Has the Sustainability Bubble Burst?

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Transcript

Saif Hameed [00:00:00]:

Sustainability linked bonuses and compensation is still happening, but there are fewer metrics that are being linked to compensation. So maybe there were 25 ESG metrics and now actually it's like, hey, we'll pick three or even we'll pick one and that one is the one that's going to be linked to compensation and we're going to have a very clear structure for how that ends up being linked. Incidentally, when you kind of look at the payouts, I think it might be in the same report you're citing, Izzy. If you look at the level of abstractness with which those compensation structures are created, the more abstract, the more fluffy, the higher the bonus payout tends to be. And I think boards are also starting to realise that and saying, hey, it makes no sense for us to pay out 116% or 120% of a bonus structure, because a bunch of kind of quite qualitative KPIs have been met that don't directly seem to impact business performance. Let's make this more concrete, more robust, narrower, but let's keep it there.

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Isobel Wild [00:01:15]:

Let's get into today's briefing. We've got three headline news stories to discuss. One, is the UK heading to a big scale back of its climate ambitions? Two, are we locked in a cycle of rising energy consumption? And three, what the future of sustainability linked compensation is. We're then going to get into what this actually means for climate tech with the backdrop of scaling back on sustainability. But before we get into that. Saif, how are you doing?

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Saif Hameed [00:01:42]:

I'm good, thanks, Izzy. It's a fun couple of weeks for us at Altruistiq. We just did our State of Sustainability Food and Bev Summit in Chicago. And it was, it was an amazing experience, as it always is. We had about 40 large food and Bev companies in the room with us and it was just an amazing coming together of a community to share what's working well, programmes that bring you to scale challenges and most of our guests so to us that it's the best event on their calendar and it's like a full day, so it's pretty intensive. I'm also quite introverted, so for me to like moderate, I think seven panels or something like that ends up being pretty. Just exhausting spiritually, but it was well worth it.

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Isobel Wild [00:02:34]:

Yeah, I feel your pain, but I hope.

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Saif Hameed [00:02:37]:

You don't, Izzy, you don't. You're an extrovert. You're like, about as extroverted as it gets there's no way you feel your feel my pain and don't pretend to.

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Isobel Wild [00:02:44]:

Well, hopefully we can lift your spirits on this podcast, but we're definitely going to try and get a lot of the speakers who were at SOCI in Chicago on this podcast as well. So the insights hopefully will be shared to all of our listeners. But let's get on with the first headline, which is is the UK heading to a big scale back of its climate ambitions? And this week the opposition Conservative leader Kemi Badenoch backtracked from policies embraced by her Tory predecessors when it comes to climate. She recently declared that net zero will bankrupt the country and that it was impossible for the UK to meet its net zero targets by 2050. She didn't offer an alternative target for the goal or actually any evidence to support this assertion. In this discussion stuff, I kind of want to dig into that, but cbi, the Confederation of British Industry, outwardly criticised the speech, saying how this was not the time to step back from opportunities of the green economy and that actually the net zero economy is expanding at three times the rate of the wider economy, so it's worthwhile putting some investment behind it. But Saif, what are the indicators to suggest this supposed scale back?

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Saif Hameed [00:03:59]:

So I think the first thing to say is he is I have no intention of weighing in too much on politics as such, in terms of like, political parties and the like. That said, I think that Ukraine politics as a whole, like every party, kind of needs to figure out what it wants from net zero and from the green economy, because I think that business finds vacillation or backtracking just very confusing. And I think that's what you see the CBI coming out with. A few years ago, the direction of travel the UK seemed to be headed in was where there was a fairly clear government position, which I think the Boris Johnson government actually did quite a lot to bring to the fore, which was that the green economy is going to be a net enabler of the economic growth story of the uk. It's going to create new jobs, new industries, new sort of new centres of excellence, really, or new capabilities for the uk. And there was a lot of talk of offshore wind being a big space for us. There was some talk of hydrogen carbon capture and storage and various new technologies as being not just good green economy sector growth, but also stuff that could maybe even revive UK manufacturing potential. I think that what is very confusing now is that the party that possibly did the most to create that narrative was the Conservative Party and the party that now seems to be most keen to dismantle that narrative.

