How ESG Solutions Are Being Driven By Blockchain

From voluntary carbon credit markets, to supply chain traceability and effective ESG reporting…

As our planet warms and social inequality persists, socially and environmentally conscious movements are more important than ever. How do we address such systemic issues? Requiring accountability and transparency from our leaders is one way to start, and ESG is here to help.

ESG stands for Environmental, Social, and (corporate) Governance. ESG is used by companies and investors to measure their impact on the environment, workers, and clients. It is a key initiative in driving us towards a more sustainable and socially conscious world, something we should all aspire for.

Blockchain is an emerging technology that is revolutionising industries and disrupting established ways of doing business. It is not only responsible for the introduction of Bitcoin and monkey-themed NFTs — it’s a pioneering technology that can bring transparency and accountability to the ESG table.

In this article, we will explore how ESG and blockchain are intersecting to drive innovation and facilitate ESG solutions.

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Table of Contents

1. Introduction
2. Understanding ESG (Environmental, Social, & Corporate Governance)
3. Examples Of ESG Solutions
4. Blockchain & ESG Solutions
5. How Blockchain Is Supporting ESG Initiatives
6. Challenges & Conclusion

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Understanding ESG (Environmental, Social, & Corporate Governance)

ESG is a major driving force for investment decision-making. According to the National Law Review, ESG assets will exceed $53 trillion by 2025. These are largely investment funds that result in net-positive outcomes for our environment and society.

ESG-conscious investors and business managers are putting their money where their morals are, signaling a massive shift from “shareholder profits at all costs,” and towards more environmentally and socially conscious business decisions.

Famed economist Milton Friedman was the creator of this shareholder-profit-first ideology — arguing that social responsibility adversely affects financial performance and that regulation and interference from “big government” will always damage the economy. Friedman’s shareholder theory was prevalent for most of the 20th century, even being labelled “the biggest idea in business” by the Economist, but in the 21st century, Friedman’s theory no longer holds water.

According to McKinsey, ESG isn’t just a feel-good exercise or corporate greenwashing — it drives better business outcomes. ESG does this by facilitating top-line growth, reducing costs, minimising regulatory and legal interventions, increasing employee productivity, and optimising investment and capital expenditures. Let’s take a look at some of the common examples of ESG solutions.

Examples Of ESG Solutions

1. Environmental Solutions

Renewable Energy Adoption: Companies are switching to renewable energy sources to reduce their carbon footprint and combat climate change.

Energy Efficiency Programs: Implementing energy-saving technologies and practices to reduce energy consumption.

Sustainable Supply Chains: Ensuring that materials and products are sourced sustainably, with ethical labor practices and minimal environmental impact.

Waste Management & Recycling: Reducing waste generation through recycling programs, composting, and sustainable packaging solutions.

Water Conservation: Implementing technologies and practices to reduce water usage and protect water resources.

2. Social Solutions

Diversity & Inclusion Programs: Promoting diversity in hiring and leadership positions and fostering an inclusive workplace culture.

Employee Wellbeing & Development: Investing in employee health programs, career development opportunities, and fair labor practices.

Community Engagement & Development: Contributing to local communities through philanthropy, volunteering, and supporting local businesses.

Supply Chain Labor Standards: Ensuring fair labor practices, safe working conditions, and that human rights are upheld throughout the supply chain.

Product Responsibility & Safety: Ensuring products are safe, meeting quality standards, and are produced ethically.

3. Corporate Governance Solutions

Transparent & Ethical Leadership: Establishing clear policies for ethical behaviour, anti-corruption, and transparent reporting.

Board Diversity & Independence: Ensuring the board of directors is diverse and independent to provide balanced oversight and decision-making.

Risk Management: Implementing comprehensive risk management strategies to address financial, social, and environmental risks.

Stakeholder Engagement: Regularly engaging with stakeholders, including investors, employees, customers, and communities, as a means to inform business strategies and practices.

Sustainable Investment & Financing: Securing funding and investments for projects and initiatives that contribute to sustainable development goals.

ESG solutions encompass a wide range of activities, signaling a clear shift away from shareholder profit above all else. This transition requires innovative solutions, accurate reporting, and reliable data — all things becoming synonymous with blockchain.

Blockchain & ESG Solutions

Blockchain is an immutable and transparent database that uses cryptography and decentralisation to create innovative data services. Blockchain’s transparent and tamper-proof database makes impact more consistently measurable across industries, as well as enabling a new wave of technical solutions to ESG-related problems.

Unless you’ve been living under a rock, you’ll be now familiar with blockchain-enabled cryptocurrencies like Bitcoin, and maybe Ethereum. Moving down the chain of familiarity, we would find other uses-cases — things like NFT art, tokenised gaming assets or digital clothes, and innovative financial products that look eerily similar to traditional financial assets. These examples just begin to scratch the surface of the potential applications.

Amidst the growing ESG trend, blockchain is emerging as a key tool in enhancing transparency, accountability, and efficiency in implementing ESG solutions. Maura Hodge, ESG Audit Leader at KPMG in the US, has commented:

“By creating an immutable and transparent data chain, it can make information accessible to all users who need it in a standardized format, with increased efficiencies and oversight. The potential benefits – for auditors, businesses, investors and other stakeholders – are enormous.”

Maura accurately recognises how blockchain’s immutable and transparent nature makes it a great candidate for providing an efficient way for organisations to collect, store, and access information that can assist in implementing ESG solutions. Let’s take a look at how these values make ESG solutions possible as well as what examples are already out there.

