Resources

• HBS Case Study: Harvard University and Urban Mining Industries: Decarbonizing the Supply Chain
• Original Cold Call episode: How Could Harvard Decarbonize Its Supply Chain?
• HBR: Getting a Clearer View of Your Company’s Carbon Footprint by Robert S. Kaplan, Karthik Ramanna, and Stefan J. Reichelstein, Havard Business Review (April 3, 2023) describes the e-liability approach

Host & Guests

Climate Rising Host: Professor Mike Toffel, Faculty Chair, Business & Environment Initiative

Brian Kenny, Chief Marketing and Communications Officer, Harvard Business School and host of Cold Call

Robert S. Kaplan, Senior Fellow; Marvin Bower Professor Of Leadership Development, Emeritus at Harvard Business School

Shirley Lu, Assistant Professor of Business Administration at Harvard Business School

Transcript

Editor’s Note: The following was prepared by a machine algorithm, and may not perfectly reflect the audio file of the interview.

Mike Toffel:

Today’s episode is the first in a series focusing on decarbonizing the roots of value chains, where we’re looking deep into supply chains that serve many industries. Today we’re looking at concrete, one of the most popular materials in the world and one of the world’s biggest hard-to-abate technologies. Concrete production accounts for nearly 8% of the world’s greenhouse gas emissions, most of which comes from cement– the glue that binds conventional forms of concrete. We will explore one type of green concrete produced by the company Urban Mining Industries, which replaces half of its cement with recycled glass that makes it much less carbon intensive. We’re bringing you this story through an episode of the HBR Cold Call podcast, where my colleagues Shirley Lu and Bob Kaplan are interviewed by Brian Kenny. They’ll discuss how Harvard is pilot testing the use of this type of green concrete as part of the university’s construction efforts in order to pursue our climate goals. They’ll also discuss various methods to measure carbon emissions, including the e-liability approach Bob Kaplan lays out in a recent Harvard Business Review article.

Here's Brian Kenny’s interview of HBS professors Shirley Lu and Bob Kaplan.

Brian Kenny:

One sage piece of advice I heard long ago, is to worry only about what I can control, which works great until you're responsible for an outcome that involves others over whom you have no control. Such as the conundrum of firms everywhere, including 96% of the Global 250 who have committed to reducing their carbon footprint. There are things you can control in your physical plant, like energy and waste reduction. Firms go to great lengths to get employees to adopt sustainability measures in their day-to-day work. But pretty quickly, you realize that most of the meaningful measures involve products and services outside your sphere of control, which can make it nearly impossible to find reliable data to accurately measure and report your progress.

It's a challenge that some consider to be the holy grail of sustainability reporting. Today on Cold Call, we've invited Professor Bob Kaplan and Shirley Lu to discuss the case titled, “Harvard University and Urban Mining Industries: Decarbonizing the Supply Chain.” I'm your host Brian Kenny, and you're listening to Cold Call on the HBR Podcast Network. Shirley Lu's research looks at corporate social responsibility with a focus on topics related to climate change and gender diversity. Bob Kaplan co-developed activity-based costing, and the Balanced Scorecard, which he applies to problems at the intersection of business and society. They both are co-authors of today's case. Thank you both for joining me.

Shirley Lu:

Thank you for having us.

Brian Kenny:

Great to have you back, Shirley. Bob, you're a first time guest here on Cold Call, but a legend here at Harvard Business School, so we're really honored to have you on the show. I thought this case was really interesting, and it takes place in our own backyard here at Harvard. Shirley, let me start with you and ask you, what's the central issue in the case, and what is your cold call when you start this discussion in the classroom?

Shirley Lu:

We want students to think about the role of measurement when companies make decisions about decarbonizing their supply chain. So we start the class by asking, "How can Harvard's Chief Sustainability Officer, Heather Henriksen, encourage Harvard's new construction buildings to use a new material to replace cement?" By the way, cement contributes to 8% of global emissions, so quite a lot. This new material is called Pozzotive, and it's invented by this entrepreneurial company called Urban Mining Industries. They claim that this material has a 95% lower carbon content than cement.

