Podcast: How AI is helping solve the carbon market crisis
Jonathan Horn, CEO of Treefera, discusses his company's mission to help clean up carbon markets using tech, AI and nature-based assets.
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The full transcript is available below:
[00:00:00.10] - David Brett
Welcome to the first ever live edition of the Investor Download.
[00:00:11.04] - David Brett
This is a podcast about the themes driving markets and the economy now and in the future. On today's show, we're going to be diving into the murky world of carbon markets.
[00:00:23.02] - News clip
The equivalent of nearly 53 gigatons of carbon dioxide were released into the atmosphere in 2021, if you include all greenhouse gases.
[00:00:32.04] - News clip
Depending on which scenario you look at, we will have to remove 6, 8, 10, maybe 15, maybe even 20 gigatons per year.
[00:00:45.12] - David Brett
Amid dire warnings of the effects that's having on the climate, countries and companies have pledged net zero goals. To help meet pledges, companies have been using carbon trading markets and offsets.
[00:00:59.01] - News clip
It's like a compensation scheme for governments, companies, or individuals. If you produce carbon emissions, let's say you're an airline or a steel factory, you can try to balance them by finding other ways to reduce carbon in the atmosphere by an equivalent amount.
[00:01:15.15] - David Brett
The carbon trading market is worth nearly $1 trillion. But here's where things get a little bit murky.
[00:01:22.06] - News clip
Carbon credits are simply buying permission to pollute. So let's say you cannot avoid polluting where you are. So you pay somebody else, someplace else, who is doing work to reverse the effects of your own actions that are damaging the environment.
[00:01:38.12] - David Brett
Worst still, some of those credits aren't achieving the offsets or reductions that have been promised.
[00:01:43.24] - News clip
Study after study has indicated that most offsets available on the market don't reliably reduce emissions.
[00:01:50.08] - News clip
Far, far more commonly, the carbon offset market is used as a reputation laundromat, and that can make climate change even worse by giving a false impression of progress while robbing us of time.
[00:02:03.18] - David Brett
And time is something we just don't have in the race against climate change. So on this show, we're going to look at what's gone wrong, what we could do about it, particularly around technology, and what that might mean for you as investors, business owners, and the climate itself.
[00:02:23.14] - David Brett
Now, it's a story that I can't tell on my own, so I've got a very special guest with me in the auditorium today. He's a theoretical physicist, a former Managing Director at J. P. Morgan, and he's on a mission to clean up some of those carbon markets and make it more transparent for those that invest in it.
[00:02:37.07] - David Brett
Please give a warm round of applause to the CEO of Treefera, Jonathan Horn. Jonathan, welcome.
[00:02:43.06] - Jonathan Horn
Thank you.
[00:02:43.19] - David Brett
How are you doing?
[00:02:44.15] - Jonathan Horn
Very Good. Glad to be here, and thank you for the warm welcome.
[00:02:47.07] - David Brett
No worries at all. I'm going to throw something straight at you first up. I've heard carbon markets been described on many occasions as the Wild West. Is that a fair comment?
[00:02:56.09] - Jonathan Horn
There is some fairness in that comment. I think the carbon markets, like any market, depend on governance to control them and to ensure that they're proper working. There's been many examples. Carbon markets aren't new. We've been here many times before. So they really got going, first of all in the '70s, then in the 2000s, and have been revived more recently. But I think they're a necessary mechanism, and therefore, there's no choice but to improve the governance, improve transparency, and regulate them properly.
[00:03:31.01] - David Brett
But the fact they've been through a few iterations already suggests there is a problem with them.
[00:03:35.01] - Jonathan Horn
There's definitely been problems in the past, and there's still some significant problems that need to be solved, like any market.
[00:03:41.24] - David Brett
Okay, I mentioned you're a CEO of Treefera. Can you just tell us a little bit about Treefera and what it does?
[00:03:46.11] - Jonathan Horn
Yeah, sure. So Treefera is an AI-enabled data platform. The purpose of Treefera is to give a discoverable, understandable, and trustworthy data on nature-based assets. And so, of course, we started with trees that are super charismatic, but that includes all types of nature-based assets, and it includes all types of understanding, so impact from an investment point of view, from a carbon offsetting point of view, from an in-setting point of view and from a supply chain point of view. It covers all aspects of data required in those areas.
