Decarbonizing Buildings with Mike Loth

Erin Pearson: Hey, everyone! Welcome to today’s episode of Decisions Now. I am your host, Erin Pearson. I’m the VP of marketing at Evalueserve, and today, I’m very excited to have Mike Loth with me. He is the executive director and general manager of specialty services at Johnson Controls in sustainable infrastructure. Mike, welcome to the podcast.  

Mike Loth: Thank you, Erin. It’s great to be here.   

EP: Great. I’m actually quite excited. We have some really cool themes coming up today covering a lot of sustainability and decarbonization, some voice of the customer research, and finding new market opportunities and what the future in this area looks like as well. But just to get us started and to set a bit of context, can you give us an overview of what Johnson Controls does and what your role is there? 

ML: Sure. So, Johnson Controls is one of the leading providers of HVAC, fire, and security solutions for buildings. Our industry is actually undergoing a number of different transformations. Digitalization is becoming more and more important in buildings and managing buildings and building infrastructure. Buildings are also a key focus for companies who own buildings to become more sustainable. So, when we talk about reducing our carbon footprint or trying to achieve net zero for buildings, it’s become important for a lot of our customers to try to get to those goals, and Johnson Controls Sustainable Infrastructure – the part of the business in which I work – we help customers get there. So, we find ways to improve the energy efficiency and sustainability of buildings to help customers reach their sustainability-related goals.  

EP: I think that’s great. I think a lot of times when people talk about decarbonization – or at least from my view of it – and sustainability, you forget a lot about the buildings that people actually work from and how to actually create everything so it is a lot more sustainable and how you can have such a huge impact within that area.  

ML: Well, that’s right, and it’s become more and more important as the impact of climate change is becoming more apparent in communities and with companies. And companies look at it also as a way to manage risk and help them, you know, improve their ability to forecast their business long-term by managing those risks. One of them is now climate change, and so to the extent that we can help them minimize that risk by addressing the carbon footprint of their buildings, it’s helping them achieve one of their business goals.  

EP: That’s great, and especially with, despite what country you’re in, there’s new regulations coming out all over the place about how you need to make your business more sustainable. So, one of the things that you guys have done is actually creating an eight-step journey to sustainability to help your clients with that. So, could you walk us through what that eight-step journey looks like? 

ML: Sure, and it’s a framework that we developed because it’s a good way for companies to think through if this is a really…it can be kind of an intimidating goal when you think about the carbon footprint of your buildings. Typically, about 40 percent of the carbon emissions in the world can be traced back to buildings, whether that’s the construction of those buildings or the ongoing maintenance of those buildings. And so, to get that 40 percent of carbon emissions down to zero can be a big challenge. And so, you know, this eight-step journey starts with step one, which is ESG planning. It’s how do I benchmark where I am today in my journey, so it’s decarbonization advisory services, it’s helping baseline, put together a roadmap for how you can go from where you are today (once you have that baseline) to whatever your goal is, whether it’s net zero or something a little bit less than net zero. Then step two is getting your buildings to be safe, secure, and healthy environments for building occupants. That’s a very important step for a lot of building owners, particularly in light of what we’ve just gone through with the pandemic and wanting to make sure that they can communicate to their building occupants, ‘This is a place you want to be. It’s a healthy environment for you to come to every day and work.’ Then step three is something we call digitally enabled environments, and a lot of customers look at that as a way to help track how the building is performing. When you think about your building, you sort of look at a building, and you don’t really think about a lot of the building systems that provide you everything from access control to the air that you’re breathing while you’re in the building and how efficient those systems are operating. A digitally enabled environment provides a platform that allows you to understand better exactly how things are operating. When you’re establishing that baseline initially in step one, you need to be able to track over time how you’re improving the performance of the assets in the building, and that’s what the digitally enabled environment enables you to do. Then, you get into step four and five, which are efficient infrastructure and sustainable operation of the building. It’s making those systems as efficient as you can by deploying the latest technology, like more efficient lighting systems, more efficient HVAC and building control systems, etc., and then continuing to operate those systems as efficiently as you can by applying active and proactive maintenance strategies so that they’re operating optimally at all times. And then, when you get into steps six and seven, that’s where, okay, now you’ve got the systems in the building operating as efficiently as you can, you’ve got your baseline, you’re tracking the performance of those systems. You’re still not to net zero, and so your building is still going to be using some energy. It’s using it as efficiently as it can, but it’s still using energy. So, how do you get from there to net zero? And that’s what step six is around, distributed energy resources. That’s deploying technology like on-site battery storage and on-site solar on the rooftop, or canopy solar for parking lots, etc. And it’s deploying those technologies to offset the remaining energy use in the building and helping make it greener. And then, step seven, which is renewable supply services, which is procuring potentially renewable energy for the energy that the building is using, instead of the building using power from non-renewable sources like natural gas or coal from the local utility. And then step eight’s the final step, and that’s certifying and recognizing the impact you’ve had to get to net zero. There’s reporting requirements that the SEC now has for reporting building performance and sustainability performance for buildings so that certification step is important to make sure that you’re meeting those science-based targets that you may have set for your business. So, that’s the eight-step journey, and some of the research that we did — the voice of the customer research — we did with the help of the Evalueserve really helped frame that journey for getting to net zero and managing the carbon footprint of your buildings by using that eight-step framework.  

