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The increasing interest and popularity of blockchain and digital assets has brought their various impacts to light. They have the potential to assist both a green transition and address Environmental Social and corporate Governance (ESG) concerns. ESG measurements aim to establish an evaluation of companies’ social and environmental responsibilities and credentials and this renders it very useful in assisting socially responsible investors to make their choice as to where to invest. The importance of ESG in determining the value of a company is becoming increasingly evident. Recently, the value of global ESG assets was estimated to exceed $53 trillion by 2025. Firms involved in ESG ratings provide corporate social credit scores which rank companies’ negative effects on the world - for instance, pollution and modern slavery.
Blockchain technology is helping to improve ESG credentials, in part given its ability to maintain a decentralised database of records which are tamper-resistant in nature. Therefore, it works as an assurance of accuracy and transparency of information. In effect, blockchain-powered platforms can act as a skeleton, interacting with other technologies, such as Internet of Things (IoT), so as to transfer the data of smart infrastructure or devices to the blockchain network, satisfying both transparency and privacy. Furthermore, via the use of smart contracts, it becomes possible to verify the consistency between the final ESG report and the raw data that has been used to create the report. As mandatory corporate and sustainability reporting becomes more commonplace, accurate and verified documentation to support transparency becomes crucial. Therefore, blockchain technology can help with compliance of ESG standards in two major areas: reporting of data and supply chain transparency.
Reporting of data
Access to accurate, standardised information is key. Blockchain-enabled reporting tools give companies a chance to collect verifiable data and produce trustworthy reports that demonstrate their ESG credentials. Blockchain enables data standardisation, whilst also providing the platform needed to support data transparency. The automation of data collection from IoT allows various devices to communicate with each other and therefore share data and information without the need for human intervention. Utilising blockchain technology offers assurance that all the data transferred between devices is genuine and properly encrypted to prevent any alteration without authorisation. An example of this would be the use of a blockchain-powered platform to monitor the carbon footprint of a global group of independent organisations. According to a report from the EU: “Blockchain technologies can transform individual efforts of companies into a networked effort. And it can clearly pinpoint the contributions individual actors make to reduce their carbon footprint. The spirit of competition and market-based incentives create a win-win situation for all. Clean technology start-ups play a critical role in this process. They develop blockchain-enabled platforms that bring together all stakeholders, including companies, government and citizens”.
Supply chain transparency
An essential part of achieving viable goals is by improving supply chain sustainability. Blockchain technology offers the potential to transform supply chain management. Using distributed ledger technology, it provides a digital system and database to record the transactions along the supply chain, whereby bringing transparency, efficiency, traceability and reliability to supply chain management. Blockchain platforms, using IoT, can automate data collection across different points of a company’s supply chain. The relevant data does not have to be checked from potentially error-prone suppliers so companies can therefore have greater knowledge and potentially control over their environmental impact. This automation and real-time availability of information can help companies detect issues faster and also reliably trace the problem back to the source. Blockchains can play a role in terms of responsible and ethical sourcing. The transparency it offers is crucial in tracking the materials and goods from source to end-use and helps ensure security for all participants by allowing them to access the records of transactions at any time. An example of this has been the deployment of a blockchain-powered platform being used by Coca Cola, which aims to promote “supply chain due diligence and working conditions”.
Drawbacks to using blockchain and digital assets to enhance ESG credentials
There has been much negative press regarding the vast amount of energy being used to power the Bitcoin Blockchain. When Elon Musk ceased accepting Bitcoin as payment for the Tesla Range, he stated that “Tesla would stop accepting the cryptocurrency as payment because the so-called mining of the coins used too much fossil fuel-generated electricity.” Even with the current dip in the cryptocurrency market, a single Bitcoin is worth around $30,000. There has, however, been widespread awareness of the impact that investments in these can have on the environment. Given these environmental concerns surrounding cryptocurrency and the increasing importance of ESG, an appropriate question to ask is whether these two developments are compatible.
As reported by the University of Cambridge Centre for Alternative Finance, Bitcoin mining consumes more energy than the UAE or the Netherlands. It consumes about 0.4% of global energy and up to 150 TWh of electricity per year. This immense energy usage has generated considerable concern, especially as the focus on climatic change increases. In defence, however, there are other blockchains using much less energy than the Bitcoin blockchain, and many blockchains actually use renewable energy as their power source. In addition to this, another consideration is the social plan; blockchain and ESG conflict in their social plan. The social component of ESG includes human rights, diversity, financial inclusion and consumer protection. However, although blockchain protects the vulnerable from oppressive governments and allows anybody with an internet connection to purchase cryptocurrencies (thereby promoting financial inclusion), it may also promote illegal conduct, such as evasion of exchange regulations and tax fraud. The exchanges on which cryptocurrency transactions are made can often be poorly regulated and leverage can be provided by shadow banks that may not be regulated, both potentially violating consumer protection. Due to their loose regulatory and enforcement structure, cryptocurrencies are appealing to those people who wish to boycott the network of regulations and fines that control traditional financial markets. Furthermore, unfortunately the decentralised nature and pseudo-anonymous structure of blockchains make them a useful tool to avoid financial sanctions.
Blockchain technology has far-reaching possibilities, not least of which is being able to increase transparency and handle and share date securely. Although there are certain incompatibilities and challenges, there is the potential for blockchain technology to assist in a green transition for addressing ESG concerns, which is one of the many various impacts the increasing interest and popularity this technology has brought to light.