Episode 189: Getting Carbon Accounting Right with Persefoni's CEO, Kentaro Kawamori
Episode 189: Getting Carbon Accounting Right with Persefoni's CEO, Kentaro Kawamori
Today's guest is Kentaro Kawamori, Co-Founder & CEO of Persefoni. Persefoni is the leading Climate Management & Accounting Platform (CMAP). The company's Software-as-a-Service solutions enable enterprises and financial institutions to meet stakeholder and regulatory climate disclosure requirements with the highest degrees of trust, transparency, and ease.
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Talk a bit about Persefoni and what the company does
We are a SaaS company and we've developed a climate management and accounting platform. And at the core of that is a system of record that helps both operating companies and financial institutions calculate their carbon footprint. And the use cases for that are really two primary ones today. It's for climate disclosure that is being pushed through by regulators around the world, especially financial regulators like here domestically in the US. The SEC or the Securities and Exchange Commission will be announcing their climate disclosure requirements for public companies and investors in Q1.
In the UK, their financial regulator in Japan has to announce their climate disclosure requirements. But then of course the other major use case is decarbonization. So if you want to achieve net-zero and you wanna decarbonize your business, usually systematically knowing what your carbon footprint is and being able to track that over time is probably a pretty good thing you should be able to do.
What did the landscape look like, not just in terms of software players, but in terms of the visibility that companies had and what tools they were using to see whatever they could see at the time?
There had been two previous attempts to do carbon accounting in the market. And the first was sort of in the mid to late ‘90s after the Kyoto protocol was signed and that didn't take off. And there was also a severe limitation of software and data capabilities, you know what I mean? People didn't even know how to Google back then. Then again, at the end of the 2000s, you know, really on the back of the Obama administration and the push around clean energy transition, there were a couple of companies that attempted to build systems and all of them fell by the wayside. SAP actually bought a company in this space most people don't know. So you had one of the largest software companies in the world trying to get into this space in the late 2000s unsuccessfully. And then in the early 2010s, a couple of niche players survived that sort of, you know, turbulence, the whole Solyndra debacle, and all that stuff.
You know, investors started pulling money out of cleantech. And one of the few survivors was a company called Akubio. So they started building their system in the early 2010s. They actually recently transacted that business too Diligent, which was a GRC governance risk and compliance software company. So some of their challenges were previously operating and having constructed this business to serve a very niche market. So when we started the business in early 2020, there were a handful of other players all pretty much started within six to 12 months of each other that realized, "Okay, there's a fundamental shift happening here, and to do this at scale, we're gonna need enterprise-grade software."
When you looked at some of the companies that had come before, what were the big lessons learned that you thought about as you set out to try to make this next wave different?
The biggest thing we looked at, and I think that broadly the market is still struggling today is how can one take a pure software business model approach to carbon in accounting. Almost every single player in the past and today has a significant consulting component to doing this because the data challenge is so hard. There's been a significant revolution in the modern data stack and cloud-based data systems over the last five years. It's something that most companies don't have expertise or experience in. And so it's a very classic SaaS kind of challenge in the early days is how do you decline consulting opportunities and stay true to developing software?
You know, and that's a common refrain that we still see in the market as well as very rapidly changing reporting and disclosure requirements. And so, you know, at the end of the day, this market doesn't exist if companies aren't forced to do it, right? The voluntary disclosure market is very small. You know, expecting companies to do this out of the goodwill of their heart, I think we all know doesn't create scalable climate markets at scale. I think Chris Sacca from Lowercarbon Capital on a recent podcast talked about how the economics of, uh, climates solution have to really mirror the value that the customers are receiving.
And in our instance, you know, the buying pattern has severely shifted because it's now becoming compliance, and CFOs and boards are really focused on buying that. And so I think two things, right, we're seeing that divergence of consulting and a traditional spreadsheet-based sort of consulting approach. That's desperately trying to get automated into a true software approach. And then we're seeing really unique forces around disclosure, creating, buying patterns that didn't exist before.
