Episode 66:
How environmental regulations shape business supply chain practices

Alex Hersham:
Hi everyone. Welcome to another episode of Freight to the Point, a podcast by Zencargo. I’m Alex Hersham, Zencargo CEO and Co-Founder, and today I’m joined by David de Picciotto, Pledge’s CEO and Co-Founder. David joins us to talk about how environmental regulations have shaped businesses’ supply chain practices, the key players involved in enforcing environmental regulations and the consequences for businesses if they fail to comply with the upcoming regulations. Welcome David. Maybe you want to give us a quick intro about yourself and about Pledge?

David de Picciotto:
Hi Alex, happy to. My name is David. I’m the CEO and Co-Founder of Pledge, which is a UK-based sustainability software working on the decarbonisation of the supply chain sector. And very briefly, we help freight forwarders meet growing demand from shippers for supply chain emissions measurement and reporting across the multimodal supply chain and are equipping them with the right tools and reporting functionalities to grow their business as a result. And this is a trend that’s majorly driven by impending regulations, which I’m sure we’ll touch on today.

Alex Hersham:
Fantastic. Maybe we can talk about those regulations; what shaped them, how long they’ve been in the woodwork and coming, and then I’d love to actually speak for a minute about Apple’s recently released video that you might’ve watched where Mother Nature turns up to a board meeting and I found one point of that very interesting. But maybe over to you to talk about the background and the motivations for the creations of regulations here.

David de Picciotto:
Sure. So, if we focus on the logistics sector or the wider transportation sector, for context, it’s actually one of the highest emitting sector on the planet, as lots of you can surely imagine. So transportation as a whole, if you include also passenger transportation, is responsible for about a fifth of global emissions. And if we look specifically at the freight side of things, it’s actually responsible for over 10% of global emissions. So I think, thinking very pragmatically, that’s something that obviously policymakers and regulators are taking a keen look at. And as we know, Europe is the front-runner establishing these framework and regulations. And so it’s principally the European Union who’s been implemented a range of regulations affecting companies directly, even international companies like Apple, but also there’s more industry specific regulators. I can think of the IMO at a carrier level for everything that touches maritime shipping, or also as a result of the new package called Fit for 55, which will be rolled out from 2025 onward. There will be similar IMO carrier level regulations, but for road freight. So you see that you have different stakeholders shaping and developing the relevant regulatory frameworks.

Alex Hersham:
And talking about some of these key players, who are the ones that people really look to? I guess from an enforceability perspective, if I’m a business, what am I thinking as a hall pass versus something that I really have to take seriously?

David de Picciotto:
So, I think the one that’s coming up the most in conversations with clients and that affects shippers is this regulation called the Corporate Sustainability Reporting Directive, developed by the EU Commission, and its regulation that’s been enacted 2023 and being rolled out with the first reporting phase in 2025 and 2024 data, affecting about 50,000 businesses in Europe, but also international businesses with significant EU presence demonstrated by a certain turnover amount. I think it’s companies generating over 150 million euros in Europe are under the scope of this regulation and it mandates companies to report on their scope one, their scope two, and ultimately over time also there are scope three emissions. So that means, put very simply, your direct but also indirect, i.e. supply chain emissions. And this will have rippling effect also for supply chain, because this means that if you want to work with, say for instance, a multinational or certain types of companies as a supplier or vendor to these businesses, they’ll probably request as part of tenders or others a number of ESG or specifically climate KPIs to help them fulfill these reporting requirements.

I think directly, obviously you need to be of a certain size to be under the scope of this regulation, but as long as your business is over 250 employees and you generate over 40 million in revenue or you have assets over 20 million, you’ll be under the scope of the regulation. So obviously a lot of publicly listed businesses will have to face this type of reporting requirements. And you have basically similar regulations being introduced in the US, where it hasn’t been rolled out yet, but the SEC has proposed similar rules. There’s actually, a few weeks ago, similar rules also proposed in Australia. So you see it’s really a global phenomenon.

And maybe to provide a bit of context, there’s a lot of jargon, everybody is launching their own frameworks, it’s a bit of the wild west. In a similar vein to what we’ve seen in financial accounting where you have bodies like the IFRS, you have now similar frameworks or global frameworks being rolled out in the sustainability space, touching specifically on carbon accounting. And so you have… The IFRS actually has launched a sustainability related framework called ISSB, and again sorry for the acronyms, which provides essentially certain guidelines for regulators, for policymakers to try to, while taking into account local specificity at the country level, provide your general framework of how carbon accounting reporting, or general climate disclosure reporting should be done at a global level, so that then if you compare two companies in different sectors or in different geographies, at least the goal is to try to speak the same language, to interpret the results in the same way and strive for apples to apples comparison to put it very simply.