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Saif Hameed [00:05:31]:

And I think this has actually been kind of true since Rishi Sunak seems to be the Conservative Party as well. So there's a bit of just like, what do you guys want from this that I'm wondering on the Labour side? And I realised I said I didn't want to go into politics, but here we are. Keir Starmer and Rachel Reeves have generally upheld the official line on Net zero, or at least they have not too directly countered it. And I think Ed Miliband is also, like, really doing an amazing job at bringing together a concrete agenda to make this sort of thing happen. Right. And he's doing all the right things from what I can see. At the same time, I don't think that the UK government has many openings to salvage their current economic story. And what I mean by that is that, you know, they have this fiscal hole that they need to fill.

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Saif Hameed [00:06:22]:

They have exhausted most of the measures that the UK population is readily comfortable with for them to exhaust. And actually the next viable place for them to go and try and make cuts or try and make scalebacks in the agenda is going to be around stuff like renewable energy and clean tech and promoting the green economy. And I just have this fear that the writing is on the wall that the commitment to the green economy is somewhat shallow right now across the political spectrum. I'm kind of waiting for a scale back, to be honest. I think it is probably the wrong thing for the economy, but I'm sort of waiting for a scale back. I'm waiting to see where the dust settles on new oil and gas licences for the uk, which has been a space that has been politically controversial. The judiciary also seems to be weighing in on, you know, against new licences. But I'm just keen to see where the dust settles on that.

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Isobel Wild [00:07:21]:

Yeah. And I looked up the UK on the Climate Action Tracker and I was met with like a wash of amber water warnings. So it was saying that our overall rating, you know, tracking against the 1.5 degree target by 2050 was insufficient, and the main red block that was popping out was climate finance, and how that was highly insufficient. I think this rings true of what you're saying, that actually there isn't being sufficient money put behind making this happen to actually accelerate it. There was a legal challenge last year from the green groups which said that our net zero strategy had insufficient detail and also was too reliant on emerging technologies to deliver any of these emission reductions. So the High Court ruled last year that it was unlawful in its current form and it said that we had 12 months to create a new strategy which should be coming out in May of this year. So maybe we can pick up on this in May to review where this strategy is coming from and what's going to be in it.

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Saif Hameed [00:08:21]:

I think that the current UK government has this unique privilege, which is everyone is expecting that they are going to be around for two terms. There is very little risk to them in the current term, which was not true of their predecessors, and it looks quite likely that they will win the next term as well. Obviously, who knows, but that looks likely right now and that's actually quite an almost unprecedented length of time for you to enact real change. And so I think that the strategy is going to be quite meaningful and quite important, which is not the case when you have one or two years left in your term. On this piece around dependency on emerging technologies, I definitely think that the government is guilty of that. When I look at the allocation that they made or the incentives that they came out with for carbon capture and storage, I struggled to see the logic, like, to me it was a strategy that was derivative of an oil and gas strategy. Actually, to me, the only way you could really justify that is you could say, hey, we think oil and gas is around for the long term and we want to actually try and maybe even start getting more oil and gas licences, but try and move the oil and gas industry towards net neutrality through the use of carbon capture and storage. That was actually the only way in which I could see the logic for such a large package of incentives for the carbon capture and storage industry, which was kind of unprecedented in that space.

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Saif Hameed [00:09:51]:

I struggle to see it. I also, personally I'm biassed being in the software industry, but if you look at like the growth story for the uk, a lot of the growth story for the UK economically has come from services and software and, you know, and this sort of job sector versus manufacturing. And I do wonder whether there's something in doubling down on strengths rather than trying to revive sectors that have not historically been main drivers of the UK's job growth or economic growth, at least for the last few decades.

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Isobel Wild [00:10:27]:

I'm going to move us on to the second headline, which is, are we locked in a cycle of rising energy consumption? So the latest international renewable energy report, Irena released a statistical report last month showing that 585 gigawatts of new clean power capacity was added globally last year, where and solar was by far the fastest growing form of renewable power, accounting for 77%. China also just kind of shot up through the ratings and installed more renewable power in 2024 than all the other countries combined. But alongside this, power usage is also skyrocketing. The main culprits for this being consumerism. So all our dependence on digital devices and also to a large extent, extent, climate change with drastic cold fronts and heat waves. Saif, I'd love to just start off by getting the big picture. What is the global state of play when it comes to energy demand and supply?

