppliers as a result of, in an effort to have it possible in any respect, the greenhouse fuel protocol scope three says, “Properly, in the event you don’t understand it for actual…” Properly, you need to use estimates, trade common estimates, so that you don’t must get the precise estimates. It’s like operating a monetary accounting system that claims, “In case you have hassle measuring your price of products offered, don’t fear about it. Simply use the common price of products offered on your trade,” which might not be a really strong basis for operating a monetary accounting system. However definitely, you’ll have nearly no concept concerning the emissions that go downstream from you as soon as it leaves your product. So the E-liability technique checked out this downside, and it’s an actual downside ’trigger we do need to management provide chain emissions and say, “If we have a look at it from the opposite route, somewhat than have a look at it from Harvard down or from BMW down, the highest down, have a look at it from the underside up,” as a result of that’s the best way the accounting course of begins. It begins with manufacturing of uncooked supplies, and you then promote it to your subsequent buyer and so they take it, that’s their enter price, and it simply ripples up the provision chain. We stated, “Why not do it that approach?” So the E-liability stated, “For any services or products you buy, get the emissions out of your fast suppliers, and you then add to that your individual emissions, the scope one emissions out of your owned property, after which take that,” right here’s possibly the place my prior work had some assist, “Assign it to your output services and products.” That is how activity-based costing works. You are taking common manufacturing facility and oblique bills, and assign them right down to particular person merchandise. So the E-liability technique says, “Take your bought scope one emissions from all of your suppliers, and your individual, and assign it out to your output services and products.” When your buyer buys that product, they not solely get bodily possession of the product, however they now, in impact, personal all of the emissions that have been produced as much as that stage of manufacturing. For those who do it that approach, the emissions info flows naturally up the provision chain. Any group simply has to get info from its fast suppliers and ship the reworked information, with its personal scope one emissions, to its fast prospects. That’s very possible to do, however you’ll want to have each entity in your complete world ecosystem right here on the identical web page following the identical customary, as we do in our common accounting requirements.
BRIAN KENNY: Okay. However I get the fundamental premise is, we’re constructing as we go. If all people’s doing it the identical approach, and following the identical guidelines, then you can begin to get your arms round this and get some fairly correct information.
ROBERT KAPLAN: One other metaphor that generally individuals decide up instantly, it’s like a value-added tax. At every stage you could have, what did you buy in supplies? Then, what did you add? You then ship that as much as the subsequent stage and that turns into their enter. So it solves this apparently intractable downside in a quite simple approach that we’re already aware of utilizing basic accounting ideas.
BRIAN KENNY: Okay. Shirley, let me flip again to you for a second, since you talked about that the manufacturing of cement produces about 8% of the worldwide fuel emissions around the globe. So, what makes it so intense the place it involves producing a excessive carbon footprint?
SHIRLEY LU: Cement’s greenhouse fuel emission, primarily coming from two sources. First, to make cement, you’ll want to warmth up the limestone to 1,400 levels Celsius. To get to that top of a temperature, you may’t use electrical energy. So you may’t use renewable vitality, you need to burn one thing. That’s round 40% of that complete emissions. Then the remaining 60%, it’s coming from the actual fact, at this excessive temperature what occurs is, the chemical bonding of the limestone will then type a substance referred to as clinker. Clinker is that grounded right into a powder, and that’s what we name cement. However that course of, the chemical response itself, guess what? Co2 comes out of that equation, and that 60%. The opposite factor, this reveals that it’s a extremely tough course of to cut back emissions. So, we are going to name them a hard-to-abate sector.
BRIAN KENNY: For those who might discover a option to produce one thing that had the properties of cement, however was lots cleaner to provide, you’ll do it, and anyone’s completed that. So let’s discuss Pozzotive, which is the product right here that Harvard was bringing into their building. Inform us about that product.
SHIRLEY LU: Precisely. Pozzotive… Let me, earlier than that, rapidly make clear one idea so everyone knows what we’re speaking about, as a result of I get confused between concrete and cement lots. Concrete is what we normally see in buildings. It’s created utilizing cement, and mixing in some rock and sand. So consider cement because the glue that sticks collectively all these supplies. What Pozzotive does is, it’s a fabric that may change cement, and it has cementitious properties within the sense that it will probably act like a glue as effectively. You’ll be able to change as much as half of the cement, and you may consider that as considerably reducing emissions. Why is that? So the best way they create Pozzotive is to make use of post-consumer glasses. These are your wine bottles, the glasses that you just see in recycling bins, all of them get put into this municipal waste facility that’s going into City Mining Industries. What they do is, they tumble these supplies, clear it up, and switch them into a really effective powder. So this course of is usually mechanical, you see. It has no chemical response. You don’t want the 1,400 levels Celsius. Therefore, in combination, they’re exhibiting it’s a 95% discount within the emissions content material.