Alex Hersham:
Yeah, that’s brilliant and that’s completely needed. And then I just want to double click on one point, so our audience, I’m sure most of them know, but just quickly you mentioned scope one, scope two, scope three, internal versus external. Maybe you can just give a very quick definition of what’s in scope one, what’s in scope two, what’s in scope three?

David de Picciotto:
Sure. So, scope one will be your direct emissions. So think for example, if you operate a fleet of vehicles and you own this fleet of vehicle, that will be part of your scope one. Scope two are indirect greenhouse gas emission associated with the purchase of electricity, steam, heat or cooling. And then scope three, I want to say it’s all the rest. So it’s all your indirect emissions. So for purchase goods or services, for business travel as an example, and typically for a business, applies pretty much across any sector, the majority of your emissions lie in your supply chains, so as part of your scope three. So this number typically start from 70% of your emissions and goes up to 95%, obviously if you’re in the logistics business for example.

Alex Hersham:
That makes sense. That makes sense.

David de Picciotto:
Maybe also just to go back to your Apple example, there’s also actually a new directive, it’s not regulation per se yet, but a directive from the EU called the Green Claims Directive, which will require companies when they report to obtain third party assurance with respect to the methodology and that it’s based on a scientific process. And there are also similar directives touching on the type of claims you can make. And there’s actually starting to have a talk around carbon neutrality claims and whether you can actually make the claim of carbon neutrality, which was something that Apple actually was quite forward with, interestingly. So, I would expect that in the future you won’t be able to make carbon neutrality claims as you wish, and that there’ll be an increased scrutiny for the types of claims you make, especially if you sell consumer products, in the same vein that maybe in financial services, you need to have certain disclaimers if you sell particular risky products to your audience.

Alex Hersham:
It’s so clear the direction of travel here and that’s actually really good for consumers, it’s good for business if they act appropriately and definitely good for the environment. So with Apple, obviously we all saw that they came out with their first line of products are completely carbon-neutral and their 2030 pledge, no pun intended. Did you also watch that video? Which I thought was brilliant by the way. Did you watch that video they did where Mother Nature came as the board member?

David de Picciotto:
Yes, I did. I did, I did.

Alex Hersham:
So I thought that was brilliant. I found it really engaging. I loved how they turned it into something that had cinematic quality. But I found it very interesting when they came to the supply chain logistics team and it’s like, “What have you done?” And it was like, “Well, we’ve stopped doing so much air freight and we’ve started to do ocean freight.” And that’s great, because air freight is such a big emitter on a pound for pound basis relative to ocean. It is a clear advantage to the economy if you switch from air to ocean.

And we know with Apple, because of the price of their product, because of the margin of their product, because of the value of their product and therefore some of the challenges around theft of attractive goods, historically the vast majority of their supply chain and probably still today ships via air freight. There’s all these anecdotes of them building their own airports by some of their large suppliers and it’s just a plane taking off and landing every two minutes, we’ve all heard the stories. I was a bit underwhelmed though with that point. I found it a bit… I don’t know. I almost felt a bit deflated when I heard that their big thing was air to ocean. And this isn’t actually a dig at Apple, it’s more a dig at the industry more broadly, because come on, can’t we do more than air to ocean? And I know we’re now looking at alternative fuels at ocean, but it just felt a bit like… I don’t know. It felt lacking. I don’t know how you felt and maybe you can be more eloquent with the feelings that I’m trying to express here.

David de Picciotto:
Maybe I’ll put some numbers for the audience to, what’s first, the impact of actually this modal shift. I think, and don’t necessarily quote me on that, I think air freight is typically on average, I think 40, 50 times more potent than sea freight. So I think it’s quite a significant change already, so it’s a first step. But I think ultimately it comes down also to consumer expectations and it comes down to also the business context in which a company like Apple is thriving, where there’s so much competition out there. We have all these consumer expectations of getting our package the next day, I think it’s an initial bold move that they made in making this supply chain shift, but we’ll see how it develops.