If you look at the landscape today, both in terms of the software competitive landscape, but also just the broader toolsets or resources that these companies are using, how do you think about it? What does that matrix look like? What's on the X-axis, what's on the Y-axis. How do you break it down and make sense of it?
I think of it as a linear sort of progression in the maturity of a climate disclosure or accounting life cycle of a company. And on the far left, you have compliance and on the far right, you have value creation. So I would say the majority of companies that are looking to do carbon accounting today are doing it because they're on the left side of that spectrum, and they just need to comply with the climate disclosure request. Most of the time, those are investors that are threatening their wallets. "Hey, if you don't provide us a climate disclosure, we're not gonna give you capital." That's happening to asset managers, it's happening to businesses, portfolio companies, so and so forth.
On the bright side, you see pioneers, right? The big kind of marque companies that we see leading in climate. I think the Microsofts of the world that are doing amazing things around promoting offset developments, companies like Allbirds, right, that are creating new ways of entering the public markets. So our team actually helped advise on the sustainable public offering framework that they followed, which is an evolution of the traditional IPO framework. Those companies are on the far right. They're creating value, you know, based and tied to sustainability think of that as a corollary to like the green bond type of evolutions in the marketplaces.
All that to say, what we're seeing is I tell people all the time, we're not even in climate software 1.0, so you're gonna see a multitude of subcategories of software in the space. I think you're gonna see accounting players. You accounting is a core part of our platform, but it's not the only part. You're gonna see players that specialize in risk modeling, whether it's physical risk modeling or financial risk modeling. You're gonna have continuously expanding and refining consulting solutions set in that. So, you know, for example, today, all of the big MBB firms, McKinsey Bain and BCG are delivering really broad climate strategies for businesses and boards at scale.
You have consulting companies like ERM, which are really specific and, you know, helping develop new methodologies. You have consulting companies like South Pole, which really specialize in creating offset development plans and projects. So we're in the early days, and I think you're gonna see, you know, a really tight matrix to your point, that's gonna define specific players in what they do best. And some that span a couple of those.
Where does Persefoni fit?
Our core market is carbon accounting, and I think you're gonna see the carbon accounting market look very similar to the financial accounting market. You know, the software markets are so large, you're gonna see in financial accounting, you have two primary players at the top SAP and Oracle, and they dominate financial ERP systems. And then as you go into that middle and SMB layer, you start seeing different companies like Zero and QuickBooks that are really servicing financial accounting for different size organizations. There's some really structural reason for that. So I think in our market, you're gonna see similar dynamics.
You're going see one to two major winners in the enterprise, and then you're gonna see companies specialize in different company sizes. And you'll also see that verticalize over time. We're seeing some of that today. You're gonna see, you know, specific carbon accounting for not just carbon accounting, but broader ESG reporting by industry. A great example is Measurable across the commercial real estate sector. You know, they're kind of the name when it comes to ESG reporting.
How do you think out offsets versus doing the hard work to decarbonize? Similarly, how do you think about serving more purely digital customers versus heavier industry, cement, industrial processes, mining, etc.?
I'm frankly really disappointed with what I think is becoming a bit of an echo chamber of, you know, people that are demonizing offsets and kind of lambasting companies for investing in them and purportedly, you know, avoiding the hard work of decarbonizing. And I think that's a very unpragmatic view of the world to take, right? I think we have to have high-quality science-based sequestration capture at scale. I think it's ludicrous to expect that policymakers and companies at scale are gonna move fast enough to solve this problem. Like we have to have nature-based and science-based solutions that are sequestering carbon to be successful in limiting global warming by 2050.