[00:04:22.23] - David Brett
And you've recently been expanding your team?
[00:04:25.04] - Jonathan Horn
Yes, we've approximately quadrupled the team in a very short period. So we went through pre-seed last year and we've just done Series A this year. So we're expanding very, very rapidly.
[00:04:36.15] - David Brett
I understand your co-CEO is also your wife?
[00:04:38.20] - Jonathan Horn
Yes.
[00:04:39.19] - David Brett
Down in the left-hand corner there.
[00:04:41.13] - Jonathan Horn
She's here in the audience as well. Welcome. We've come colour coordinated in some way.
[00:04:46.22] - David Brett
I was going to ask how it is working with your wife, but I'm pretty sure I know what the answer is going to be, bearing in mind she is in the room as well.
[00:04:50.20] - Jonathan Horn
Yeah, absolutely.
[00:04:53.01] - Jonathan Horn
We've always had completely different career paths. Hers is much more on go-to-market. Mine is much more on the technical and banking. And we've always been interested in each other's careers greatly. And so this opportunity arose, and we found all our skillsets are really complementary.
[00:05:09.06] - David Brett
Okay, brilliant. And before we go on to your mission, I just want to talk a little bit about yourself. For you, were you always really interested in data, in the environment around you, and how it works?
[00:05:20.12] - Jonathan Horn
So I grew up on a farm in a place called Rutland. It's the smallest county in England. Huge collection of horse shoes, if anybody goes there. I was really interested in the natural environment, but I was also very interested from a very early age in physics, particularly, and in science, and trying to understand how things work. So my defining characteristic, I was intensely curious.
[00:05:51.12] - David Brett
And there was plenty of famous theoretical physicists in the past. There's one there, very famous man. Yet you ended up in investment banking. How is that?
[00:06:01.01] - Jonathan Horn
It's weirdly theoretical physicists, there's a lot of them that wash up in investment banking for various reasons. My attraction to investment banking was really it's about solving problems at scale. I originally joined Citi as part of their payments business, TTS as it was called at the time. For me, payments on the scale that Citi were doing it at that stage was really about massive flow problems, and most of my work was done in risk, strategy and flow around payment.
[00:06:33.03] - David Brett
Was there a light-bulb moment during that time where you thought what you're doing now is what you're destined to do?
[00:06:39.04] - Jonathan Horn
In terms of Treefera, it evolved and emerged rather than any eureka moment. I was doing a lot of work on artificial intelligence and data at scale. I was doing a lot of work on risk, understanding risk and risk assets, risk in the natural world, the integration of what we think of as the economy and the natural world, which really could be thought of as one thing. And I started to understand and realised that main issue in order to efficiently deploy capital in those areas, in my opinion, was a lack of understanding and data, transparent data, in order to deliver that insight. So really, it came from the emerging thought that someone really needs to sort out this data.
[00:07:26.14] - David Brett
And did you always want to become a CEO?
[00:07:29.11] - Jonathan Horn
That was never a burning ambition. I've always liked leading teams, and I've had many opportunities in my career to do that, but I didn't wake up one day and say, I'd love a card with CEO on it.
[00:07:42.18] - David Brett
Enjoyed it or regretting it?
[00:07:43.24] - Jonathan Horn
No, it's brilliant. I'm really enjoying the company. We've built an amazing team in a short space of time, which is the same reward. So no, it's been a fabulous decision.
[00:07:59.22] - David Brett
Okay, so let's talk a little bit more about Treefera's mission because it does directly impact what we're trying to talk about today, which is other markets and clean them up a bit. So what is Treefera's mission?
[00:08:08.21] - Jonathan Horn
So Treefera's mission is to bring discoverable, understandable, and trustworthy data sets on nature-based assets. They are relevant and important in all sectors of the economy. So supply chain, biofuel, bioenergy, regenerative agriculture, and then your more common carbon projects, particularly nature-based. So, carbon sequestration through forestation, through biochar, all of those things require data sets. Typically, the data that exists today is complicated. You need to be very expert in order to try and understand it. We're trying to package that data up and deliver it, particularly to financial services and other enterprises, in a way that makes sense to the consumers of that data. In that sense, it's simple. In another sense, it's a vast scale that's required. You need to be able to provide data at the scale of countries and globally. In order to make this practical, it has to be done at a point that's obviously cost-effective to make the use of that data ubiquitous.
