Part 1: Changing Climate, Changing Supply: How Regulation and Availability are Disrupting the Supply Chain

Intro/Overview

In this episode, Suzanne Shelton of the Shelton Group interviews Wilson Lau on his thoughts about sustainability.  In this episode, they discuss:

  • 2:04:  Five macro themes that impact the future of our food supply chain.
  • 4:09: How do we avoid global famines?
  • 7:10:  Proof that climate change is real.
  • 9:48: Extreme weather impacts the cost of business.
  • 14:09: We have to invest in a way that is profitable and sustainable in the long term.
  • 16:18:  The impacts disease can have on productivity.
  • 20:10: Have we seen the last pandemic?

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Wilson Lau:

Welcome to season two of Herbal Explorations. Today, I have Suzanne Shelton, my PR guru with the Shelton Group, to join me on today's show.

 

All of season two will be about sustainability, and through our work with the Alpha Sustainability Group, we have had a lot of conversations on sustainability. Today, we'll have the pleasure of having Suzanne interview me and give my thoughts on sustainability instead of being the interviewer.

 

Welcome, Suzanne. How are you doing today?

 

Suzanne Shelton:

I'm great. Thank you so much for having me.

 

Wilson Lau:

No, thank you. I always enjoy our talks about sustainability and how it will impact our lives in the industry.

 

Suzanne Shelton:

It's appropriate for us to have this conversation because we do talk a lot about sharing your thoughts on sustainability needing to be an important component of all the decisions that companies make, particularly companies dealing with botanicals. I'm thrilled to be able to have this conversation with you. Are you ready for my first questions?

 

Wilson Lau:

I'm always ready.

 

Suzanne Shelton:

You gave a presentation recently at SIAL on the top issues impacting the future of the food supply chain, including medicinal herbs.  Your company Nuherbs is an importer of organic and conventional botanicals and botanical extracts focused on the dietary supplement and functional food markets.  What are the five macro themes impacting the future of the food supply chain?

 

Wilson Lau:

It starts with the environmental aspect. There are global warming and environmental impacts worldwide, and we're seeing more and more of them. On top of that, there's also social and demographic change.  Sustainability also has to include the social aspect of people, and with environmental change, there's also demographic change.  This goes back to college, where I was a geography major and looked at how people are reacting to what's going on in the bigger world and how they will move based on opportunities, the weather, climate, and geography.

 

Diseases in the future will also be a significant trend based on environmental steam. We will have to look at how diseases affect where people live, how freely they move, and how quickly we get to move around the world.  Right now, disease and COVID are big topics.

 

And then the governmental picture; how is the government reacting to their policies? How will that impact the environment, the social aspect of things, disease control, and public health?

 

Lastly, how will technology help us identify or give us tools to battle some of these environmental impacts, whether through measurability or how effective the changes we're putting in place will be? Those are the five themes of ESG: environmental, social, governance, disease, and technology. Those are the five themes that will impact the food supply chain.

 

But even more importantly, with botanicals, we have all the same issues, but we all have different resources. The government and people will figure out how to feed people first. If it's corn or wheat, it's rice; they're going to figure out how to feed people first. The resources will be allocated, not necessarily to botanicals.

 

So we have to be smart about how we invest and make decisions on how to improve the state of botanicals because we just don't have the same resources, nor will the same attention be paid to our little food sector.

 

Suzanne Shelton:

That's both true and terrifying. Let's dig deeper into the environmental piece of it. What's one of the first things? We could talk about so many aspects of the environment and environmental awareness. What's the big thing you think everyone needs to look at?

 

 

Wilson Lau:

The key is that there are more major climate events happening worldwide. Major climate events are defined as climate-related damage of over a billion dollars. Even though we may lose power due to electrical grid issues due to unseasonable heat, rain, or weather, it may not be classified as a significant climate event. Although those events impact people, they're just not over a billion dollars.

 

As of October of this year, there were already 29 major climate events in the world, and 13 of them directly impacted the US. In 2021, there were 20 major climate events in the US, and the price tag was over $145 billion dollars, and they impacted over 40% of Americans.  The frequency of these major climate events is proof that something is going on and that the impact is wide and varied.