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Saif Hameed [00:11:32]:

I think there are a number of big drivers, as you indicated, Izzy, towards just increasing energy demand in general. You just kind of look at a growing middle class. One of the things that's defining of the middle class is they buy household electrical appliances, right? Amongst other things, they buy consumer electronics. As they start to have a bit more disposable income, they replace those electronics with maybe new electronics that might actually be more powerful, do more and use more energy as well. And I think that transition is something that many people are going through around the world, frankly. Let's leave aside AI and the vast energy requirements to cool cloud server capacity, let's leave our data centres, let's leave aside bitcoin mining or cryptocurrency mining and the vast energy requirements that prompts or promotes, you know, there's just a lot of big drivers towards energy demand. I think the interesting one here is this piece around climate change also driving demand. And I don't think there's a way around this because if you look at one of the main impacts that you get from climate change, it is volatility in weather patterns, which means that it is harder to predict, harder to predict where the peaks and troughs will happen.

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Saif Hameed [00:12:51]:

So the highest energy, highest heat points and the lowest cold points, and it is also those points might also become more extreme. And so again, if you look at like Pakistan, for instance, which, you know, I am, I am personally familiar with, you have temperatures rising to 45, 46, 47 degrees, I think even 49 and 50 degrees at times or soon in different parts of the country. Those are unsurvivable temperature points. And so the only way that people manage to actually survive, survive is if they're very, very poor. They try and simply find shade and kind of wait it out. And maybe they can have access to ice blocks that they buy on the street. And, you know, there are these like ice blocks with like just like pieces of cloth over them to try and kind of act as a little cooling agent or you can find coolers or chillers or things like that to just try and keep the temperature a little low or fans or air conditioning for those that can afford it. And for more and more people, I think air conditioning in those extremely hot parts of the world will become an unfortunate expense that they have to try and make just to survive, just to make life livable.

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Saif Hameed [00:14:07]:

Almost like the refrigerator for many families is just an expense that they have factored into the cost of living, really. Whereas obviously many people around the world still see it as a luxury item. So I think that's going to be a big driver and I think the same will be true in some ways for heating in some parts of the world at some points in time. And that's unfortunate and is likely to continue, sadly.

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Isobel Wild [00:14:30]:

Yeah. So despite this record breaking renewable energy growth and as we said, consumption is on the rise, are we locked into this cycle or are there any signs of stabilisation?

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Saif Hameed [00:14:47]:

I think that we are locked into this cycle. I think that the silver lining, if there is one, is that I think that the trend towards decarbonizing energy is going to increase. And if you just look at installed new, new installed capacity, most new capacity in many parts of the world is now renewable energy capacity, solar, wind and so on. And I think that as that trend continues, in some ways it becomes less of a problem if there is more, more energy being demanded. I think that there is a math problem which is at, at what points do those curves develop, basically, which is, can we actually grow the availability of renewable energy capacity? Can we decarbonize the energy grids fast enough for this not to be a problem that accelerates our trajectory towards 4 degrees or wherever it is that we're heading?

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Isobel Wild [00:15:44]:

And within like a kind of business or corporate sense, are there any like, trends or innovation, innovations that you've seen that have helped with this?

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Saif Hameed [00:15:54]:

I think that in the uk, what is really interesting is just how we're now trying to sort of flatten the, the, the demand curve. So if you kind of look at companies like Octopus Energy, for example, which have for the last few years been using agile pricing to incentivize people to use power at certain times when, when actually there's an abundance of power available or when power is being used, much less that sort of flattening of the curve, I think it'd be a very helpful trend just to evening out energy.

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Isobel Wild [00:16:29]:

Demand and supply onto the third headline, which is what's the future of sustainability? Linked compensation. So this week two of Britain's biggest banks, Barclays and NatWest, reported that they're removing sustainability metrics from short term executive bonus plans. And I think we've spoken about sustainability linked compensation before. It was a very popular or is a very popular method of incentivizing leadership to get behind sustainability commitments. And last year KPMG released a study to say that 40% of the largest companies are integrating ESG performance into executive pay. But recently there have been big movements in this space, especially in regards to diversity and inclusion. So, Sepha, I'd love to get your take on how sustainability linked compensation is evolving.

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Saif Hameed [00:17:20]:

So I think one of the interesting things about the free market and capitalism is that adversity tends to even out inefficiency. And so when it comes to sustainability linked compensation, a few years ago when we first started commenting on this, one of the things that we said, Izzy, I think on this show is we said that there are a lot of ways in which this compensation structure in general is a good thing. We think it's a good thing to link some sustainability elements to bonuses, but there's also a lot of bad practise or inefficient practise. There are a lot of things that don't really make sense. So for example, we would say, hey, if you are linking the completion of 10 workshops to sustainability bonuses, that doesn't really make a lot of sense necessarily. There's no clear link to performance that is worthy of unlocking a bonus there. And I think that is that sort of thing is now starting to get flushed out a little. So what I'm hearing from others in the industry, you know, when I kind of speak to corporate sustainability teams, is that in general, sustainability linked bonuses and compensation is still happening, but there are fewer metrics that are being linked to compensation.

