How to use carbon credits in the CSRD with Adrian Wons

Hey, do you have to comply with the csid then this podcast is exactly the right thing for you because at the Atlas Zero podcast we are talking to companies that have to comply with the CSRD and with experts that know very well about specific topics of the csrd. In this talk we are going to talk with Adrian Wans, who is an expert in compensation and can explain to you how exactly you can use compensation in your CSID report. Enjoy. Hey Adrian, thank you so much for taking the time. In the past weeks we have been working much more together and yeah, we actually also launched our compensation guide within the ccrd. And for all of the listeners that have not seen that, I will also put notes down below with the podcast. But in this episode I actually would like to focus a little bit more on Senken and talk a little bit more about this. So Adrian, can you tell us a little bit more about Zenken and how did you come up with the situation or with your company and how did everything start?

Totally. Thanks for the invite. Yeah, and I think we did some great work with the guide and it was a pleasure to work with you. And yeah, let's see where it takes us. But going back to the roots, how did I actually come or end up founding Xenken? So originally I'm an engineer. I come from the wind energy space. Later I went into consulting to Ernst and Young first, also in the wind energy space. Later I went into the area of all sorts of new technologies because for instance, I wrote the first blockchain book in German language for springer back in 2017 because I was really interested in the technology on the side. But of course there was no direct connection to the wind energy at that point, maybe to energy a little bit. So after a short while at ey, I was like, hey, now I want to get more into technologies. And then EY helped me actually founding the blockchain department at EY itself. So we then had a lot of customers. It was always in the B2B space where a lot of customers in helping them bring more transparency and traceability into their supply chains. Like for instance, the biggest wine manufacturer in Italy said, oh, we have a problem. 20 to 30% of all the wine that you buy at your supermarket is actually fake wine, but our label is on it. And first of all, I was mind blown because I thought, how can that be? Like, I think all the bottles of wine that I ever bought from the same brand tasted the same, but even the taste is really well copied. And then, yeah, for instance, for this project we brought A blockchain solution in there where you could track all these different kind of suppliers in the supply chain. And you could also look into who is liable at what point in time in the supply chain. And after three years, doing a lot in traceability and transparency with new technologies, not only blockchain, but a big part of it, I wanted to go completely back to sustainability. And I found a research institute for a new German university around the topic of sustainable innovation. Because I thought, hey, I want to bring these two things together, innovation and sustainability. And with that I went to South Africa, where I'm actually right now.

And.

I had this research topic around. How are farmers, local farmers, incentivized to switch to regenerative agriculture? And they said there are many two things, and the one is subsidies, of course, subsidies, especially in Africa, not the easiest topic. And the other thing would be carbon credits or CO2 certificates. But they also said they're not working. And I was like, why are they not working? And then they said also two reasons. The first reason is the money is not arriving. So we had this case which was a little bit of the catalyst for founding Senken, where farmer here in South Africa sold their carbon credit for €3. And a carbon credit always stands for 1 ton of CO2, either avoided or directly removed. So avoided means, for instance, the farmer switches from a really chemical fertilizer that takes a lot of CO2 to produce it, to a more natural fertilizer, which basically avoids the production of that fertilizer or remove. So remove or sequester additional CO2 means the soil maybe suddenly, through different measurements, take on more CO2 and sequesters and draws down more CO2 out of the atmosphere. So they sold one of these credits for €3. And we found exactly the same credit in Germany being sold for €15. And I was like, hey, how? How can this happen? And we then found out that first of all, most of the climate projects, 90% are in the Global south, but 90% of the buyers of carbon credits sit in the global North. So this kind of geographical gap has been almost used by intermediaries, brokers to bring opaqueness, so no transparency actually into the market, and also to take a lot of margin on every transaction. So we found that for instance, for this specific Credits, there were three brokers involved and each of them took between 40 and 100% margin on top. So basically, if you paid €15, only €3 arrived at the impact at the cost. Okay, which is mind blowing because that directly shows us one of the biggest tools we have Fighting climate change can't scale, right? No one. Especially if you look at financial markets, right? What financial market would scale if you know only like 20% arrives? It's impossible. And the second thing they said it's really hard to prove that we actually did a good job, that our soil, for instance, stores an additional 1 ton of CO2, so even if they do a really great job, it's tough to show. But also if they would do a bad job, it's hard to expose. So that's the second thing. And at this point I was, hey, that's actually what I did at ey, right. I always try to bring in traceability, transparency, and thus trust. Right. It's always around trust. So I was like, hey, we definitely can solve these two problems with technology. And that was like two years ago where I then said, okay, let's found Zheng.

