With the increasing demand for greater transparency and accountability from companies, investors, customers and other stakeholders, ESG (environmental, social and governance) elements are increasingly influencing investing and business.
While the S and G part of ESG continue to grow in importance, the imminent challenge of dealing with the climate crisis is very much driving this ESG trend, which is expected to continue in the coming years.
Despite the growth of ESG funds and capital allegedly flowing into this sector, it is still extremely difficult to understand whether this is actually the case. Without enough regulation or universal standards, ESG is still in its “wild west” stage. Regulators are increasing their scrutiny in the sector as greenwashing allegations surge.
Given the nature of today’s ESG sector, how do we know if capital is truly going to companies that have a verifiable positive impact on the environment?
One issue plaguing the market is the lack of high quality data, creating a general deficiency in ESG transparency and allowing for greenwashing to occur. And it’s no surprise why – the processes for corporate climate-relevant data collection have historically been challenging.
Aside from the fact that companies are voluntarily reporting data with varied or incomplete ESG standards, they have often relied on manual data collection, which is not only prone to error, but is also a time consuming and costly process.
Blockchain technology and tokenisation may be a timely and effective solution to our ESG problems. Despite the aftermath of FTX’s recent collapse causing some traditional financiers to shy away from digital assets, this debacle is likely to be an example of basic financial fraud found in a traditional centralised financial system. Blockchain technology and decentralised finance were not the culprits – they could have helped prevent fraud like this. Larry Fink, initially a skeptic of tokenisation, recently asserted that “the next generation for markets, the next generation for securities, will be tokenisation of securities.”
When it comes to green finance and ESG, a blockchain-based system is not the only solution available, but it does provide all stakeholders with greater trust and more predictable time and cost in the gathering, recording and sharing of information – ultimately contributing to the acceleration of positive climate action.
A blockchain is essentially a digital ledger – each block of transaction data on this decentralised growing list of records contains information about the block previous to it, thus forming a chain that is resistant to modification. It is secure by design, making it very suitable for situations where transparent and traceable information is important.
A blockchain-based system, combined with other technologies, ensures organisations can capture and record accurate, verifiable climate-relevant information at the asset level that is tamper-proof, retaining a high degree of provenance.
This technology-enhanced, direct methodology for extracting, recording and sharing climate-relevant data can materially accelerate processes that are often entirely manual and open to human error, only requiring manual inspection where and when necessary. This results in more timely data, greater predictability, reduced cost, and vastly improved auditability.
The benefits of applying blockchain technology to financial products can be seen in initiatives like the Genesis 1.0 and Genesis 2.0 projects. Led by the Bank for International Settlements Innovation Hub, Genesis 1.0 explored how blockchain and IoT technologies can drive transparency of green investments and accessibility to small investors.
The success of the first project led to the launch of project Genesis 2.0 which explored the use of blockchain, smart contracts and other related technologies for tracking, delivery and transfer of digitised carbon forwards, which conceptually results in cheaper funding for green investments, while reducing the risk of greenwashing. We are seeing more projects like these being introduced to solve problems in, and optimise, the climate finance space.
It’s likely that in the foreseeable future, we’ll see more organisations utilise advanced solutions for both the capturing, recording and sharing of ESG data, and the creation of environmental financial products dependent on such data. Ultimately, this is what is required to accelerate positive climate action on the timeline we need.
Allinfra is building technology solutions to help your organisation achieve ESG goals. Learn more about our sustainability data management software, Allinfra Climate.