EP: So, as we’re getting into the voice of the customer research, I guess one of the questions I have within that framework is it does sound like there’s a lot of…I mean, obviously, there’s a lot of different steps. It sounds like different people could be involved in different parts of the journey. So, how do you go about segmenting all of this in order to gather this type of information, and who do you talk to to gather together this information?  

ML: Sure, a couple of different stakeholders are involved typically in goal setting and then tracking the performance and progress against those goals. One is the facilities departments, so the facility director. Also, in a lot of organizations, we want to talk to the chief sustainability officer or who’s ever in charge of sustainability on behalf of the company. So, those are two key decision-makers we spoke with. Also, when you’re making investments in your buildings, it’s typically going to involve somebody from finance, so a Vice President of Finance or somebody that has their hand on the purse strings and is involved in looking at the business case for the investments that you want to make. So, those are the types of positions that we spoke with when we did this research, and they’re also the positions that we’re typically speaking with as a company when we’re approaching organizations about doing energy efficiency work or doing decarbonization-related work on their buildings. 

EP: Sure, so when you’re doing the voice of the customer research, it’s really about understanding the buying process and understanding where clients, not only where they are at in their sustainability journey, but also where do they want to start at, who needs to be involved, where do they want to go, and how can you help the. So, once you actually have this type of information, you have this voice of the customer, how are you actually using it internally to form decisions and to change the different solutions that you guys are offering?  

ML: Right, well, it is important in that first conversation with the customer to find out what they’ve already done. And so using the eight-step framework can help us in that regard, and so one of the key goals of the research that we did with Evalueserve was to…a hypothesis that we had going into the research was ‘Customers start the journey at different steps, but eventually they’ll touch all eight, because to get to net zero you have to. But some customers may start in that planning phase, a lot of customers we assume will start in that planning phase, right? You’ve got to create a plan, and you’ve got to start with — Where are we today?’ So, the hypothesis was certainly that a lot of customers have done at least some work in step one, but then they may skip over step two. The framework, the eight-step framework, isn’t one that necessarily has to be followed chronologically from step one, then you have to go to step two, on to step three, and so on. You can jump around, and we know a lot of customers have. We know that from the work we’ve done with some customers. And so we use the framework to sort of figure out, okay, what have you done today, and then what makes the most sense for us to do next as you proceed in your journey. And then the other thing we use the framework for is figuring out what are the aspects of the of the journey that customers see logically coming from a single provider, if they can use a single provider. Because when you look across these eight steps, there aren’t very many companies that do all eight of these things themselves, that have internal capability to do that. But yet a lot of customers, we think, to the extent they can find somebody that can partner with them on as much of the journey as they can, if they’re a credible provider of those steps, you know…What are the things that they would logically think to bundle across the journey? And we wanted to understand that a little bit better, too. How do customers think about the buying process here and who they would buy the various aspects, whether it’s who would you go to to find a digital solution to manage your buildings, who would you go to to improve the efficiency of the operating systems in your building, who would you go to to buy solar for the rooftops of your buildings or to at least look at renewable energy solutions that can be deployed on-site or procure renewable energy through a virtual power purchase agreement, for example. And so, getting a sense for which of those they would want to look for a single provider if they could find one was an important component of the work we did. And the results were very revealing for us, because then we were able to look at that and go, ‘What are the capabilities we want to make sure we have in-house so that when customers talk to us, we know we could provide those aspects of the bundle because that’s what they’re looking for?’  

EP: I mean, that’s brilliant, really. But I’m assuming that there’s this issue of market perception that goes into it as well. So, people are going to perceive Johnson Controls in one way and having an expertise. And then, especially when you start doing this voice of the customer research and seeing how people want to bundle or where there might be the best opportunity to provide additional services or solutions to them…So, how did having this research also help inform that go-to-market approach that you had? 