Maybe the cynical in me would say, “Well, the best thing they could do is not incentivise people to change their iPhone every other year,” because that would be the biggest reducer of emissions probably, or what would’ve the biggest impact. And there’s actually quite a few secondhand IT equipment marketplaces that I’ve responded to this Apple ad with their own ads on the back of what Apple had published, which was quite funny to watch.

Alex Hersham:
It was the supply chain point and also I felt a bit uneasy with their water consumption answer, which was a very large number, but it misses the point of percentages, et cetera, et cetera. I don’t know, those were the two points in the ad that I felt a bit uneasy towards, but it was brilliant. Now coming back to the impact on businesses more broadly, so you talked about the size of business, the scale, the reporting requirements, how we’re going to essentially over time have generally accepted reporting for this maybe slightly regional, but nonetheless. If businesses fail to comply with these regulations, what are the consequences going to be?

David de Picciotto:
Obviously there are different regulations coming up, but for the ones I’ve mentioned, CSRD and to keep things simple, try to think of GDPR compliance and what happens if you’re not GDPR-compliant, you typically get fined a certain multimillion figure amounts or it’s typically a percentage of your revenue for the given year where you were noncompliant. So now going into the details specifically with CSRD, in Europe each member state will have to define penalties and administrative measures within a certain framework dictated by the EU Commission. But if we look at financial penalties specifically, for example, in Germany they said that they would fine companies for non-compliance with CSRD of about up to 10 million euros or 5% of annual revenue, which is obviously non-negligible. And to put this into context with GDPR, GDPR I think is typically 2% of annual revenue, which companies were already finding it was quite a lot. So I think you can see that this is, as you mentioned earlier, this trend is only going one way and it’s only becoming more and more scrutinised and stringent. And I think you also then have maybe the less tangible consequences of non-compliance with damage reputation, loss of investor confidence, if you’re publicly listed, and so on and so forth.

Alex Hersham:
And obviously this is leading up to the whole reason why you started Pledge, because there’s obviously an information gathering you want to understand. To go one scope, two scope, three, you’re going to need technology to help it and we’ll come to exactly where Pledge supports in a moment. But how complex is this going to be for a business, a business of that sort of size, a couple hundred employees, maybe a couple hundred million in revenue across the EU or wherever it might be? How complicated would it be if they were to try to all do it individually with Excel and just capture what’s happening across their business?

David de Picciotto:
In short, I think it creates a big burden, which typically requires additional headcount. I look at companies with a few hundred employees, they typically have teams of one to five or are now hiring teams of one to five in sustainability, whilst also leveraging consultants or software to essentially automate a lot of the tasks and scale manual processes like doing this in spreadsheets.

But I think also beyond just this elevating this pain or this burden and the time it takes to do all that work and collect the data and do the accounting and so on and so forth, I think it’s also very important to think about the third party assurance you’re getting for this work. First, if something goes wrong, it’s easier to blame a third party than your own company. And secondly, as we touched on with this Green Claims Directive, your methodologies need to be scientifically based as well, because at some point you’ll be audited as well in the same vein that the EYs, KPMG of the world audit you financially. They’ll also audit you from a sustainability standpoint as part of your CSRD reporting. So making sure that you follow the right standards will be crucial.

And then the last point I think which is interesting is, if you use scientifically backed methodologies, this also results in typically lower emission estimates. Or put differently, the more you use averages as part of your calculation for carbon accounting, the more it overshoots emissions. So I think the first step in a world where eventually we’ll have carbon pricing and every time you emit we’ll have a corresponding price or cost to your company, there’s also an incentive to go from these more averages type of calculation to using bottom up methodologies and be as accurate as possible, because this is the first step in the reduction journey.

Alex Hersham:
And to your point earlier, when thinking about scope one, scope two, scope three, you can maybe do quite simply in terms of with your scope one, scope two is probably quite hard actually, and you probably start to need software. And then scope three, you really need software and you really need to be understanding what’s happening. So when you think about the future tech stack, both today with what you can offer, but a couple of years out, how would you think about the tech stack, what it pulls into, what it spits out? What would it look like and what will technology unlock in a couple years time?