So now, how can Henriksen show this all to the University's many, many stakeholders. There are the students, faculty, staff, alumni, even the city of Cambridge and Boston, and this is where she needs reliable and verified emissions numbers from the supply chain. Essentially, this case lets students to discuss the challenges with measuring supply chain emissions, many of them are four or five tiers down the supply chain, and explore various methodologies including one that's called E-liability, which is introduced by Professor Bob Kaplan here and Professor Karthik Ramanna in their 2021 HBR article.

Brian Kenny:

We're going to dive into more of that a little bit later. But first, I'd like to know, Bob, why don't I turn to you and ask, how did you hear about this case? How did you hear about Pozzotive, and what Harvard's doing here?

Robert Kaplan:

Karthik and I published the article November, 2021 in HBR. A couple of faculty at the university said, "This could be of interest to the university," because Harvard is trying to decarbonize, and its own emissions are fairly small. Occasionally, one of us goes on a plane and that plane emits, so we get charged in effect for those emissions. But most of the emissions that Harvard might have some control over, to get, Brian, to your opening comment, are really embedded in the buildings that it builds.

As the Chief Sustainability Officer, Heather, told me, "We build a lot of buildings. Those buildings contain cement, they contain steel, they contain glass, they contain copper, all of which generate a large quantity of emissions in their extraction, processing, and distribution.” Harvard was looking for a way to work better with its suppliers to lower the footprint of the materials that it's purchasing and embedding in its buildings.

Brian Kenny:

Perhaps not surprisingly, Harvard has some very aggressive targets that they've set for reducing their carbon footprint. But what you're describing in this article are things that live way upstream and way downstream of where the University is.

Robert Kaplan:

As I started to talk with Heather about this, and she starts mentioning this product, which I had never heard of, or even that this type of product existed, I said, "Well, how can I learn more about this?" So we set up some calls, and I got to meet the founders and the senior executives of this company to learn what they had. I said, "We're looking for new content that we can teach our students." I thought, "Well, let's get a teaching case that is right at the cutting edge of environmental measurement."

Brian Kenny:

Shirley, I don't want to assume that our listeners... Everybody's heard about greenhouse gas emissions and carbon footprint. We may not all understand it the same way. So maybe you can level set for us at the beginning of the conversation here, what are we talking about when we're talking about greenhouse gas emissions?

Shirley Lu:

Let me start by actually describing Harvard's approach to how they think about greenhouse gas.

Brian Kenny:

Great.

Shirley Lu:

There's two things that make them special. Number one, you mentioned target. So the target Harvard has is to reach fossil fuel neutral by 2026, and fossil fuel free by 2050. That goes beyond just greenhouse gas. It's essentially saying, "We can't even use fossil fuel," and then use offsets to replace them. The other part Harvard really cares about, the health consequences of fossil fuel. The second specialty that Bob just mentioned is that Harvard treats the campus like a testing bed. The idea is, we can really use students, researchers to explore different solutions, try to test it on the campus, institutionalize the best practices, and then amplify that to the larger society. So this potential use of Pozzotive is very in line with this focus.

Brian Kenny:

How do you measure greenhouse gas emissions? What are the approaches that Harvard's using?

Shirley Lu:

Harvard, like a lot of other organizations, use the greenhouse gas protocol. To briefly describe it, they separate emissions into three categories, three scopes. The first scope, scope one, is direct emissions. That's anything that's coming out of the company's chimney, or even cars owned by the company. Scope two is indirect emissions, but only those relating to electricity, or water, or cooling. Then scope three is everything else, all the other indirect emissions, such as employee commutes, upstream supply chain emissions, downstream use phase. Harvard, like a lot of companies, their majority is scope three because we don't really produce steel or cement, but a lot of that is coming from, actually, construction and operational buildings and labs.

Brian Kenny:

But it's amazing, once you start to dig into that, it's just this ripple effect of all these impacts that you have to think about and account for. The accounting parts really difficult in this, Bob. Is that right?

Robert Kaplan:

It is, because supply chains are quite complex and diverse. So every organization would know its immediate suppliers, what are called the tier one suppliers. Maybe they know some of their tier two, the ones who are their supplier's suppliers, but they won't even know the majority of those. When you get to the supply chain for concrete, or steel, or copper, you have no idea who did the mining of this. Or if you're using natural gas, where did the extraction come from? Not only you don't know what emissions they are sending up to you, you don't even know their names or their existence. So, that's the challenge. How are you actually going to be able to measure, much less influence the emissions of organizations that you don't know about?