Yeah, super interesting to hear how then your past and the backstory actually with the traceability comes back and you can apply that in South Africa. So how's the project in South Africa going right now? Is this your first case that you're working with or how did things develop from there?

Yeah, good question. I mean, there was, I think I interviewed them two and a half or almost three years ago. So a lot has happened in the world of carbon credits and in the world of sustainability. As you probably know, this specific project is one of the projects that we work together with. But in the meantime, we actually founded Zenken, which is a platform bringing project developers or farmers off climate projects together with corporates around the world that have net zero ambitions or just want to invest into nature. So during these two years and two years in the startup history feels like 10 years. I grew. Like, I think when I started I did not have a single gray hair. And every day now I look into a mirror and I get additional one. So I think these two years were definitely the most, yeah, I would say challenging, but also the most rewarding and learning years in my life. But what happened in these two years? We created a technological infrastructure where first you can track the money. So you can see exactly that your money arrives, that there are no other intermediaries involved, and you always directly transact with a project and you see the money actually arriving at the cost. This is number one. And for the second problem that I described before, we created an intense due diligence process, which is based on an insane amount of data to actually see and show that the projects that we work together are of high quality and the risk is really, really low. Of Them to actually not avoid or sequester 1 ton of CO2. And these data points could be all sorts of things. There could be satellite data, there could be sensor data, the rating data out there that we use. We also use credit scores of project developers and past history of what the project developers did before in other projects. We also have scores for different kind of countries and their policies towards carbon credits. And all this massive mix ends up in our due diligence process which is like super data driven. In the end only 3% make it through this due diligence process. And over this year we supported a lot of companies putting up long term strategies in how carbon credits actually fit into their whole decarbonization strategy. Because it's never really a completely secluded topic, it always needs to fit into the broader strategy which we also going to talk about in a second. But yeah, this specific project is actually like 50 kilometers from me right now and yeah, is thriving I would say.

Nice. It's super. Yeah, very glad to hear. So for companies that actually don't know that much about carbon credits and are not so much into all of that, like how could you explain shortly and easily to them what Zenkin is doing right now?

So it is actually quite easy. The market is not easy, but what we are doing is easy. We are just connecting corporates with carbon projects that issue carbon credits.

Okay, yeah, and you just said like that the market is not really easy. Like when I talk to companies and then the compensation topic comes also in. Like sometimes there's like some skepticism with like the scandals like with Vera and such in the last year, like how do you think the market developed or what is the current situation with that, in your opinion?

Yeah, so actually the market is really old already. It always feels like the market only came up in the last five years, but it got created in doing the Kyoto Protocol which is I think 1997. So it's already almost 30 years old. So it's not a completely new topic and not a completely new, I would say instrument because the carbon credit is a little bit like a market based instrument to give a little bit of a background. So I would say what most people currently connect carbon markets with is basically what they heard in media around lack of quality in these carbon projects. And I think fairly so. The market was really small. There was not a lot of innovation going on and there was not enough scrutiny on the market. In my opinion example, we have satellite data for a long time now already we have a lot of different data points that came through technological advancements over the next, over the last 20 years. But none of them have been used in order to verify a project. It was mostly about, for instance, a forestation project. Someone flies over to the project, comes with the measuring band and says, yeah, this tree has a diameter of 1 meter or something like that. Which is mind blowing because it will take you a lot of time to measure all the trees. That's the reason you don't measure all the trees. So you only take like a small probe. But you could just use satellite data, right? I mean it would take you one second. You can also have, you can check on, analyze over time. So you see how for instance, there was no tree 10 years ago. Now there is a tree and all these things. So I think first of all, no technology has been used or not a lot of technology has been used which only came into the whole market over the last, I would say four years, a little bit also because the market was growing and there's also a lot of policy work that will funnel capital into the market and if there's capital, it attracts innovative people and startups to bring the technology in there. So I think that has been a really exciting development and definitely changes the market. So all these media articles was aware about the legacy market that I described before and that's 100% fair because I think what we need is really high quality projects. And by high quality project I mean a really low risk of them actually not achieving what they're promised. And promise is, hey, one certificate stands for one ton. But before and you see that if you for instance, look at the big rating agencies, there's a couple of rating agencies like B0 or Silvera rating. All the projects from Vera, gold standard and so on, 85% were on the lower crates of the grading scale and only 15% on what you call high quality credit. So a lot of these standards, Vera are based on the scrutiny now working really hard to implement new technology. All the standards are currently being redone. But also I think we need quality assessment on top of it. So I always love to take the analogy like VERA or gold standard is only as high as a horse has to jump. But for the rest you still need more quality assessment. And that's what we are for instance doing with different kind of partners, like for instance these rating agencies, satellite data and so on. So the scrutiny was good, it pushed the market forward. But now of course we need solutions and that's exactly where we come in. And we even created something like a buyer protection, like a little bit like the eBay or PayPal buyer protection, because we're so, I would say, proud of our due diligence process and confident with it. We integrated this buyer protection or guarantee that if something ever happens with the project and the carbon credit on top of it, that we just exchange it with an equivalent quality credit. So I really saw that this gave even more confidence to the buyers because I think most of the buyers, they really want to do something good, but I think it's more about like them being scared of greenwashing accusers or just spending money on something that actually doesn't promise what's. Or like, doesn't deliver on the promise they bought into.