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Saif Hameed [00:18:38]:

So maybe there were 25 ESG metrics and now actually it's like, hey, we'll pick three or even we'll pick one and that one is the one that's going to be linked to compensation and we're going to have a very clear structure for how that ends up being linked. Incidentally, when you kind of look at the payouts, I think it might be in the same report you're citing, Izzy. If you look at the level of abstractness with which those compensation structures are created, the more abstract, the more fluffy, the higher the bonus payout tends to be. And I think boards are also starting to realise that and saying, hey, it makes no sense for us to pay out 116% or 120% of a bonus structure because a bunch of kind of quite qualitative KPIs have been met that don't directly seem to impact business performance. Let's make this more concrete, more robust, narrower, but let's keep it there.

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Isobel Wild [00:19:34]:

Can you give some examples like one or two of quote meaningful sustainability linked compensation?

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Saif Hameed [00:19:43]:

So quantitative might be, for example, did you achieve an emissions reduction? And you know, maybe the emissions reduction is through actual initiatives that delivered value or it's through refinement of the calculation process, but those might all be seen to be things to be encouraged and driven out of performance. And there might be qualitative elements as well, which could, for example be some leading practise indicators or activities like did you set targets? Did you actually start cascading targets out to suppliers for emissions reduction? Did you build an index to link carbon in with procurement and with cash for procurement purposes? These sorts of things might be sort of important enabling elements as well. And the delivery or completion of certain activities or tasks for this might count towards the unlocking of the bonus. And then you'll typically have that as like a management by objective style performance bonus.

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Isobel Wild [00:20:41]:

And are there any watch outs to be aware of because things like, you know, changing accuracy of your omission numbers or the challenges associated with each target might change. And you know, as you pick up the low hanging fruit earlier on in your sustainability journey versus later where you have the beefier, as you mentioned, supply chain targets that you have to meet, are there any things that people should be aware of when setting these?

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Saif Hameed [00:21:06]:

Let me answer this from the perspective of a board member, because if you get that perspective right, then the sustainability team can manage for that perspective because that's going to be important as a hurdle. And if I was a board member I would say how does the achievement of your sustainability linked objective or how does the achievement of the sustainability objective make for a better business? Like why does this particular thing unlock a better business here and create more shareholder value? And so if you say, hey, the objective is we want to make sure that our suppliers are helping us drive our emissions numbers down and a certain percentage of our target is covered by our suppliers. Like we have passed on the liability for this share of our target to these suppliers and that is the achievement we've done, that we now want to unlock our bonus, then the logic should be if we hadn't done that, that having the same target we would have to spend more money to achieve the target because we'd have to do these other things. And so we have saved the business money by offloading this share of the achievement requirement to Our suppliers. I can buy that. I can see the logic for why that makes sense.

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Isobel Wild [00:22:22]:

So do you think sustainability link compensation is here to stay or do you think it's going to peter off?

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Saif Hameed [00:22:28]:

I think that it is here to stay. I don't think we have bottomed out the sort of the curve yet. And for those who are watching the video, I'm kind of like making this shape with my hands. But we kind of, I think on LinkedIn at some point earlier I sort of posted this curve about how you get this hype curve when everyone is excited about something, hey, let's set an SBTI target and then actually get this trough of disillusionment. And everyone's like, oh, SBTI targets make no sense, let's do something else. And then actually you get like this levelling out where people find what works for them. I don't think we are anywhere near the levelling out on sustainability linked compensation yet. I think we are still coming down from random territory, which is where like two years ago, three years ago, everyone was trying to set an ESG linked compensation target without really thinking it through.

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Saif Hameed [00:23:18]:

And I think we are still climbing down from that peak and still trying to figure out what the right normal is.

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Isobel Wild [00:23:25]:

We've spoken a lot, I think, in all these three news headlines about the levelling out and how this sustainability bubble has maybe burst, but it's stabilising a little bit. And I want to take this angle into the lens of climate tech. And Saif, you've expressed quite a lot of scepticism about the prevailing optimism around climate tech. Can you just walk us through what you're seeing on the ground?