Brian Kenny:

The case describes E-liability accounting, and by no means am I familiar with accounting practices, generally speaking. Can you break that down for us in a way that maybe people like me can appreciate what E-liability accounting is?

Robert Kaplan:

Let me indicate what the issue was that we addressed with E-liability accounting. Shirley described these three scopes and, in particular, scope three. The scope three standard says that every company or organization, whether it's BMW, as in one of Shirley's other cases, or Harvard, as in this case, has to estimate all of its supply chain emissions. The standard actually also says you have to measure all the emissions that occur at your customer's locations, and your customer's customer's locations.

Brian Kenny:

Wow.

Robert Kaplan:

You might have some idea, again, of your suppliers and have some influence on that. But to know who are your customer's customer's seems like an impossible task.

Brian Kenny:

It does.

Robert Kaplan:

So what happens now, these two problems, one is that the measurements are not going to be very accurate of your suppliers because, in order to have it feasible at all, the greenhouse gas protocol scope three says, "Well, if you don't know it for real..." Well, you can use estimates, industry average estimates, so you don't have to get the actual estimates. It's like running a financial accounting system that says, "If you have trouble measuring your cost of goods sold, don't worry about it. Just use the average cost of goods sold for your industry," which would not be a very robust foundation for running a financial accounting system. But certainly, you would have just about no idea about the emissions that go downstream from you once it leaves your product.

So the E-liability method looked at this problem, and it's a real problem 'cause we do want to control supply chain emissions and say, "If we look at it from the other direction, rather than look at it from Harvard down or from BMW down, the top down, look at it from the bottom up," because that’s the way the accounting process starts. It starts with production of raw materials, and then you sell it to your next customer and they take it, that's their input cost, and it just ripples up the supply chain. We said, "Why not do it that way?" So the E-liability said, "For any products or services you purchase, get the emissions from your immediate suppliers, and then you add to that your own emissions, the scope one emissions from your owned assets, and then take that," here's maybe where my prior work had some help, "Assign it to your output products and services."

This is how activity-based costing works. You take general factory and indirect expenses, and assign them down to individual products. So the E-liability method says, "Take your purchased scope one emissions from all your suppliers, and your own, and assign it out to your output products and services." When your customer buys that product, they not only get physical possession of the product, but they now, in effect, own all the emissions that were produced up to that stage of production. If you do it that way, the emissions information flows naturally up the supply chain. Any organization just has to get information from its immediate suppliers and send the transformed data, with its own scope one emissions, to its immediate customers. That's very feasible to do, but you need to have every entity in the entire global ecosystem here on the same page following the same standard, as we do in our universal accounting standards.

Brian Kenny:

Okay. But I get the basic premise is, we're building as we go. If everybody's doing it the same way, and following the same rules, then you can start to get your arms around this and get some pretty accurate data.

Robert Kaplan:

Another metaphor that sometimes people pick up right away, it's like a value-added tax. At each stage you have, what did you purchase in materials? Then, what did you add? Then you send that up to the next stage and that becomes their input. So it solves this apparently intractable problem in a very simple way that we're already familiar with using fundamental accounting principles.

Brian Kenny:

Okay. Shirley, let me turn back to you for a second, because you mentioned that the manufacturing of cement produces about 8% of the global gas emissions around the world. So, what makes it so intense where it comes to producing a high carbon footprint?

Shirley Lu:

Cement's greenhouse gas emission, mainly coming from two sources. First, to make cement, you need to heat up the limestone to 1,400 degrees Celsius. To get to that high of a temperature, you can't use electricity. So you can't use renewable energy, you have to burn something. That's around 40% of that total emissions. Then the remaining 60%, it's coming from the fact, at this high temperature what happens is, the chemical bonding of the limestone will then form a substance called clinker. Clinker is that grounded into a powder, and that's what we call cement. But that process, the chemical reaction itself, guess what? Co2 comes out of that equation, and that 60%. The other thing, this shows that it's a really difficult process to reduce emissions. So we will call them a hard-to-abate sector.