To me, that's, that's super clear. And we have to expand the, of what those offsets mean, right? And so there's, there's criticism around things in the offset markets around, you know, direct air capture technologies not being economically viable at scale today. About even forestry projects, you know, being hard to verify. And all of those are legitimate. You know, direct air capture is not economic viable today, but it has to start somewhere. We need continued investment into it for those, for those unit economic costs to continue coming down. And we have to have high-quality engineered sequestration that can put carbon in the ground for tens of thousands of years, versus just planting trees everywhere, which is a critical part of the solution to be clear but comes with some severe downsides and limited sequestration capabilities.
We just need to follow the science. We say, follow the science all the time when it comes to believing and solving around climate change. But some people that use that same moniker tend to forget that also should apply to offsets. As it applies to our business, we help our customers today track offsets. We're actually partnered with Patch and help, you know, promote offset purchases. You know, our stance is for us, we don't think it's an acceptable position to be an accounting provider and profiting off of selling offsets. We don't wanna be a broker. We also think there's a huge problem with brokers broadly in the marketplace taking too much money away from projects. And in fact, just yesterday, I spoke with financial times about this. There's the amount of fraud and graft that we're gonna see related to offsets.
And that's the client demand and balance is gonna be crazy. But for us, we don't want to ever profit from selling offsets. We wanna be able to take the user base that we have and promote investment into offset projects at scale and Patch helps us do that. Patch of course, has to still run a business, so they take a small margin, but it's a very acceptable margin in our opinion, versus, you know, some of the more traditional brokers that are kind of making a crazy amount of profit off of it. And then as it pertains to industry, you know, decarbonization is not possible without decarbonizing heavy industry. You know, cement, agriculture, oil and gas utilities. You know, all we have to do is look at the numbers, focusing decarbonization efforts on the highest emissions companies is supercritical.
Today, we work on both sides of that and that's been really critical for us. We work within those high emissions environments, but also with those that are financing them, 'cause if you're not working with the people that are financing those activities, whether it's through lending activities and the banking sector, or whether it's through direct equity investments, there's gonna be a real gap there because the people with the most influence in that decarbonization journey today, in our opinion, are financial institutions that are really threatening, you know, the equity value of those businesses and really threatening boards like we saw at Exxon. You know, these people are at threat of losing their job, whether it's the CEO or the board directors, that's a super powerful thing.
You mentioned that one of the things that makes you different is that you've avoided heavy consulting engagements, and really tried sticking strictly to SaaS, given that, as you said, we're not even in climate tech 1.0, and given how many gaps there are and how different it is from industry and industry and the expertise that's required that often doesn't exist in these companies. How have you done that? What makes that possible, and why is it possible for you where so many others have struggled?
I think that's the power of software, right, is the ability to codify knowledge into a readily accessible on-demand sort to format. And really what we've done is taken an approach similar to what you've seen other companies that have radically simplified, highly technical areas into much more approachable ways. I think a great example is what Intuit did with tax filings. So think about the IRS tax codes. You know, if you're, if you're international, the IRS is the Internal Revenue Service, the federal agency, that's responsible for collecting taxes in the US. And there are 5,000 pages in the US tax code.
You and I are never, ever gonna go read maybe even a single page of that tax code. We just wanna go into a piece of software, tell it how much money we made, and with confidence and trust have that software, tell us how much money we owe the federal government. We don't wanna pay it a single dollar more. We don't want to pay a single dollar less because there are downsides to doing both. And so we took a similar approach to that. We're actually releasing a whole freemium version of the platform. We're gonna make the entirety of scope one through three carbon accounting available for free in the market. Really a new mission we're adopting is democratizing carbon accounting, 'cause we've been able to figure out how to introduce the concept of materiality.
Which is really answering the three biggest questions that companies have in calculating their footprint, which is what is my footprint today? How do I calculate it? Number two. And what parts of it are most relevant for me? And what you'll find is in scope three emissions especially the Pareto principle applies almost every time. The Pareto principle being 80% of the emissions are gonna come from 20% of the activities, the majority of the time. And so we've been able to do two things. We created some really specific IP that allows us to do calculations of all types across the entire carbon accounting framework, which is called the Greenhouse Gas Protocol in a singular workflow, a singular system of record.