[00:09:19.05] - Announcer
On Apple Podcasts, Spotify, or wherever you get your podcasts, you're listening to the Investor Download.
[00:09:25.24] - David Brett
Why should it matter to investors, the people in the audience, the people listening at home?
[00:09:29.24] - Jonathan Horn
Perhaps some of us learned during the financial crisis, having data about the fundamentals of an asset and the underlying provenance of that asset is vitally important. Today, data on nature-based assets is super patchy, hard to understand. If you can understand the data on nature-based assets, you can make a proper assessment around risk, and that makes insurance and investment then a reliable proposition. So it brings it into the domain of financial services in a real way.
[00:10:05.24] - David Brett
Presumably without stating the obvious, it all starts with the climate crisis, right?
[00:10:09.08] - Jonathan Horn
It absolutely starts with the climate crisis. And so that chart you showed earlier, David. So what's different, I think, about the climate crisis versus other things that we've been facing, this problem isn't going to go away. It's just going to get worse and less addressed. So there's this constant backdrop of time running out and things having to be done. So from my point of view, it's also an obligation to do something about this. I think very strongly that something has to be done, and then people that are in a position to do something should do so. But it's not a negative thing. Often when you think a crisis, it's a terrifying prospect, which it is, but it's also a massive business opportunity.
[00:10:50.20] - David Brett
I was going to say there's a lot of risks out there, so what are the opportunities for investors?
[00:10:54.07] - Jonathan Horn
The opportunities are everywhere you look, every industry you look in, every business that you look at. If we're going to the second of your 3Ds, decarbonization. If they're going to decarbonize, they need data in order to understand what their impact today is on the natural world. That could be supply chain, so deforestation in coffee supply chains in Brazil has to go down there to an individual plot level. That's some small scale producer with three or four hectares of coffee. What's the deforestation in that space since 2020? That's now enshrined in regulation. Those are the sorts of insights that are going to be required. And if you have those insights, then the opportunity is like any. Now, I always used to think in banking, I was working, which I loved working in a big risk engine, really, a risk processing engine. So if you really understand the risks better than somebody else, then you can make sound investments in these spaces.
[00:11:52.07] - David Brett
Data plays a huge role as you were talking about there. So let's start with some of the technology you use. Do you use drones and satellites?
[00:11:59.19] - Jonathan Horn
Use drones and satellites, the vast majority of it is satellite. What's fascinating about satellites is, the last year, there's like 12,000 launches of satellites. When we first started this business, I did dream of launching a satellite with my picture on the side, but I'd certain maybe that was a vanity project, but the ...
[00:12:16.15] - David Brett
Talks with Elon Musk?
[00:12:17.07] - Jonathan Horn
We talked with Elon Musk over this. So what's the important part about this is satellite data has become inexpensive. It's getting better and better quality. When we started Treefera, free data, open source data was at 100 metres resolution. An image from a satellite, one pixel was 100 by 100 on the ground. That's now 10, so 10 by 10. So the resolution is getting better and better. You can buy off the shelf resolution data at 30 centimeters. So in Treefera, we can get data that would allow you to identify this table from space. So the quality of the data, the richness of the data, the insights you can get from it are growing exponentially.
[00:12:56.20] - David Brett
Okay, so does that mean you don't need people like these guys on the ground anymore?
[00:13:01.03] - Jonathan Horn
Not so much. And one of the secret sources of Treefera, we do have ground source data that typically comes from our clients, which is helpful to validate and calibrate the AI models. But once that's embedded in the model, you can analyse all sorts of vast areas at super high speed and inexpensively, and that allows you then to take action and develop plans.
[00:13:27.06] - David Brett
And I presume AI plays a huge part as well?
[00:13:29.19] - Jonathan Horn
AI plays a huge part. I've been interested, my first AI model was actually, I was looking back in 1996. So AI has been around a long time, like a lot of these other technologies. What's enabled it now is the cost point and price point for cloud, so now compute at a vast scale. The types of models and the quality of those models is going up and up. What you can detect reliably and accurately with AI is now incredible.
[00:14:00.22] - David Brett
And assuming it was part of the solution, AI could also be part of the problem as well?