ML: Yeah, it informed it in a couple of different ways, Erin. To start with, it helped us understand which are the most important capabilities for us to try to build in-house because customers were going to look to Johnson Controls, they see Johnson Controls as a credible provider of services in those areas. One of the things we’ve been doing for 130, 140 years of existence is providing building systems, infrastructure. So when customers think of step four and five, efficient infrastructure and sustainable operations…But now they also think of us with regards to step three, digitally enabled environments, because we, several years ago, launched OpenBlue, which is a digital platform into which you can track the performance of all of the systems that operate in a building. So, that’s step three, four, and five for Johnson Controls. You start to look beyond that and you look at things like safe, secure, healthy environments – again, a Johnson Controls core strength. We have security, we have fire and life safety systems. And we’ve actually been investing in technology that can help improve the healthy air that the HVAC systems provide for building occupants to make sure there are no airborne pathogens, for example, like what you had during COVID, that could affect the building’s occupants. And so, it’s taking that core competency in steps four and five and then expanding beyond to step three and step two. And then in some cases for example, in step one, where you have decarbonization advisory services, which the research tells us is very important and is something that customers refer back to and update as they progress on their journey, having a good partner in this area is something that’s particularly important. So, we can come to the customer with a complete solution and say, We can help you across all eight steps by either having the core capability ourselves in-house that we’ve built organically or through partners that we’re bringing with us like for steps one and, in a lot of cases, steps six and seven as well, some of those renewable supply capabilities and distributed energy capabilities that we have a little bit in-house, and we continue to build but we knew we had some gaps. And so, let’s go find the right partners so that when you’re approaching a customer, you know that between ourselves and our partners, we can meet them wherever they’re at in their journey and provide a complete solution to get them to their goal. 

EP: Yeah. So, with the growth within the sustainability and decarbonization space, there’s new market opportunities in addition to the ones that you just mentioned that are emerging as well. So, can you walk us through some of the market research that you’ve done? I think you’ve mentioned water efficiency as one where you’ve found these new studies and new areas of opportunity.  

ML: Yeah, so the buzzword today is decarbonization, and so everybody’s thinking about how do I reduce my carbon footprint, but one of the other aspects of sustainability that’s beginning to get more and more attention is water sustainability. It’s being better stewards of the freshwater that we use; you know, freshwater is only, out of all of the water on Earth, only three percent is freshwater. The rest is in our oceans and in seas, and it’s salt water, so we have to be good stewards of freshwater since it represents only three percent of the total water on Earth. And a lot of processes that particularly industrial customers use are very water intensive, and so water is becoming very much a scarce resource in parts of the world where a lot of businesses operate. You just think about the US and the drought conditions that the desert Southwest in California have experienced for much of the last 20 years until just this past winter, when there was finally a lot of rain and snow in the Sierra Nevada Mountains that is helping replenish aquifers that were dangerously low levels. But that was one year, and it’s going to take years and years of that, and the expectation is that climate change will continue to have an impact on water availability in some parts of the world, like the West, and so water sustainability becomes a very important issue for a lot of our customers. Because it’s related to decarbonization or carbon-related sustainability, it’s a natural add-on to the capabilities that Johnson Controls can bring to customers. And in a lot of our projects that we do for customers today, decarbonization type of projects, we’re also doing some what I would call domestic water conservation improvement measures, looking at things like low-flow shower heads and in aerators and faucets and low-flow toilets and waterless urinals and things like that, more efficient kitchen systems and irrigation systems for lawns and in athletic fields for K-12 school districts and the like. And so, we had an interest in exploring, ‘Okay, across the water sustainability spectrum, what services do customers buy, and which types of water-related solutions could Johnson Controls be a credible provider of if we were to expand our service capability into new areas?’ So, we looked at things like water loss reduction and water demand reduction and then some of the things in water and wastewater infrastructure and who the providers were today. We asked, again, Evalueserve to help us with some research just to understand the market better, more broadly. We know some of the things that we’ve begun to do for customers in the area of water demand reduction, some of the things that I mentioned — fixture replacements and the like — but we know that water has a lot broader service potential than that, so we wanted to understand: who are the providers of those services today, what does the industry structure look like, what do some of the margins look like, so we could figure out where are the best spots for Johnson Controls to potentially look if we were to expand our services into those areas.  

EP: And when you get studies like that and you’re uncovering these new market opportunities, how do you work with other teams within Johnson Controls to share out the information and to put together a strategy in determining whether or not you want to move forward with that new opportunity?  