 

Suzanne Shelton:

It's been interesting to watch through the decades the resistance to dealing with climate change and one of the main excuses always given is short-term economic considerations.  For instance, "Oh, the economy's not good enough, we can't blah, blah blah. Oh no, we need the money from petroleum.  We can't..."

 

That short-term thinking causes an immense amount of human suffering but in terms of what's going to motivate businesses to take a longer-term view and do climate change mitigation steps, what kind of costs are there to businesses from climate change now?

 

Wilson Lau:

One of the things is this; with climate change, there are external and internal impacts.  From a business point of view, the external could be your supply chain; you don't directly own the farms, but the farms got damaged. It's your customers being impacted.  If Suzanne's too hot, she's not going to go out and go shopping. She's going to stay home and try to figure out how to do it, especially if there isn't sufficient electricity to fuel the a/c system.

 

For example, Pakistan this year had two major things: extreme flooding, which caused over 1500 deaths, impacting over 33 million people. Just in one province, almost 40,000 square miles of land are still under water.  At the same time, they had extreme heat.  They had this huge heat dome that impacted Pakistan, and there were 20 or 30 days above 104 degrees. People can barely operate, especially if they don't have air conditioning or climate controls for their building.  They can't go out and farm, they can't go out and buy things, they can't go consume, they can't produce.

 

There are a lot of costs that are external and internal.  The internal costs are, for example, facilities in Pakistan; those facilities will be operated at sub-levels.  If you post 100% efficiency and your people are too hot and can't work, you might be at 0%, 20%, or 30% efficiency. There will be both external and internal costs that are impacts, not cost, but impacts.

 

Suzanne Shelton:

That makes sense. Think about just this year alone, the stories we heard about record heat waves in England. England is supposed to be drizzly and cold.  But people, it was like they couldn't function. Their infrastructure is not built for that; their houses aren't built for that. And France had wildfires, and was it Spain?

 

We're seeing extreme weather that is impacting people's ability to work and buy groceries all over the world. The environmental takeaway is that we must all factor that into our decisions.

 

Wilson Lau:

Many of these environmental costs used to be externalized; basically, they're born by someone outside you or your company.  It will become internalized because we'll have to do something about climate change and have to put things in. Even if you don't want to do anything and want to deny it, you will still have to do something.

 

For example, if your locale is getting hotter, you'll have to install air conditioning or cooling devices if you don't have them already. If there's a lot of rain, you must construct better drainage to shed the water. If there's drought, you will have to figure out how to treat water to have access to water.

 

There are going to be costs that are helping make positive change against these extreme climate events, and there will also be costs that are reactionary because it's too late. We will have to put these things in to live here.

 

I'll give you a perfect example. I live in Oakland, and almost no one in Oakland has an a/c. Now, as you build a new house or as people are retrofitting their homes or condos, people are looking at adding air conditioning because there are more hot days. Before, it might have been one or two days, and everyone opened the windows, went outside, or went to the movies. Now, there are more and more of these days, and we have to put in measures to deal with that reality.

 

Suzanne Shelton:

I remember you telling me that you had installed solar panels in the Nuherbs facility. One reason for that was with all the wildfires and extreme weather, there may be blackouts.

 

Wilson Lau:

There are definitely rolling blackouts, and it could mean lost work days; it's going to be the cost of insurance, and it's going to be other health risks. There are a lot of things that companies are going to have to address or answer. How do we account for these changes? How are we going to deal with this, and what are we going to do?

 

Suzanne Shelton:

Right. Right.

 

Wilson Lau:

Do we need more rainy day funds on the operations side to account for things that we might not have previously had to do or install?

 

Suzanne Shelton:

That makes sense for businesses to expand their rainy day fund budget because we're going to have crazy stuff happening that has a social impact and creates social pressure.

 

Wilson Lau:

Social pressure is significant because as climate change happens, it will impact the quality and availability of botanicals and food throughout the world, leading to the question of food security or insecurity. That is huge and impacts governments and society because the quickest way to dissatisfaction as a community or a society is not having enough calories.