David de Picciotto:
The answer I’m going to give obviously depends on the complexity of your business, the number of different business units, the geographies and so on. But at the core I think you need a very solid foundation based on data, otherwise you’re going to struggle, it’s going to be extremely painful. And once you have this solid foundation based on data, you then also need to educate your team, your stakeholders. But ultimately I think the goal is similar to your financial system, so you want to have this financial system of record, you want to have a system of record for all your sustainability or even wider ESG KPIs. And there, some companies might look into more vertical specific solutions, say like Pledge, where we focus solely on multimodal supply chain emissions. While in some other instances, some companies will look at more having a holistic solution that might also leverage vertical specific point solutions, but have this wider system of record, which could be a third party software. And obviously all the ARP systems today also developing this holistic layer that can aggregate data from these different vertical specific solutions out there.

Alex Hersham:
Brilliant. Obviously we’re a customer of yours, we’re a partner, we work together, we think a lot about our customers’ supply chains, first looking at our customers and then looking at our own emissions, because obviously in our business, our emissions, we did our analysis of the overall emission that happens through our business and the number was infinitely small that came from our own business versus what came from the business that we do for our clients. That’s not to minimise what happens in our own business, but just focuses the attention on our clients. And when I speak to businesses, supply chain management is obviously tricky. There’s a lot going on and there’s a lot to optimise in a very competitive marketplace. But what people are starting to realise is that, yes there are some things that you have to do when it comes to supply chain if you want to reduce your emissions that will cost more, or that will have other implications on the business.

So for example, Apple shift from air to ocean should reduce spend, which is good, but obviously has a working capital implication, has that business model implication that they can work through. But at the same time, there are so many things that can be both good for the bottom line and good for the double bottom line, if that makes sense, in terms of reducing spend, being more efficient and reducing emissions. But I think moreover what businesses are realizing is; “Okay, so it could be more expensive, it actually could reduce spend bucket whilst also reducing environment.

But to your point earlier, both from a moral perspective, from a legal perspective and from a demand perspective, so the end consumer perspective, I think businesses have realised that in a couple of years time, whether it’s 1, 2, 3, 5 years time, you are not going to be able to be in business, exactly to your point earlier, whether you’re B2B or B2C or B2B2C, if you haven’t got this under control and if you aren’t at least converging on net-zero, which to your point earlier is still a bit of a vague term, but if you aren’t at least converging. I don’t know what you see. You obviously work with the logistics businesses, you think about ROI when speaking to them. How do you think about it and how do other firms think about it?

David de Picciotto:
So I try to share relevant insights from working with these clients depending on which function I’m speaking to in the business. If you think more to the finance function or the compliance function, they’re not necessarily going to think about returns, but more about what’s the cost or the risk of not doing this, because ultimately you have these financial penalties with these costs about. But then thinking more from a strategic level and from a more growth perspective, obviously we see that it helps clients win new business. And if it’s not winning new business, it’s at least increasing existing customer satisfaction. So there’s that retention element which is important. For also in the context of logistics about maybe increasing wallet share, to have your clients maybe push more volumes towards you.

And then there’s maybe the less tangible ones that we’re seeing grow more and more in importance, such as from an investor demand standpoint, where now you have a lot of capital, be it private to public, that has certain ESG KPIs attached to it, typically driven by pension funds and that touches on equity investment also from a lending standpoint. We have different green lending programs or green bond programs. And then the other one, which I think is typically something that most CEOs I speak with don’t necessarily think about firsthand, but once I start sharing about it, they realise, “Oh yeah, actually that’s a thing that comes up,” is about employee satisfaction and employee retention, as well as employee attraction. Especially if you’re in a sector like logistics or if you’re in a function like logistics within, let’s say your retail or wholesale or manufacturing business, the younger generation typically puts a lot of scrutiny on the environmental impact of their day-to-day. And that’s a way to demonstrate that not only you care about the topic, but you’re also actively doing something about it. So there’s also this less tangible driver of, “Well, how can I actually show my stakeholders, not only my external ones, but importantly my internal ones that I’m doing something about this problem?”

Alex Hersham:
And I agree with all of the above. Obviously we came into business with Zencargo with a vision of a world with smarter trade and smarter trade definitely means a world where obviously smarter trade enables globalisation, enables people of share and learn, enables businesses to do better, but also enables business to be done better for the environment. And so we’re completely aligned with what you say there, both in terms of the internal working with customers and also financing markets. I think those are all completely valid points. David, thank you so much for joining us today and thank you everyone here for joining us on another episode of Freight to the Point. I’ve really enjoyed this episode. If you’ve enjoyed this too, you can follow us on Spotify, on Apple Podcasts or on Google Podcasts. And if you have any questions, please reach out to me or to David and Pledge directly. And thank you very much for your time.