Yeah, no, and understandably. So, like, I can completely understand that companies are then, yeah, scared about that. But it's very. I'm very glad to hear that you are taking measures against it and improving on that. Yeah. Since this is actually the CCID podcast, I'm trying to like, shift the topic now a little bit towards csrd because, yeah, compensation and carbon credits also play a role in the csrd. Can you maybe explain a little bit more about the importance of carbon credits and compensation within the csrd?

Yeah, totally. So we get that question also quite often because I think a lot of people don't know that carbon credits actually have already a place in the csrd. So you can report on your carbon credits in the csrd and it's not mandatory. So it's not that you have to report on or that you have to buy carbon credits. Let's put it rather like this. It's not mandatory that you have to buy carbon credits at this point in time. I think we talk about it later. I think there will be changes in the future. So basically what you have to do at the moment in the CSRD is that you have to report on how many carbon credits you bought. So what is the tonnage amount? So how many tons of CO2 did you bought? And then you have to report on what is the split between removal and avoidance. And that comes back to the first thing I have explained. In the carbon world, you always distinguish between removal and avoidance. Avoidance meaning because of your purchase of one ton of CO2, this ton is just not being released. Like, for instance, switching from energy generation from coal to energy generation from renewable energy. And removal means one extra ton of CO2 is being sequestered. Like, for instance, I plant a new tree and that through photosynthesis, takes extra CO2 out of the atmosphere. So you have to report on what is the split of removal and avoidance, because the general I would say recommendation by the UN last week from Oxford. They also work a lot on carbon credits, but also for instance things like science based targets initiative, say at the end of your net zero journey. So basically when you hit your net zero goal, for instance reducing your footprint 90% with only 10% remaining remaining unavoidable emissions. So things that you just can't avoid due to nature of your business up to that point, that share should go all the way up to 100%. Removal credits, they're always a little bit more expensive. But of course not everyone directly can say I going to offset my whole footprint with removal credits because that would be way more too expensive. So that's the reason that split that you have to, that you have to report and then you also have to report how many of these credits did you actually use this year for compensation measurements? You always talk about retirement. So only buying a credit doesn't mean you retired, means you have it on your balance sheet. It's basically like a financial asset and only if you retire it and then you get a certificate of retirement, then you used it to compensate for your footprint. So why is this important? Because you also have to report on how many credits you bought, but also in how many purchases of maybe of future credits did you go into. Because a really important topic around this whole industry of carbon credits is we need to finance these projects also for the future. Because it's not like let's talk about that pharma in the beginning again it's not like you get the carbon credits basically on day one when he decided to now changed to regenerative agriculture, of course there were a couple of years involved an investment for him to actually get to this point to issue a credit. And that can be three years, five years. And for that there are measures in order to invest early in this project and support the farmer with the promise of a future credit. So that's another thing that you that you have to report on. And then there's a separate topic around insetting and how the word insetting already says a little bit is that it's basically reduction measurements or removal measurements in your own business that you invest in. So whereas offsetting mostly means and science based targets initiative, for instance call it beyond value chain mitigation. So basically things that you invest in outside of your value chain, insetting is more around things that's in your value chain. So for instance, if you are a supermarket and you have products in your supermarket that come from a local farmer, if you basically invest into that farmer to switch to renewable regenerative agriculture. Then your scope free emissions go down. Right. So you basically invested in your own kind of value chain and that's what we call insetting. And you also can report on these kind of measurements. But these are the big two topics.

Okay, super interesting. Are there any other topics in the CSRD when it comes to reporting like certain claims or something that are relevant to know?

Yeah, definitely. I think this also comes a little bit into the whole topic around people are scared of or people. Yeah, that's what people connotate with carbon credit are the different kind of claims that you can make. Right. So I think last year was a lot about being carbon neutral. And everyone I think without being verified or without being audited quickly said they are carbon neutral, which I think sometimes is not really beneficiary because carbon neutral stands for hey, I know my footprint right now and completely or my completely existing footprint I gonna offset with carbon credits. What is the problem behind it? First of all, no one verifies it. There are always two providers, right? On one hand you have the provider.