Brian Kenny:

If you could find a way to produce something that had the properties of cement, but was a lot cleaner to produce, you would do it, and somebody's done that. So let's talk about Pozzotive, which is the product here that Harvard was looking at bringing into their construction. Tell us about that product.

Shirley Lu:

Exactly. Pozzotive... Let me, before that, quickly clarify one concept so we all know what we're talking about, because I get confused between concrete and cement a lot. Concrete is what we usually see in buildings. It's created using cement, and mixing in some rock and sand. So think of cement as the glue that sticks together all these materials. What Pozzotive does is, it's a material that can replace cement, and it has cementitious properties in the sense that it can act like a glue as well. You can replace up to half of the cement, and you can think of that as substantially lowering emissions.

Why is that? So the way they create Pozzotive is to use post-consumer glasses. These are your wine bottles, the glasses that you see in recycling bins, they all get put into this municipal waste facility that is going into Urban Mining Industries. What they do is, they tumble these materials, clean it up, and turn them into a very fine powder. So this process is mostly mechanical, you see. It has no chemical reaction. You don't need the 1,400 degrees Celsius. Hence, in aggregate, they're showing it's a 95% reduction in the emissions content.

Brian Kenny:

Okay. It sounds like a dream product. It almost sounds too good to be true.

Shirley Lu:

That's what I thought when I initially saw it, yeah.

Brian Kenny:

I would imagine that the concrete market itself, it's part of a mature industry, it's probably some very well-established players in it around the world. How do you even begin to penetrate a market like this with a product that has not really been proven or tested?

Robert Kaplan:

There was a lot of companies out there that are building and they want to, just like Harvard, reduce their environmental footprint. So they put pressure on their concrete suppliers and say, "We can't do business as usual. You're going to have to figure out a way to lower the emissions in the concrete that at least you sell to us."

Brian Kenny:

There's some leverage there, if you are the person who is managing the construction projects, that you can put on your providers to incentivize them to think about new ways of doing things.

Robert Kaplan:

You can. One of the interesting features of this case is, again, Harvard doesn't purchase powder from Urban Mining, they purchase concrete. So we had to talk to another player, Boston Sand and Gravel, which does buy cement or cement substitutes, which could be fossil fuel based, like fly ash or slag. Or in this case, potentially Pozzotive. Shirley, maybe you can describe how we interacted with Boston Sand and Gravel.

Shirley Lu:

Exactly. Like Bob described, Harvard doesn't use Pozzotive directly. Actually, there's quite a long supply chain between Harvard and then, at the end, the construction material. So Harvard will have a general contractor. The general contractor will then find a contractor for the concrete that they'll probably buy from, potentially, Boston Sand and Gravel. So now the question is, when they create their concrete, can they replace some of the cement with Pozzotive? They will have to test out different formulas to make sure the material is strong enough, 'cause we're talking about the construction industry. It's a slow moving industry, you want the buildings to hold up for a hundred years. So they had the process of doing that, and they come up with two different formulas that they think will hold up to the strength, and it uses a different amount of Pozzotive.

That's why Boston Sand and Gravel is really the company that's doing the testing, and they need to feel comfortable with using the material as well as well as any of the other parties in that supply chain we just described, from Harvard.

Brian Kenny:

So suffice to say, there's going to be a great need for these materials going forward. To Bob's earlier point about everybody being on the same page as it relates to measuring the usage of these materials, everybody has to be aligned. Is that right?

Shirley Lu:

Yes, exactly.

Brian Kenny:

Bob, let me come back to you for a second. The case does talk about blockchain as a technology to be used here. This is another term that I think people hear a lot about, they don't really understand blockchain necessarily in the same way. But, can you talk about how it would be applied here?

Robert Kaplan:

We've described how the data flow from a supplier, potentially like Urban Mining, to a transportation vehicle, and then the data goes to the Boston Sand and Gravel that mixes it, and then it goes to a general contractor. The general contractor says to Harvard, "Okay, this concrete has 40% less carbon emissions per ton than traditional Portland cement. In the case, Shirley constructed an Excel spreadsheet where the students get to play with the different mixtures that she described, the formulas, and how those affect the carbon content. Think about a skeptical student or alumni talking to the director of sustainability and saying, "Prove it."