[00:14:06.14] - Jonathan Horn
It is part of the problem. Again, going back to my previous employer, we spent a lot of time, valuable time, trying to make AI more efficient. There's a misconception often that AI and machine learning are the same thing. They're not. AI is a much bigger topic than machine learning. So a lot of these models are now extremely expensive computationally, therefore, they're burning through a huge amount of electricity. Running AI last year, I think, was 3% of the global energy consumption. It's forecast to become 8%, that dwarfs aviation as an industry. AI is becoming, quietly, a very big problem within climate change, generally. So again, our obligation is to be much more frugal, and that's part of the Treefera mission.
[00:14:54.01] - David Brett
Are people working to make AI more efficient in terms of energy consumption?
[00:14:57.18] - Jonathan Horn
Yes and the differences you can make by taking a much more frugal approach to the engineering are vast. So you can quite straightforwardly make it a thousand times more efficient.
[00:15:11.05] - Announcer
Get in touch with us by email at schroderspodcasts@schroders.com or visit our website, schroders.com/theinvestordownload.
[00:15:22.08] - David Brett
Okay, just before we get on to the future, how the future might look like, I just want to ask one question because we're talking about trading markets, but why don't we just attack the source? Surely, nature-based solutions will do a better job than just trading on markets.
[00:15:35.17] - Jonathan Horn
We need to do all of the above. So again, going back to your graph, that isn't going to change. I think the interview that you showed before, they said, we're going to have to capture between 10 and 20 gigatons per year. That requires reduction, and it also requires sequestration. Both leavers have to be pulled in every place as much as possible.
[00:15:58.07] - David Brett
Okay, so I presume carbon markets are here to stay, but do you see more money being funneled into the nature-based side of things?
[00:16:03.14] - Jonathan Horn
Yeah, definitely. I think carbon markets are a very important mechanism. In order to operate correctly, they need to be governed, they need to be integrity in the market. If you see, certainly in the US, there's been a huge push now. I think it was a couple of weeks ago in the FT, there's an article from statements by Yellen on driving integrity in the carbon markets. Those huge investments that they're putting in the US and the drive to integrity, that's going to foster a better environment for operating correctly in the carbon market.
[00:16:38.21] - David Brett
Okay. Obviously, there's lots of doubts out there from investors. How long do you think it will take for people to get more belief within the carbon markets? Because it's pretty muddy water out there.
[00:16:50.10] - Jonathan Horn
It is muddy water. We work a lot on what I would say is the origination side. People come into market with projects. I was out in Washington State the other week talking with regenerative agriculture consortiums. The people on the origination side are doing a huge amount. That will eventually come to the carbon market. From where we sit, we see a huge amount of progress on the origination and the big drive on integrity in the market. Some people are already there, many others will join.
[00:17:24.13] - David Brett
How do you respond to people that think that lots of companies, because you speak to a lot of companies, their carbon offset plans, their plans for sustainability are just PR plans.
[00:17:36.09] - Jonathan Horn
Realistically, of course, there has been plenty of greenwashing. That's inescapable. But the more we drive integrity in the market, and again, the backdrop of that chart that you showed at the start, which is an inescapable result of physics, those things are going to drive serious action.
[00:17:54.12] - David Brett
Okay, and just a final question, what does the future look like for the industry?
[00:17:58.17] - Jonathan Horn
Well, from a Treefera point of view, I've literally bet the farm on it, so hopefully looking very rosy. But I think genuinely, I think that in terms of timing, when we started Treefera, I think the turning point for me was working down in Canary Wharf in 2020 in the summer. It was too hot to go to work, and I used to go to work on a bicycle, and you thought, wow, this is what it feels like to cycle in 42 degrees heat with this must drive, action. So I think it's a very positive future.
[00:18:32.00] - David Brett
Jonathon, it's been fascinating. Thank you so much for joining us.
[00:18:42.02] - Announcer
That was the show. We very much hope you enjoyed it. You can subscribe to the Investor Download wherever you get your podcast. And if you want to get in touch with us, it's schroderspodcasts@schroders.com. And you can find out much, much more at schroders.com/insights. New shows drop every other Thursday at 05:00 PM UK time. In the meantime, keep safe and go well. The value of investments and the income from them may go down as well as up, and investors may not get back the amounts originally invested. Past performance is not a guide to future performance. Information is not an offer, solicitation, or recommendation of any funds, services, or products, or to adopt any investment strategy.
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