BRIAN KENNY: Okay. It appears like a dream product. It virtually sounds too good to be true.
SHIRLEY LU: That’s what I assumed after I initially noticed it, yeah.
BRIAN KENNY: I might think about that the concrete market itself, it’s a part of a mature trade, it’s in all probability some very well-established gamers in it around the globe. How do you even start to penetrate a market like this with a product that has probably not been confirmed or examined?
ROBERT KAPLAN: There was plenty of firms on the market which can be constructing and so they need to, identical to Harvard, cut back their environmental footprint. So, they put strain on their concrete suppliers and say, “We are able to’t do enterprise as regular. You’re going to have to determine a option to decrease the emissions within the concrete that a minimum of you promote to us.”
BRIAN KENNY: There’s some leverage there, if you’re the one that is managing the development tasks, you can put in your suppliers to incentivize them to consider new methods of doing issues.
ROBERT KAPLAN: You’ll be able to. One of many fascinating options of this case is, once more, Harvard doesn’t buy powder from City Mining, they buy concrete. So, we needed to speak to a different participant, Boston Sand and Gravel, which does purchase cement or cement substitutes, which might be fossil gas primarily based, like fly ash or slag. Or on this case, doubtlessly Pozzotive. Shirley, possibly you may describe how we interacted with Boston Sand and Gravel.
SHIRLEY LU: Precisely. Like Bob described, Harvard doesn’t use Pozzotive instantly. Really, there’s fairly an extended provide chain between Harvard after which, on the finish, the development materials. So Harvard can have a common contractor. The final contractor will then discover a contractor for the concrete that they’ll in all probability purchase from, doubtlessly, Boston Sand and Gravel. So now the query is, once they create their concrete, can they change a number of the cement with Pozzotive? They must check out completely different formulation to ensure the fabric is powerful sufficient, ’trigger we’re speaking concerning the building trade. It’s a gradual shifting trade, you need the buildings to carry up for 100 years. So, that they had the method of doing that, and so they provide you with two completely different formulation that they assume will maintain as much as the energy, and it makes use of a distinct quantity of Pozzotive. That’s why Boston Sand and Gravel is de facto the corporate that’s doing the testing, and they should really feel comfy with utilizing the fabric in addition to effectively as any of the opposite events in that offer chain we simply described, from Harvard.
BRIAN KENNY: So, suffice to say, there’s going to be a terrific want for these supplies going ahead. To Bob’s earlier level about all people being on the identical web page because it pertains to measuring the utilization of those supplies, all people needs to be aligned. Is that proper?
SHIRLEY LU: Sure, precisely.
BRIAN KENNY: Bob, let me come again to you for a second. The case does discuss blockchain as a know-how for use right here. That is one other time period that I believe individuals hear lots about, they don’t actually perceive blockchain essentially in the identical approach. However, are you able to discuss how it might be utilized right here?
ROBERT KAPLAN: We’ve described how the info circulate from a provider, doubtlessly like City Mining, to a transportation automobile, after which the info goes to the Boston Sand and Gravel that mixes it, after which it goes to a common contractor. The final contractor says to Harvard, “Okay, this concrete has 40% much less carbon emissions per ton than conventional Portland cement. Within the case, Shirley constructed an Excel spreadsheet the place the scholars get to play with the completely different mixtures that she described, the formulation, and the way these have an effect on the carbon content material. Take into consideration a skeptical scholar or alumni speaking to the director of sustainability and saying, “Show it.”
BRIAN KENNY: Yeah, after all.