Brian Kenny:

Yeah, of course.

Robert Kaplan:

"Why should I give money for the construction of this building at its low carbon? I want to be assured that it's correct." So the question is, when you have this very complex supply chain, hundreds of thousands of organizations feeding information up to aggregators like Boston Sand and Gravel, and then they're sending information to the contractor, how do you validate this information? One of the principles, again, of the E-liability method is, first, that the emissions should be measured once, and only once, at the place where they occur, whether it's Urban Mining, or the transportation truck, or the cement mixer at Boston Sand and Gravel. And, it needs to be assured at that point.

Now, by the time the product comes up to Harvard, it's very difficult for Harvard's auditor to go all the way back into the supply chain and figure out, "Are these data real on carbon?" So I thought, "Gee, blockchain has this capability of a distributed ledger." So I was having conversations with IBM, sustainability people in general. But I asked them, "You have Blockchain, don't you?" They said, "Yes." "Wouldn't this be a good application for this?" So they put Shirley and me in touch with their blockchain sector. It turns out, they'd already done this problem but in a different context. They had been hired by Walmart, and subsequently other food retailers, to provide a clear chain of sight of quality and safety information of all the food that ends up on the food retailer’s shelves, starting with the farm or the plantation where it's grown.

They actually constructed this blockchain solution. It's called Food Trust, that gives a downstream retailer visibility into the specific quality and safety data for every one of its suppliers, for every one of its products. What we realized is, we just had to relabel this. Also, the data has to have assurance. At the local level, someone had to go there and say, "Yes, this data that we're putting on the blockchain is not only private and secure," which blockchain does, "But it actually has assurance documents associated with who gave that audit or assurance at that site." So we brought IBM into the conversation, so they created a mockup or a display of how they could adapt the Food Trust blockchain to the carbon accounting issue that they had here.

Brian Kenny:

Wow.

Robert Kaplan:

In principle, if that were put into place, this is still in prototype stage, that would give all the stakeholders of Harvard University confidence that the data were real, and had been verified and audited, and we could trust the numbers on carbon emissions that are coming out of the system.

Brian Kenny:

It also makes me wonder, if everybody is gathering this data in the same way, and the data's reliable and trustworthy, are there other kinds of insights, even beyond the immediate application, that we might be able to glean from these sets of data?

Robert Kaplan:

Well, there's a lot of issues on ESG. We're just talking about E, and one particular E, which is greenhouse gases, and not water or other forms of pollution. But in general, when stakeholders, including investors, but also communities, want to hold corporations accountable for performance, they don't just mean their own company's performance, they actually mean their supply chain performance. We know from Nike, and several other examples, that if you have a bad outcome in one of your suppliers, the end use company is the one that's going to be held accountable for it. We could use the same principles of E-liability to start and track issues like child labor and slave labor. We could track use of conflict minerals, we could track safety and health data of employees, all the way down a supply chain, and use it for a much more robust and verifiable form of environmental and societal accountability.

Brian Kenny:

That's very powerful. So has Harvard been able to calculate any emissions reduction from these efforts, or this is still in the trial phase?

Shirley Lu:

What makes this case special is, everything is evolving. So Harvard is now also trying to figure out the emissions content, as well as the pricing of these materials.

Robert Kaplan:

This has been an unusual case because both Shirley and I are actively involved in its creation. Usually, in a case writing, we take a situation that has already occurred, and our job is to go back in history and document what happened, but not be involved in the process. But we've been involved in the process, and the process is ongoing. So Harvard hasn't started to talk about price, and it wouldn't talk about price with Urban Mining. It can only talk about price with the general contractor for a new building. So the question is, in the case, what can we do to get at this important issue? In principle, how much extra would the Harvard have to pay in a contract to get access to this low carbon concrete? So Shirley and I had to think about a way of how we could have this discussion go on in class.