ML: Yeah, well, so in the case of the research that we did with Evalueserve — water services are an area today that, again, the sustainable infrastructure business unit of Johnson Controls dabbles in today. So, we knew that we needed to involve some of the…what I’ll call the project development team members within sustainable infrastructure who have a little bit of a baseline understanding of water demand reduction in some of the services we provide there today. We also wanted to involve some of our global products organization, because some of the products that we manufacture, particularly, for example, in the HVAC space, do use water, like water-cooled chillers, for example, and cooling towers, which are a key component of industrial cooling systems. And cooling towers rely on water and make up water as part of the cooling process in those HVAC systems that they’re a part of. So, we wanted to get some products people involved to help us not only sort of craft a little bit of a hypothesis on what some of the different market segments might be but then who some of the players were to provide a little bit of guidance to Evalueserve as you went out and looked for who were the players in this market. We could give you some idea of some of the companies to look at, and then from there, you can learn more about what they do and who some of the adjacent players and spaces are…some of the spaces that those players are involved in that go beyond what Johnson Controls might be familiar with, and then that helps, I think, form a more complete picture of the market in the different service offerings the customers that play in water provide. And then it’s a little bit of an iterative process. As you were able to learn more about some of the companies and service offerings, you came back to us, the team that we had, what I’ll call the research advisory team, who was able to look at some of your preliminary research and then provide some guidance on where to dig a little bit deeper, which aspects of what you were learning probably apply a little bit more, a little bit less to capabilities that may be adjacent enough to Johnson Controls’ capabilities that we could be a credible provider if we were to move into that area, and which to maybe de-emphasize because they’re a little bit further afield from what Johnson Controls does. And in that way, I think we could refine where you spent the most time building a profile of the different segments of the market and maybe going a little bit deeper into the segments that we knew would be of greater interest based on the capabilities being maybe a little bit closer to what we do today. 

EP: Yeah, I mean, I think that’s great. And I think, especially today, there’s so much opportunity within this space in particular. And what’s good, and hopefully you guys are seeing a lot of it too, is how much interest there is in people wanting to do things, whether it’s on a personal level or on a larger corporate level as well, in order to help become more sustainable and to improve all of these efficiencies. 

ML: Yeah, and I’ll make one other comment about this water services area that was really helpful in terms of the way you portrayed back some of the research learnings. We wanted, I mean, one of the couple of the key elements that we wanted to understand…we built an attractiveness index, which was based on key aspects of each one of the segments within the water services market space that you helped us understand better. So, we identified with you what aspects to look for that would be attractive to Johnson Controls, because they were closer to capabilities that we had today. Another element of attractiveness were margin levels, growth rate, things like that, so it kind of helped us envision which of these segments were growing the fastest, were the largest, were the most adjacent to capabilities that we had. And then plotting that gives us a visual way of identifying what the true potential is, were we to invest in some of these areas for incremental growth. So, it wasn’t just about learning what the segments were, but it’s about going a little bit deeper and identifying which ones represent the best targets for us by using that series of criteria that we had identified up front to evaluate overall attractiveness of those segments.  

EP: That’s great. I am running a little bit low on time here. So, my final question for you, and I think what a lot of people would be interested in who are listening to this is, what advice would you have for somebody who’s looking to get started on their sustainability journey? 

ML: Well, you’re never too late to start the process of understanding what your carbon…what your goals are that you want to achieve and then where you are today. I think a good plan starts with creating a baseline and collecting the data or finding a partner that can help you collect the data to understand where you’re starting from, what that base is, because that establishes a point in time from which you can, in the years to come and based on the actions you decide to take, can help you understand how much improvement you’re seeing in the actions you’re taking. And so that’s where we start the conversation with most of our customers is, let’s help figure out where you are today by looking at all of the buildings in your portfolio and the systems you have running in those buildings and in how you manage your business on a day-to-day basis and estimate what your scope one, scope two, and scope three emissions profile looks like. And only then can you begin to envision what your plan, what your roadmap needs to look like and how long you should plan on it taking to get there. So, a lot of people say start with the end in mind, which certainly should be a goal — do you want to get to net zero, or how close to net zero do you want to get? But then from there, establish that baseline and then build the plan from there. 

EP: I think that’s great. You have to understand where you’re at in order to get to where you want to go. Well, Mike, it was great having you on today. I thought it was a really fun conversation. I learned a lot. And, I mean, this space is super hot right now. It’s quite interesting and more to come with it in the coming years as well.  

ML: Thanks, Erin, and thanks to Evalueserve for being a great partner and helping us understand through voice of the customer research and some of the market research we’ve done in key adjacent spaces really helped us figure out what our plan as a business should be to continue to build capabilities to help customers reach those decarbonization goals. 

EP: That’s great.