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Saif Hameed [00:23:50]:

Seeing like a weird dystopia. I'm seeing both strange optimism and strange negativity and that usually makes me immediately think the truth is somewhere in the middle. And I don't know if that's right here or not. But like, let's maybe talk a little bit about the optimism first. I think that there are a lot of people that think, oh, the bubble hasn't burst, everyone is still gung ho for sustainability Kumbaya. My very niche solution for managing biodiversity depletion in big corporate value chains still has a $5 billion total addressable market and I just don't think a lot of that is true. Like, if you just look at. As an investor, I'm both an entrepreneur and recipient of venture capital and I'm also an angel investor and therefore a provider of capital to other software companies.

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Saif Hameed [00:24:44]:

The current geopolitical environment, combined with the current economic environment so interest rates, for example, being where they are, has definitely changed the model for climate tech versus what the model might have been five years ago. And anyone who says it hasn't is just avoiding the facts, basically. And if you kind of look at how these models are built, you assume a certain cost of money, you assume a certain growth in demand, you assume a certain level of adoption and rate of adoption. Those things are all different. The companies and the technologies that will struggle and suffer the most are the ones that were on the edges and only made viable by either low interest rates, which means money was cheaper, or by very high regulatory anticipation, which meant that demand would be higher. Like these were basically the two kind of things that for the fringe technologies, made them viable. Let's look at it in terms of, for example, carbon capture and storage or carbon offsets. Carbon offsets exist along a whole spectrum, right? They're the very cheap and the very, very expensive.

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Saif Hameed [00:25:54]:

The very cheap might be a few dollars, the very expensive might be fifteen hundred dollars or more. And there are different technologies behind those, different types of offsets. The ones at $5 are using different technologies to the ones at 1,500 dol. And there's demand for both of them. But that demand is going to be influenced by how much are these things going to be needed because regulation is driving demand or how cheap is it to buy them. And the cost of money is going to impact how cheap they are actually in terms of opportunity cost. So I think those things have changed and all the fringe stuff is more at risk. That, I think is my critique of the optimism.

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Isobel Wild [00:26:33]:

And how is corporate finance perceiving sustainability investments right now? Are there any kind of specific barriers that are preventing companies committing to long term funding?

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Saif Hameed [00:26:45]:

The same thing, right? Money is more expensive now. It just, you know, just factually more expensive than what it was several years ago. And so that has certainly an impact on budgets, making budgets tighter. At the same time, there is, the regulatory environment is different now to what it was before. And if the main focus of your climate tech or the innovation you wanted to bring in as a sustainability practitioner in a business, if the main reason for this was actually regulatory anticipation and that regulation has changed, that is going to have an impact many companies. For many companies, much of this hasn't changed. For some companies it has. And if I was in the finance team of those companies where regulation has lowered the bar, I would challenge the expense for sure.

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Isobel Wild [00:27:33]:

And so if this, you know, happy clappy climate tech bubble has burst, can we expect any, like, opportunities off the back of it or any movements or solidification towards certain technologies versus others, to.

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Saif Hameed [00:27:47]:

Be honest, think that bubbles bursting tends to be a good thing in the long run. Like a bubble is by definition an inefficiency. And so for me, an environment where actually like the companies that don't seriously need to do something about sustainability and we're only doing it because of, you know, maybe a somewhat abstract bar set by regulation that is now being rolled back. Like I'm happy with that. You know, like I think that builds a better business. And so I think that more entrepreneurs who have that mindset and are focused on business fundamentals, business value. And that's kind of why we talk always about what value is sustainability bringing to the business. If the sustainability agenda was bringing real value to this business business, that real value will still be there in spite of bubbles.

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Isobel Wild [00:28:35]:

What advice would you give to sustainability teams evaluating climate tech solutions in this incredibly uncertain market in some ways sound.

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Saif Hameed [00:28:43]:

Like a broken record because every time I reflect on this sort of thing I come to the same conclusion, which is if you as a sustainability professional are looking to bring a technology into the business, you need to make a good business case for why is this going to generate business value. And the more that you identify that with clarity and the more that that is linked to real economics for your business, the better. In some cases, maybe it is purely going to be a regulatory thing, maybe it is purely a compliance thing and that's what makes the budget. And that's okay. You just need to then be prepared for any movement in regulation will impact that business.

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Isobel Wild [00:29:20]:

Case wise words, Saif. And if you we have also got the state of sustainability community, so if you want to talk to, you know, peer to peer or talk further about these conversations, I'll put a link in the show notes and feel free to subscribe and join to that community there. But Saif, thank you so much. This has been a great episode and look forward to speaking to you next week.

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Saif Hameed [00:29:43]:

Thank you very much Izzy. Likewise.

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