Shirley Lu:

Exactly. We actually asked the students to create a spreadsheet to really compare the different formulas from the original mix of just using cement. Now you add in some Pozzotive in different ratios, what is that total emissions turning out to be? Looking at that number, it's what allows managers, or in this case Harvard, to think about the decision. They can even layer in other information, how much are we willing to pay per ton of carbon saved, for instance, to help them decide how much more they're willing to pay for a premium, if any, for this product?

Brian Kenny:

Do you think that Harvard's willingness to consider this signals some broader change in the way that firms are thinking about other ways to reduce their carbon footprint? Or, is Harvard like an outlier? Because, for us, it's such an important initiative overall.

Robert Kaplan:

My sense in the work that Karthik Ramanna and I are doing in many other sectors is, there's huge interest in companies that want to decarbonize their supply chain. But to date, they've lacked a rigorous methodology for measuring the current carbon content of its products and services, much less the reduction that could occur if they adopt new processes and new product designs. So, I think there's enormous interest. This case enables Harvard to help teach, not only other universities or large health systems, but also corporations, a way to go about measuring the existing carbon that's being produced in the products and services that are being purchased. But also, how they might contract differently with the organizations, their suppliers, to access lower carbon content products and services.

Brian, to your point, what this means is that companies are thinking about, when they're sourcing all their products and services, not just what the price is, and the quality, and the delivery, and the functionality, but how much carbon was emitted to access that product or service? So it's another dimension that comes into the procurement decision, and the logistics decision, and ultimately how we design our products and services so that we can use lower carbon components.

Brian Kenny:

Right. Another potential benefit here is that, firms that are willing to pay a little bit more to move in this direction also gain some brand strength from this, because people care a lot about the products and services they buy and the companies that they do business with. To know that somebody is really working and going that extra mile to maybe achieve a less of an impact on the environment, I think in many ways can help your brand.

Shirley Lu:

If you have good measures.

Brian Kenny:

If you have good measures, and you can rely on them. Sure.

Robert Kaplan:

The measures are real and audited. They're not greenwashing. Ultimately, that's the message from the case.

Brian Kenny:

This has been a great conversation, and I really appreciate you joining me to talk about it. I'll ask you both to chime in with one last response, which is, if you want people to remember one thing about the case, what would it be? Shirley, I'll start with you.

Shirley Lu:

Sure. Back to the beginning, which is measurement. Measurement allows us to figure out the best use of resources. One thing that wasn't obvious to me in the case is that, they were using glass and recycling to replace cement instead of creating new glass. Because if you create new glass using recycled glass, you create the same amount of emissions as using virgin glass. So here, by really doing the carbon accounting, you can see that bigger impact by turning it to replace cement.

Brian Kenny:

Bob, how about you?

Robert Kaplan:

Well, as a co-developer of both activity-based costing and the Balance Scorecard, I obviously endorse Shirley's enthusiasm for measurement. Let me pick on something else. What it is, it's actually, commodities are no longer commodities. If you think about what we're working with in concrete, or steel, or glass, or copper, we think about them as is they’re commodities. But once you get to the carbon content, they're no longer commodities. You can differentiate what otherwise would be a commodity by making it lower carbon and do exactly, Brian, what you said. Maybe you'll have customers that are willing to pay a price for a product that's now differentiated by its lower carbon content. That's a pretty important development.

Brian Kenny:

Bob, Shirley, thank you for joining me on Cold Call.

Shirley Lu:

Thank you.

Robert Kaplan:

Thanks for inviting and hosting us.

Brian Kenny:

If you enjoy Cold Call, you might like our other podcasts, After Hours, Climate Rising, Deep Purpose, Idea Cast, Managing the Future of Work, Skydeck, and Women at Work. Find them on Apple, Spotify, or wherever you listen, and if you could take a minute to rate and review us, we'd be grateful. If you have any suggestions or just want to say hello, we want to hear from you. Email us at coldcall@hbs.edu. Thanks again for joining us. I'm your host, Brian Kenny, and you've been listening to Cold Call, an official podcast of Harvard Business School and part of the HBR Podcast Network.

Mike Toffel:

That was Brian Kenny’s interview of HBS professors Shirley Lu and Bob Kaplan on Cold Call, as part one of our series on decarbonizing the roots of value chains. Join us next time on Climate Rising for a discussion of green steel.