And we've been able to codify the materiality piece, which traditionally consultants have been filling that really answers the what's material to my business. And then how do I go calculate it? And so, you know, for us, it's... that's taken, you know, upwards of $20 million in capital investment today. It's getting access to those world-class experts, distilling that information, putting it in the software. It's still early days. You know, we're, we're excited about what we've been able to build so far, but there's still a lot of opportunity ahead.
When it comes to accuracy, one of the knocks I've heard on carbon accounting is just that so much of the data is self-reported and that companies aren't necessarily incentivized to tell the truth. How do you handle that? And also how much does your job differ as a company or as a product from sector to sector?
Another set of great questions. You know, two primary components to the accuracy around carbon accounting and the first is the calculation methods. And it's, it's one that most people don't understand. And so the greenhouse gas protocol is literally designed to accommodate for the wide range of industry and data scenarios. So a great example is air travel. You and I just spoke, you haven't taken a flight since, since COVID has gone down. I've been on a few and there are three ways according to carbon accounting methodologies that you can calculate the carbon footprint of air travel.
The first is called a spend-based methodology. You tell me how much money you spent on that flight from Boston to London and I can give you an approximate carbon footprint calculation on that. By nature, it's gonna be high level and it's gonna be not very accurate. The second methodology would be a distance-based. So if I have data that tells me you flew from Boston to London, Heathrow. Maybe that's from a concur system, maybe it's from an accounting system, now I can give you a distance-based calculation that's more accurate. The third is a fuel-based calculation. So if I know exactly how much jet fuel that 747 burned getting you from point A to point B, I can give you a very accurate calculation because there are emission factors that tell us the carbon intensity of jet fuel for US-based flights.
That's where that problem comes in, right, is you're almost certainly not going to get the data from American Airlines that tells you exactly how much fuel they burned going from point A to point B, but you can probably get spend or distance based calculations. And you know, one of the important things to remember about all carbon accounting, all carbon accounting is an estimation. The only way you can get 100% accurate emissions data is to put a physical sensor on something, and that's not economically viable. And that's usually reserved for very specific industrial applications. You know, things like methane leaks on oil and gas wells, and those sorts of things.
And so there's a, there's a huge sort of technical of entry to understanding how carbon accounting works. And, yeah, that's tough. How do you explain that to people? Should people necessarily care about that? Who knows? The other part of it you pointed out is assurance and audit. I had one CFO tell me he predicts that we're going to see the greatest transfer of wealth from 401ks and pension plans into the big four in Sarbanes Oxley. And what he means is the big four are about to have a massive boon doing assurance and audit work on carbon disclosures and climate disclosures for companies all over the world, because what's gonna happen is the SEC is gonna put out their disclosure mandates in Q1.
If you haven't seen it yet, Chairman Gensler has made an absolutely brilliant move. And as soon as the SEC mandates that they have to disclose it, remember in the US corporate officers are liable for everything they put out as a public company. They are personally liable. They have to sign every disclosure that goes out. Now, what's gonna happen is no CEO or CFO or board is going to allow climate disclosures to go out without a big four or a similar auditor assuring that that methodology was correct because they don't want to get sued, especially because of precedents at Shell and Exxon of their company making misstatements about their carbon footprint.
You're going to see a whole bunch of time and money spent on assurance and audit. And one of the ways that we've approached that is right now we're the only ones in the market that are fully transparent on that. So when you use our platform, you know exactly what calculation was used, you know, exactly what data was used, you know, exactly where it came from. It's literally audit trails in our ledger system, very similar to thinking of it as a journal of entry in financial accounting. And so we've gone through multiple assurance audits with our customers. They're saving upwards of 50 to 75% of the time they would usually spend on assurance and audit because they have it all in one central system now.
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