How Blockchain Is Supporting ESG Initiatives

1. Consumer Trust & Supply Chain Transparency

Ensuring the sustainable and ethical supply and production of goods is key to meeting ESG goals. Supply chains are some of the most opaque and complex systems on earth. Mapping the movement of ingredients from producers, distributors, retailers, and through to consumers provides an end-to-end view of a product’s life cycle.

WWF International Director General Marco Lambertini has said:

“Unsustainable production of food and goods is a major driver of environmental damage and some of the worst supply chains remain rife with human rights issues.”

Implementing chain-of-custody records for the sourcing of ingredients or raw materials ensures transparency, and this traceability reinforces ethical sourcing practices, crucial for environmental and social governance.

Starbucks’ tracking of coffee beans from field to cup demonstrates how blockchain can authenticate the origin and journey of a product. When combining technologies like QR codes or IoT devices, this supply chain traceability can be implemented to run with maximum efficiency.

Blockchain provides a way to record each step of the process, thus making it easier for ESG-conscious businesses to build trust with their stakeholders while also allowing consumers to make informed decisions about the goods and services they consume.

2. Measuring ESG Impact & Compliance

ESG ratings have a verification and standardisation problem. Standardised and accurate data is required to measure and analyse any ESG investment. With many ESG-based sustainability assessments suffering from a lack of data verification, consistency, and transparency, blockchain can provide a data layer that is standardised and accessible in a way that anyone with the right credentials can access and verify the data.

Large corporations often have the resources required for ESG reporting, but smaller and mid-sized companies don’t. Blockchain levels the playing field by simplifying this process for smaller companies.

This accessible, standardised, and verifiable data layer isn’t centrally controlled by one party. It is stored on a decentralised network of blockchain participants (computers or ‘nodes’) that ensure the data is always available and nearly impossible to tamper with.

This combined standardisation, verifiability, and accessibility allows for the automation of compliance reporting, ensuring companies of all sizes are better able to adhere to ESG standards and regulations.

3. Tracking Greenhouse Gas Emissions

Blockchain facilitates more accurate and communal governance of emissions reporting. Standardised metrics and precise data collection provides ESG managers with a comprehensive view of a company’s carbon footprint.

In 2020, The World Economic Forum’s Mining and Metals Blockchain Initiative (MMBI), released a proof of concept that uses distributed ledger technology (a.k.a. blockchain) to track greenhouse gas emissions across the mining and metals supply chain.

Tata Steel CEO T. V. Narendran said:

“As a responsible corporation, Tata Steel welcomes the opportunity to collaborate and create a sustainable future. MMBI’s Proof of Concept is the first practical step to create a solution facilitated by blockchain technology to reduce emissions and conserve the environment.”

Helping understand and address greenhouse gas emissions is one of the most important problems being addressed by ESG. This level of detailed tracking extends across various stages of the supply chain, offering a global perspective on the complex and international nature of greenhouse gas emissions.

4. Enabling Smart Grid Management

Blockchain can play a pivotal role in managing smart grids. This includes monitoring energy usage in cities, neighbourhoods, and homes, and coordinating with renewable energy sources. Such advancements not only contribute to energy efficiency but also become notable achievements in ESG reports, showcasing a commitment to sustainable energy management.

Powerledger has developed an energy and flexibility trading platform that allows households, organisations, and the grid itself to trade with each other. They have a pioneering energy-saving project in Chile — by implementing a solar microgrid network, a water monitoring system, and a sustainable solution for solid waste with Powerledger’s blockchain-enabled energy trading platform, they help businesses within the selected communities to trade excess rooftop solar power.

5. Efficient (& Honest) Carbon Markets

Carbon markets provide a way to quantify carbon emission reductions and package them for sale as ‘carbon credits.’ These markets provide an incentive for carbon capturing or emissions-reducing projects and give carbon polluting companies a way to offset their emissions.

Unfortunately these markets are plagued with problems such as lack of transparency, inconsistent quality of credits, verification issues, and the challenge of ensuring purchased credits actually lead to a reduction in emissions.

Luckily, blockchain opens the door for innovative and honest financial solutions in the carbon credit space. Blockchain can help with transparency by standardising the market — helping to avoid problems like double accounting where the same emissions reductions are claimed by multiple organisations.

It can also help provide transparency into the source (quality) and use of carbon credits. According to a report by Corporate Accountability, more than 90% of the carbon credits that Chevron had used to offset its emissions appeared to be what it called “junk” (meaning having little to no positive environmental impact). This highlights the lack of standards and visibility with the current mechanisms of the carbon credit market.

The World Economic Forum has even gone as far as claiming the digitisation of the voluntary carbon market as “the leading use case for blockchain innovations in the climate space.” The creation of on-chain Virtual Carbon Markets and peer-to-peer (p2p) carbon credit trading can not only ensure the quality of carbon credits and their associated projects but can also help carbon credit producers connect with consumers who are committed to sustainable practices via p2p markets.

There is no shortage of activity in the space, with blockchain projects KlimaDAO, Toucan, Regen, and Moss all attempting to increase transparency and improve accessibility to the carbon credit market. These projects support the global drive towards carbon neutrality and help meet the rising consumer demand for ESG-responsible products.

Challenges & Conclusion

As investors and businesses look for ways to increase profits in a more sustainable and environmentally conscious way, blockchain-powered ESG solutions are only going to become more prominent. We’ve seen how blockchain can play a pivotal role in enabling transparency and accountability in ESG solutions, but it isn’t entirely without its challenges though.

Regulatory frameworks, agreed-upon industry standards, and enhanced data privacy and security are some of the challenges faced by organisations and industries looking to implement blockchain-based ESG solutions. Luckily there is no shortage of international organisations working to address these issues.

As we move towards a more socially conscious and sustainable future, we are confident we will see blockchain being adopted across industries to move us forward.