Written by Jonny Fry
Writers linkdin: https://www.linkedin.com/in/jonnyfry/

Due to its tamper-resistant nature, blockchain fits as an assurance of accuracy and transparency of data. This decentralised database of records is designed to facilitate raw data authentication challenges, transferring data of smart infrastructure or devices whereby improving both transparency and privacy.

Environmental, social governance (ESG) is “an approach to evaluating a company’s corporate social and environmental credit score compiled from data collected and related to the intangible assets of a company”. The social credit scores that are provided rank companies’ impacts on the world - for instance, pollution and modern slavery. Furthermore, the significance of ESG in determining the value of a company is gaining greater importance and attention from staff, clients, suppliers and shareholders. Globally, the value of assets now invested with an ESG mandate is estimated to exceed $53 trillion by 2025.

ESG-mandated assets are projected to be 50%+ of managed funds by 2024

Source: Deloitte

As mandatory corporate and sustainability reporting becomes common, accurate and verified documentation to support transparency becomes essential to satisfy various parties. Therefore, to comply with ESG standards, blockchain technology has increasingly been seen as valuable tool to help in verifying an organisation’s ESG credentials: 

• data reporting - access to accurate, standardised information is key. Blockchain-enabled reporting tools allow companies to collect verifiable data and produce trustworthy reports which demonstrate their ESG credentials. Blockchain enables data standardisation whilst also providing the platform needed to support data transparency. The automation of data collection can be braced with other digital technologies, which allows various devices to communicate with each other automatically and share data and information without the need for human intervention. For example, to reduce the global carbon footprint companies are able to report the entirety of their emissions through a single blockchain platform thereby making a standardised space for data to be collected and tracked reliably, and consequently allowing for meaningful measurements.

• supply chain transparency - an essential part of achieving the EU's sustainable goals is by improving supply chain sustainability. Blockchain technology shows the potential to transform supply chain management creating a database to record the transactions along the supply chain and bringing transparency, efficiency, traceability and reliability to supply chain management. Blockchains, coupled with Internet of Things (IoT), can automate data collection across different points of a company’s supply chain. This automation and real-time availability of information also helps companies detect issues faster and reliably trace the problem back to the source. Blockchain-powered platforms play a role in terms of responsible and ethical sourcing. The transparency it provides 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. This feature is particularly important when supply chains are global and can be complex, involving many different parties. 

Companies which are taking advantage of blockchain to support their ESG credentials:

As one of the leading energy companies in the world, Shell recently embarked on an ambitious energy transition agenda in a bid to move away from the use of fossil fuels and towards green and sustainable energy. It aims to reach net-zero carbon emissions by 2050 or sooner, and reduce emissions by 50% by 2030. To do this, Shell is leveraging game-changing technologies, such as artificial intelligence (AI), the internet of things (IoT), Web3 and blockchain. Blockchain's decentralised and tamper-proof nature makes it an attractive technology for global organisations such as Shell, which need both hyper-secure and scalable technology solutions to pilot a new generation of applications involving gathering and sharing of valuable data. Shell has created a blockchain-based system that can demystify the complex web of sources. 

Also, to ensure all-day consumption of green energy, Shell is creating highly granular certificates in real-time at the source of where the energy is generated so as to represent green energy produced every half hour. Every point of that electron’s journey, from production to consumption, is tracked and recorded on a blockchain. Aiming at increasing the availability and use of sustainable aviation fuel, Shell is collaborating with Accenture and American Express Global Business Travel to work on a new project, Avelia. This is one of the first public blockchain solutions that creates a credible and transparent way to help decarbonise the aviation sector.

 

The beauty sector:

For the beauty industry, which has a long-time dependence on agricultural ingredients (production practices for which have often not prioritised sustainability), hazardous chemicals, eye-catching packaging and constant replenishment, the adoption of sustainable values is particularly challenging. Unsurprisingly, the industry has recently been under pressure from both consumers and regulatory authorities. Regulators are vowing to tighten up regulations following reports of mislabelling of ESG investment products whilst consumers are also becoming more educated about ‘greenwashing’. As the demand for transparency increases, the sector is being compelled 'to do more' and to provide the evidence. Some beauty brands are considering the potential of blockchain as a tool to improve transparency whilst some have already adopted the technology. For example, in 2019, Provenance joined forces with British e-tailer, Cult Beauty, to provide “proof points'' on the product pages of participating brands. With these, customers can examine and compare claims made by brands (such as easily recyclable packaging or cruelty-free status) with the confidence that the information is unedited and has been independently evaluated, since it is in the blockchain. Positive Luxury is also using blockchain to improve transparency and to make it easier for brands to track their progress. This London-based firm accredits ESG efforts through its Butterfly Mark and Diana Verde Nieto, its co-chief executive, has said: “With our blockchain and QR code-powered pages, our portfolio brands will have an easy dashboard that will show them where they’re at, and the return on their sustainability investment”. 

Drawbacks to using blockchain to enhance ESG credentials: 

There has been much negative press regarding the vast amounts of energy used to power the Bitcoin blockchain. When Elon Musk stopped 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 $23,500 but there has, however, been awareness of the impact on the environment when investing in Bitcoin. Given these environmental concerns surrounding cryptocurrency and the increasing importance of ESG, an appropriate question to ask is if these two developments are compatible. According to 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 much concern, especially as the focus on climatic change increases. Another consideration is the social plan, since blockchain and ESG both conflict with this. The social component of ESG includes human rights, diversity, financial inclusion and consumer protection. Although blockchain protects the vulnerable from oppressive governments and permits the purchase of cryptocurrencies by interested individuals (thereby promoting financial inclusion), it may also promote illegal conduct, such as evasion of exchange regulations and tax fraud. Also, the exchanges on which cryptocurrencies transactions are made are poorly regulated - leverage is provided by a shadow bank that is not regulated as a bank - and this may violate consumer protection. Due to its loose regulatory and enforcement structure, cryptocurrency is appealing to those people who want to boycott the network of regulations and fines that control traditional currencies and financial markets. Its decentralised nature and pseudo-anonymous structure make it a useful tool to avoid financial sanctions. 

Conclusion:

The increasing interest and popularity of blockchain has brought light to the various impacts it has. It is a technology with far-reaching possibilities. Although there are certain incompatibilities and challenges, there is however the potential for digital assets and blockchain to assist a green transition and address ESG concerns.