At first blush, even defining the concept of net zero sounds like a relatively straightforward thing to do. International collaboration through the likes of the GHG (Greenhouse Gas) Protocol are creating a global standard to measure (and hence reduce) the carbon generated by both the private and public sectors. And yet in practice, it’s hard to do. While it may be easy enough to measure what happens under your own roof, how do companies account for emissions created by third parties and suppliers that technically sit outside of their business model, but are integral to success? These curve ball emissions – so called Scope 3 emissions – account for over 75% of the carbon emitted by most companies; and have a habit of blowing out good internal standards, and good intentions. Unsurprisingly, supplier emissions are notoriously tricky to accurately calculate. Companies are forced to rely on third party data or unverified numbers that don’t paint the entire picture.
Avarni is entering the market with a timely and potent decarbonisation solution. It is a carbon accounting and emissions management tool that accurately and efficiently measures Scope 3 emissions; then helps companies engage and incentivise their suppliers to reduce their emissions in order to remain preferred suppliers. Co-founders Misha Cajic and Anuj Paudel have been friends for 13 years and bring the right level of passion and expertise to crack this notoriously difficult nut. In a short amount of time, they brought the Avarni product to market, landed some high-profile logos and built excitement for their mission to “decarbonise the world’s supply chains”.
Charting the course to net zero doesn’t just happen with the press of a button. Businesses face two important challenges to get there. First, they must measure their organisation’s carbon footprint. This includes capturing the requisite data, both from within the business and beyond (third parties and suppliers), as well as correctly navigating the uncertainty associated with underlying assumptions. The next step involves turning captured data into insight; and understanding the levers for improvement, creating the business case for change, and mobilising against them. Avarni’s software offers value throughout this entire sequence; either as an independent tool or with the help of key partners.
We are proud to be supporters of the Avarni team, joining their most recent funding round led by Main Sequence Ventures, along with our friends at Sprint Ventures.
What we loved about the idea
The journey to net zero is long… and just beginning
You’d have to be living under a rock to not notice the speed at which ESG, specifically net zero, has become a major tenet of modern capitalism. Amongst large enterprises and funds management businesses, ESG reporting, strategy, and action has become a de facto (and in some cases de jure) part of the social licence to operate. And it’s only heating up. The ground swell of pressure is mounting from both the top-down (regulation) and bottom-up (customers), and will only continue.
In Australia, regulations to accelerate Scope 3 emissions are expected to come into force in mid 2024. Meanwhile, investors are increasingly requiring that companies disclose their supply chain’s emissions. With the very real threat of divestment and taxes looming, companies have billions of dollars of value at risk if they don’t act. At the same time, a huge swathe of suppliers will be forced to take action alongside these companies, and are willing to pay to ensure they maintain their contracts.
It’s not hard to see why Scope 3 emission reporting is set to be the next ‘natural greenfield’ opportunity for businesses supporting the transition to net zero.
Scope 3 is the hardest nut to crack
We have an unspoken mantra at AfterWork that the only problems worth solving are the really thorny ones. It’s not surprising that we love how Avarni is tackling the brazen Scope 3 beast head on. To date, most calculators have focused on Scope 1 and 2 emissions, with Scope 3 emissions often tossed into the ‘too hard’ basket or the ‘we’ll get around to that later’ basket. The upshot being tremendous inaccuracies on net zero reporting; alongside the relative ease of skirting responsibility, while also eroding consumer trust. Avarni recognises cutting through the noise can only be achieved through a mixture of technology and ‘in the trenches’ hard work. The Avarni platform empowers businesses and their advisers with the tools to engage their supply chains directly and intimately; pairing this with a suite of AI-powered tools trained on $1.58 trillion of real company spend.
For years, Scope 3 emission calculations have remained an elusive piece of the net zero vision; with customers and advisers alike resonating with Avarni’s innovative approach to the problem. Further, news is spreading fast – with Avarni’s Scope 3 focus naturally lending itself to the inherent network effects in supply chains.
Working with the tide, not against it
As investors we love it when businesses have a razor sharp understanding of the role they play in the value chain, and where they can work with, rather than against, their peers to create the most value for customers. In Avarni’s case, the tremendous value they bring is as the Scope 3 supplier management platform. They recognise that when it comes to emissions management, the raw calculations are a commodity product, while data gathering and ingestion is the really meaty offer. At a high level, the market currently segments itself into three tranches.
- Carbon Consultants – to date, enterprises have leveraged the expertise of third party consultants and carbon accountants to help them manage their pathway to net zero. Though services heavy, and hence limited in scalability, this approach works and it’s hard to see a world in which these players disappear.
- Lightweight SaaS tools – many calculators have come to market offering “instant emissions measurement”, yet they fail to engage with the complexities of the real world. Most often, they work through simple 1:1 modelling of financial data, leaving logic gaps. For example, did that flight you just took really contribute half the emissions because you bought it for 50% off?
- Carbon management and accounting platforms – these technology-led players offer full service platforms to calculate emissions, model reductions, and automate reporting. Reacting to the challenges of a pure SaaS approach, these players typically supplement their technology with in-house consulting services or focus on larger enterprises with dedicated sustainability teams.
Avarni’s key point of difference, and business model edge, is its partnership-led approach. They have deliberately chosen to work hand-in-glove with the largest consultancies tackling the net zero problem, equipping them with powerful tools to help improve their accuracy, efficiency and output. Some of their key initial partnerships include Schneider Electric, KPMG and Jacobs. In fact, KPMG referenced Avarni as a key player in both their 2022 and 2023 Impact Plans. We’ve seen momentum firsthand and look forward to seeing other large partners hop aboard the net zero train.
The challenges we saw
Can they cut through in a crowded market?
As Scope 3 heats up, there are more professional service and SaaS businesses flooding into this green opportunity space. Many competitors have chosen to take on the burden of fighting their way to success; by focusing on operating up and down the value chain (including providing professional services directly). In a sea of competition, we were most impressed with Avarni’s ability to carve out a well defined strategic niche. Their focus on working with existing professional service firms allows them to get further, faster – while also making it easier to become indispensable to the process.
On top of this, Avarni see themselves as in the business of ‘supplier mobilisation’, not just supplier engagement. Avarni provides suppliers a free profile on Avarni, that allows them to access full capabilities of calculation automation; as well as a data audit and reporting capabilities. This is a leadership move, while also providing robust network effects.
Is it too early for Avarni to succeed?
In Australia, penetration is currently small. Only around 43 companies (representing 22% of the ASX200) have a Scope 3 target and report Scope 3 emissions and none of them disclose their Scope 3 strategies. However, the pace of change is accelerating and those that choose not to act will get left behind. The Australian government is expected to introduce new reporting requirements that will come into effect by July 2024; starting with financial institutions and other large industries. This change in policy will give the Scope 3 decarbonisation movement a momentous and fast surge; and we believe the time is right to ride the wave.
How we built conviction
We were impressed by the team’s novel and collaborative approach to work within the existing ecosystem of decarbonisation solutions. Laser-like clarity on the value they add, and how that can complement existing solutions, sets Avarni up for accelerated distribution and rapid adoption. And that’s before we even take into consideration the increasing consumer, investor and regulatory pressure coming down the pipe. We’re excited to back Misha and Anuj and their bold vision to decarbonise supply chains; and believe the time is right to ride this greenwave to great heights.