ROBERT KAPLAN: “Why ought to I give cash for the development of this constructing at its low carbon? I need to be assured that it’s right.” So, the query is, when you could have this very complicated provide chain, tons of of 1000’s of organizations feeding info as much as aggregators like Boston Sand and Gravel, after which they’re sending info to the contractor, how do you validate this info? One of many ideas, once more, of the E-liability technique is, first, that the emissions ought to be measured as soon as, and solely as soon as, on the place the place they happen, whether or not it’s City Mining, or the transportation truck, or the cement mixer at Boston Sand and Gravel. And, it must be assured at that time. Now, by the point the product comes as much as Harvard, it’s very tough for Harvard’s auditor to go all the best way again into the provision chain and work out, “Are these information actual on carbon?” So, I assumed, “Gee, blockchain has this functionality of a distributed ledger.” So I used to be having conversations with IBM, sustainability individuals normally. However I requested them, “You’ve gotten Blockchain, don’t you?” They stated, “Sure.” “Wouldn’t this be a very good utility for this?” In order that they put Shirley and me in contact with their blockchain sector. It seems, they’d already completed this downside however in a distinct context. They’d been employed by Walmart, and subsequently different meals retailers, to supply a transparent chain of sight of high quality and security info of all of the meals that finally ends up on the meals retailer’s cabinets, beginning with the farm or the plantation the place it’s grown. They really constructed this blockchain answer. It’s referred to as Meals Belief, that provides a downstream retailer visibility into the precise high quality and security information for each one in every of its suppliers, for each one in every of its merchandise. What we realized is, we simply needed to relabel this. Additionally, the info has to have assurance. On the native stage, somebody needed to go there and say, “Sure, this information that we’re placing on the blockchain isn’t solely non-public and safe,” which blockchain does, “However it truly has assurance paperwork related to who gave that audit or assurance at that web site.” So we introduced IBM into the dialog, in order that they created a mockup or a show of how they may adapt the Meals Belief blockchain to the carbon accounting difficulty that that they had right here.
BRIAN KENNY: Wow.
ROBERT KAPLAN: In precept, if that have been put into place, that is nonetheless in prototype stage, that may give all of the stakeholders of Harvard College confidence that the info have been actual, and had been verified and audited, and we might belief the numbers on carbon emissions which can be popping out of the system.
BRIAN KENNY: It additionally makes me marvel, if all people is gathering this information in the identical approach, and the info’s dependable and reliable, are there different kinds of insights, even past the fast utility, that we’d have the ability to glean from these units of knowledge?
ROBERT KAPLAN: Properly, there’s plenty of points on ESG. We’re simply speaking about E, and one specific E, which is greenhouse gases, and never water or different types of air pollution. However normally, when stakeholders, together with buyers, but additionally communities, need to maintain firms accountable for efficiency, they don’t simply imply their very own firm’s efficiency, they really imply their provide chain efficiency. We all know from Nike, and a number of other different examples, that when you’ve got a foul consequence in one in every of your suppliers, the tip use firm is the one which’s going to be held accountable for it. We might use the identical ideas of E-liability to begin and observe points like baby labor and slave labor. We might observe use of battle minerals, we might observe security and well being information of workers, all the best way down a provide chain, and use it for a way more strong and verifiable type of environmental and societal accountability.
BRIAN KENNY: That’s very highly effective. So has Harvard been capable of calculate any emissions discount from these efforts, or that is nonetheless within the trial section?
SHIRLEY LU:
What makes this case particular is, all the things is evolving. So, Harvard is now additionally making an attempt to determine the emissions content material, in addition to the pricing of those supplies.
ROBERT KAPLAN: This has been an uncommon case as a result of each Shirley and I are actively concerned in its creation. Normally, in a case writing, we take a state of affairs that has already occurred, and our job is to return in historical past and doc what occurred, however not be concerned within the course of. However we’ve been concerned within the course of, and the method is ongoing. So Harvard hasn’t began to speak about value, and it wouldn’t discuss value with City Mining. It will possibly solely discuss value with the final contractor for a brand new constructing. So the query is, within the case, what can we do to get at this vital difficulty? In precept, how a lot additional would the Harvard must pay in a contract to get entry to this low carbon concrete? So Shirley and I had to consider a approach of how we might have this dialogue go on at school.
SHIRLEY LU: Precisely. We truly requested the scholars to create a spreadsheet to actually evaluate the completely different formulation from the unique mixture of simply utilizing cement. Now you add in some Pozzotive in numerous ratios, what’s that complete emissions turning out to be? Taking a look at that quantity, it’s what permits managers, or on this case Harvard, to consider the choice. They’ll even layer in different info, how a lot are we keen to pay per ton of carbon saved, as an example, to assist them determine how far more they’re keen to pay for a premium, if any, for this product?
