The ESG Blockchain Gold Rush
As environment, sustainability and governence becomes an increasingly important component to driving change in corporations - Does blockchain hold the keys to the chest?
As the EU regulation stick is bounced off the proverbial head of corporations for things like sustainability reporting and EU battery passport regulations. Corporations are now looking externally for tech organisations that can provide the necessary solutions to clean up their supply chains from top to bottom.
Blockchains core features—transparency, traceability, automation through smart contracts, and decentralization—make it the ideal tool for enhancing ESG efforts across a multitude of sectors.
Blockchain’s Strengths in ESG
Traceability and Transparency: Blockchain’s immutable ledger ensures detailed monitoring of supply chains, enabling companies to track materials, reduce waste, and lower carbon footprints.
Automation: Smart contracts facilitate the automatic enforcement of ESG standards, streamlining compliance processes.
Decentralization: Reduces the need for intermediaries, increasing accountability and efficiency.
This level of scrutiny and transparency is vital. Key components in green technology such as Cobalt, which is critical in the production of lithium-ion batteries for electronics and electric vehicles, is predominantly mined in the Democratic Republic of the Congo (DRC). While cobalt is essential for the advancement of green technologies, its extraction raises significant ethical concerns.
Blockchain technology can advance consumer trust, improve ethical standards across supply chains and ensure corporate responsibility. By recording transactions on an immutable ledger, companies can better track the origins of their cobalt and ensure ethical practices.
Use Cases in ESG
Environmental:
Tracking: Blockchain enhances supply chain transparency, helping companies identify inefficiencies and promote sustainability. For example, Food Trax uses blockchain to track food from farm to fork, reducing waste and increasing consumer trust.
Trading: Enables efficient trading of green financial products like carbon credits and renewable energy certificates. Toucan Protocol, for instance, tokenizes carbon credits for easier trading.
Compliance: Tools like DiginexClimate integrate climate data into ESG reports, helping companies meet regulatory requirements more accurately and efficiently.
Social:
Financial Inclusion: Blockchain lowers costs and increases access to financial services, especially in cross-border payments. It offers faster, cheaper, and more inclusive transactions.
Humanitarian Aid: The UNHCR and Stellar Development Foundation use blockchain to deliver aid directly to refugees, providing secure financial support.
Governance:
Measurement and Assessment: Blockchain tracks and validates ESG milestones, enhancing transparency. Decentralized databases allow for secure sharing of data among stakeholders.
Blockchain Voting: Emerging as a secure and transparent method for elections, with successful pilots in South Korea and India.
Challenges of Utilizing Blockchain in ESG
Blockchain technology, while promising, is still in its nascent stages with much of the infrastructure and business integration yet to be fully developed. One of the critical challenges it faces (which if you’ve read some of my previous installments, will be a familiar concept) is its environmental impact; energy-intensive models like Proof of Work (PoW) are proving to be highly inefficient. This highlights the urgent need for more sustainable solutions such as Proof of Stake (PoS) or the integration of renewable energy sources.
Furthermore, human involvement in blockchain design can introduce biases and conflicts of interest, underscoring the necessity for ethical codes and comprehensive regulations to guide its development and use. This is being addressed at source by many organisations, promoting diverse global developing teams, utilizing community governence models and open source development of their
Financial Institutions (FIs) and Blockchain
Web 2.5: A hybrid approach combining blockchain’s privacy and decentralization with traditional system usability can help FIs implement blockchain while maintaining regulatory compliance.
Applications: Blockchain can enhance ESG-linked bonds, green loan origination, and credit rating systems. FIs can also partner with blockchain companies to improve financial inclusion and provide low-cost financial services.
Conclusion
Blockchain technology holds significant potential for enhancing ESG initiatives through increased transparency, efficiency, and accountability. However, it is not a panacea and must be developed alongside appropriate tools, technologies, and strategies tailored to each organization's sustainability goals. It’s unclear how this space will unfold in the coming years, however, the promise of a more trasparent and sustainable future is a tantalising one.