 

Suzanne Shelton:

We've already seen famines in different parts of the world, with Bangladesh heading into another one, which will spread. Those of us in our cozy developed country lives will be impacted by that as well. We may not be at risk of starving, but we will feel that impact in other ways.

 

So what should companies factor into their business plans to accommodate the social aspect of this? What's the social takeaway?

 

Wilson Lau:

 

For the social impact, we have to invest in a way that is profitable long term. We have to have a longer-term outlook than the financial markets, which measure things by quarters, or because some of these themes are going to be longer-term, and if we don't have something that's sustainable over the long run, we won't have a business.  I think the real key is, how do we remain profitable but invest for future growth and sustainability?  It's not trying to maximize profit today at the expense of cutting your nose.

 

Companies need to remain profitable, but we no longer should think that profit is the only thing that matters. You can invest and reduce your profitability to ensure that you have a long-term plan to address these macro themes.

 

Suzanne Shelton:

To some extent, sustainability could be whether or not a business will be viable in the future.  Addressing some of these hazards that have been created by not addressing them before definitely impacts a business's ability to stay in business, to have a market, to have ingredients, and to have products.

 

One thing we talked about throughout the pandemic is the impact of COVID-19 on society and businesses and how that all snowballed into the supply chain breakdown. Everybody likes to pretend that it's over, and after having just had it again, I can tell you it isn't.

 

What do companies need to think about here? Do you think companies are pretending it's over? Is COVID still impacting businesses? What should companies be thinking about that they may not be?

 

Wilson Lau:

Companies should not think COVID is over; there are impacts of COVID throughout the world and even in the US. There's a 28% spike in COVID cases after the Thanksgiving holiday in the US.  It's happening, and people are still getting it. The severity may be less with the tools we accumulated over the last two years.  You're still saying, "Hey, you got COVID, don't come to work, and make sure you don't have COVID anymore before you come to work." So there are lost work days again.

 

Productivity will continue to be affected.  For example, if you have COVID, as long as you're sick and not feeling well, there's no PR going out, and things get delayed. These are real things that happen.  We will still lose a lot of productivity to COVID, and COVID isn't the last disease we see in our lifetime.  We must figure out, "Are we giving people enough sick days? Are they going to be happy with the sick days they have? Is it sufficient?" If you look at the current railroad issue and strike, it's all about sick days.  How is one enough?

 

Suzanne Shelton:

One?  Do they get one day off a year?

 

Wilson Lau:

It's not only the person being sick.  I have younger children than you; your children are grown, and mine are young. If they get sick, guess who stays home?  Either I am not going to work, the Mrs. is not going to work, or a combination of the two; but they can't stay home alone. COVID is still here, and the impact it will have is going to be far more significant, and it hasn't gone away yet.

 

If we pivot outside the US and into China, China is stuck between a rock and a hard place with COVID. They have this zero COVID policy, which they're trying to move away from, which is that if they have a COVID case, they go on lockdown in a particular portion of the area. It used to be the city, then it went to the neighborhood, and from the neighborhood, it went to the block, and then it went to the tower. They're trying to make this confinement smaller and smaller, but even that isn’t working.

 

They're trying to remove the zero COVID policy, but many of their elderly are not fully vaccinated. They think they need three shots to be equivalent to the Moderna or Pfizer two-shot routine, and many of them haven't had their third shot. Most of them had their second shot but not their third shot.  Internal estimates by the Chinese government and think tanks say that if they took away zero COVID policy, they anticipate 1.6 million deaths from COVID in a short amount of time.

 

Suzanne Shelton:

Oh my god.

 

Wilson Lau:

There have been over 1 million COVID deaths in the US over two or three years.  A shorter time may be in months.

 

Suzanne Shelton:

Wow. That's terrifying.

 

Wilson Lau:

There has to be an investment in public health throughout the world to deal with COVID, and once we have a good firm handle on COVID, how do we have systems in place to deal with the next disease?

 

Suzanne Shelton:

That's terrifying. Thanks for inviting me to hang out with you.

 

Wilson Lau:

There's hope.

 

Suzanne Shelton:

I know there is, but there is a lot to worry about, and planning on how that will impact businesses and our lives are essential. So I appreciate these conversations we have.