BRIAN KENNY: Do you assume that Harvard’s willingness to think about this alerts some broader change in the best way that corporations are occupied with different methods to cut back their carbon footprint? Or, is Harvard like an outlier? As a result of, for us, it’s such an vital initiative general.
ROBERT KAPLAN: My sense within the work that Karthik Ramanna and I are doing in lots of different sectors is, there’s large curiosity in firms that need to decarbonize their provide chain. However up to now, they’ve lacked a rigorous methodology for measuring the present carbon content material of its services and products, a lot much less the discount that would happen in the event that they undertake new processes and new product designs. So, I believe there’s huge curiosity. This case permits Harvard to assist educate, not solely different universities or giant well being techniques, but additionally firms, a option to go about measuring the present carbon that’s being produced within the services and products which can be being bought. But in addition, how they could contract otherwise with the organizations, their suppliers, to entry decrease carbon content material services and products.
Brian, to your level, what this implies is that firms are occupied with, once they’re sourcing all their services and products, not simply what the worth is, and the standard, and the supply, and the performance, however how a lot carbon was emitted to entry that services or products? So it’s one other dimension that comes into the procurement resolution, and the logistics resolution, and finally how we design our services and products in order that we will use decrease carbon elements.
BRIAN KENNY: Proper. One other potential profit right here is that, corporations which can be keen to pay a bit bit extra to maneuver on this route additionally acquire some model energy from this, as a result of individuals care lots concerning the services and products they purchase and the businesses that they do enterprise with. To know that anyone is de facto working and going that additional mile to possibly obtain a much less of an influence on the setting, I believe in some ways might help your model.
SHIRLEY LU: In case you have good measures.
BRIAN KENNY: In case you have good measures, and you may depend on them. Certain.
ROBERT KAPLAN: The measures are actual and audited. They’re not greenwashing. In the end, that’s the message from the case.
BRIAN KENNY: This has been a terrific dialog, and I actually admire you becoming a member of me to speak about it. I’ll ask you each to chime in with one final response, which is, in order for you individuals to recollect one factor concerning the case, what wouldn’t it be? Shirley, I’ll begin with you.
SHIRLEY LU: Certain. Again to the start, which is measurement. Measurement permits us to determine one of the best use of assets. One factor that wasn’t apparent to me within the case is that, they have been utilizing glass and recycling to exchange cement as an alternative of making new glass. As a result of in the event you create new glass utilizing recycled glass, you create the identical quantity of emissions as utilizing virgin glass. So right here, by actually doing the carbon accounting, you may see that greater influence by turning it to exchange cement.
BRIAN KENNY: Bob, how about you?
ROBERT KAPLAN: Properly, as a co-developer of each activity-based costing and the Steadiness Scorecard, I clearly endorse Shirley’s enthusiasm for measurement. Let me decide on one thing else. What it’s, it’s truly, commodities are now not commodities. If you consider what we’re working with in concrete, or metal, or glass, or copper, we take into consideration them as is that they’re commodities. However when you get to the carbon content material, they’re now not commodities. You’ll be able to differentiate what in any other case could be a commodity by making it decrease carbon and do precisely, Brian, what you stated. Perhaps you’ll have prospects which can be keen to pay a value for a product that’s now differentiated by its decrease carbon content material. That’s a reasonably vital improvement.
BRIAN KENNY: Bob, Shirley, thanks for becoming a member of me on Chilly Name.
SHIRLEY LU: Thanks.
ROBERT KAPLAN: Thanks for inviting and internet hosting us.
BRIAN KENNY: For those who take pleasure in Chilly Name, you may like our different podcasts, After Hours, Local weather Rising, Deep Function, Concept Forged, Managing the Way forward for Work, Skydeck, and Girls at Work. Discover them on Apple, Spotify, or wherever you hear, and in the event you might take a minute to charge and assessment us, we’d be grateful. In case you have any options or simply need to say hey, we need to hear from you. Electronic mail us at coldcall@hbs.edu. Thanks once more for becoming a member of us. I’m your host, Brian Kenny, and also you’ve been listening to Chilly Name, an official podcast of Harvard Enterprise Faculty and a part of the HBR Podcast Community.