A Billion-Dollar Idea

That's a big claim, I know. The idea: accounting software. In this newsletter, let's see if I can convince you that I'm on to something.

When is a Commodity Not a Commodity?

I was reading about coffee on the weekend, in James Hoffman's new magazine, Cherry Bones. In it, there's an article by Janina Grabs. She writes about the effect of the EU's deforestation legislation on the coffee industry (here is a similar piece of academic literature she has co-written). Simply put, the legislation will regulate the sale/purchase in the EU of coffee that was grown on deforested land.

While reading around in these early stages of Brunn, I have been struck by a recurring issue associated with the energy transition, and society's push for sustainability more broadly: the creation of commodity products that differ exclusively in production characteristics.

Most of the time, the only differences between commodities that support a price increase(/decrease) are related to physical properties. For example, heavy vs light crude oil: it's all crude oil, but differences in the chemical composition motivate pricing differences.

When it comes to sustainable aviation fuel (SAF) or deforestation-free coffee, (or palm oil, or cocoa) though, the final-products (fuel molecules or coffee beans etc) are often physically identical to their non-sustainable counterparts.

Credence

In the field of economics, sustainable goods fall under the broader category of credence goods: goods that are difficult or impossible to evaluate, even after consumption has occurred. An example from history comparable to sustainable goods is slavery-free goods. In the 19th century, consumers might choose to pay extra for, for example, sugar or cotton that was produced with slave-free labour.

So how can consumers of credence goods be confident they're getting what they pay for? Certification programs. Producers of slave-free cotton would issue certificates along with their goods, which could be verified by the cotton mills that purchased the raw cotton; the mills would send inspectors to check that there were no slaves working on the relevant farms. Critically, because slave-free cotton is identical to its slave-ful counterpart, cotton mills could blend all of their raw cotton together, and sell a portion of their finished cotton fabric with a slavery-free guarantee, equivalent to the quantity of slavery-free certificates they held.

While there must have been 100% slave-free cotton mills, for those that mixed their raw product and implemented the certificate program, economies of scale associated with running larger, unified cotton mills, allowed them to more efficiently process their cotton, thus decreasing the price of both regular and slave-free cotton. Although those who paid extra for slave-free cotton fabric may have actually physically received cotton fibres that were grown on a farm with slavery, they had (well-founded) confidence that the premium they paid 1) went directly to supporting slavery-free farms; and 2) accurately represented the additional cost of producing cotton without slave labour.

Slave-free cotton is one example where a non-segregated or integrated supply chain was possible. There are some commodities, though, where segregated supply chains rule. The Kimberly Process for conflict-free diamond certification adds value to individual gems; certified and non-certified diamonds are rarely mixed. When it comes to diamonds, in the vast majority of cases, the end consumer is not happy only paying a premium to support a conflict-free diamond supply chain, they want to know their diamond is guaranteed conflict-free.

The fully-segregated supply chain of Kimberly Process diamonds introduces inefficiencies, requiring separation and tracking at every stage of the mine-to-showroom process. Given, though, that diamonds are relatively small and valuable, thus already have highly secure and specialised supply chains, the additional costs clearly add enough value (on average) to justify the segregated supply chain.

When it comes to environmental-friendly goods, there are plenty of emerging segregated vs integrated supply chain conundrums. Taking SAF as an example, there are cases today of both segregation and integration. It is unclear which paradigm will win.

The Case for Integrated Supply Chains

I have a strong conviction that integrated (non-segregated) supply chains should dominate segregated supply chains when it comes to sustainable goods.

Unlike credence goods associated with slavery or conflict reduction, the sustainability of sustainable commodities is directly influenced by the use of integrated supply chains. If SAF is produced in Singapore, and there is an environmentally-conscious flyer in the US, if the customer were to insist on transporting the fuel from Singapore to the US to fuel the plane, rather than buying a certificate for the sustainable qualities of the fuel, there would be greenhouse gas emissions associated with transporting the fuel to the jet. This directly diminishes, or perhaps even negates, the low-carbon benefits of the SAF.

In my perfect world, the SAF in Singapore would be loaded onto a plane at Changi Airport, where the airline pays the market price of fossil jet fuel. The producer decouples the environmental benefit of the fuel with the physical fuel and sells the SAF certificate (price = additional cost of SAF production, relative to fossil jet fuel) to the environmentally conscious American flyer, who fuels their plane with fossil-derived jet fuel from a local refiner.

This is not a radical idea and is already happening with SAF, among other sustainable goods. Sustainable electricity is another example of integrated supply chains that allow providers and businesses (for example, Dutch railways) to make claims of "100% green energy" in spite of all electricity flowing along the same power lines.

What is the Billion-Dollar Idea Exactly?

While certification and Book-and-Claim systems already exist to support integrated supply chains and the mixing of sustainable and non-sustainable products, there is still a lot more work to be done. One example of a recent innovation is Matched, which uses advances in the availability of hourly power delivery and consumption data to test the veracity of 100% renewable claims.

As AI continues to improve, the availability of data increases, and the demand for sustainable goods continues to strengthen, there will be evermore opportunities to match sustainable producers with consumers seeking certified sustainable products.

Crede will be a technology company that enables and promotes integrated supply chains for sustainable credence goods.

The product-market fit is still somewhere on the horizon, but I imagine Crede will at least offer:

1. Software as a service (SaaS) to producers to facilitate sustainability certification, potentially enabled by AI-supported assessments (for example, analysis of satellite imagery), and/or integration with existing certification systems;
2. A market place to match producers and consumers; and
3. A corporate tool to aid bussinesses with their ESG compliance, especially with increasingly ownerous sustainability regulations, such as the EU's anti deforestation laws.

So, as I said, basically some accounting software.

Alignment With Brunn

Not that I feel bound by my self-defined mission and vision of Brunn, but I think Crede, as Brunn's first startup, would fit exceptionally well with what I had outlined:

Brunn exists to design new systems and improve upon current solutions to big, societal problems. Global problems that cross borders and negatively impact the quality of life of people everywhere. Market and financial systems innovation is the name of the game. My working tagline is “Just Action, Incentivised”, with the vision statement “creating a world where just action is always incentivised.”

While I still like the idea I previously outlined of a sargassum-to-SAF business, I feel Crede has a greater ability to scale across national boundaries and market sectors.

I'm going to consult some mentors and do some more digging to test my Project Crede idea. If successful, next step, prototype ASAP and work on product-market fit.