March 9 2022
One of the primary problems with ESG reporting is trust. Because there are no universal standards by which companies report their sustainability efforts, investors and stakeholders must rely on the word of the reporting company to a significant degree.
New blockchain technologies, however, bring an added level of transparency, verifiable evidence, and therefore credibility, to ESG reporting. A blockchain for ESG creates an immutable historical record. A company’s progress on sustainability is thereby captured and tracked over time with precision. Investors and stakeholders can verify that reporting is accurate. In fact, any two, or more, parties can audit the record. But, blockchain platforms are far more valuable than simply recording transactions. Blockchain for ESG economically incentivizes corporate sustainability and generates better ESG outcomes.
Blockchain technology brings transparency, verifiable evidence, and credibility to ESG reporting Photo: Shubham Dhage – Unsplash
Blockchain’s base functionality is similar to a traditional business ledger in that it digitally and permanently records transactions. In fact, blockchain is a nickname for Distributed Ledger Technology (DLT). Because a blockchain is digital, it can be encrypted, stored, shared, accessed and validated easily from nearly anywhere in the world. That also means it is decentralized and exists in the digital cloud. Blockchains are typically difficult, or impossible, to hack because they are encrypted and then verified by many different participants involved in the decentralized system. Even if the encryption is broken, other participants would know a change had been made.
When it comes to sustainability, blockchain for ESG can have an array of applications. It can be used to track a fair-trade product from field to shelf, thus giving a customer assurance about a purchase. In this scenario, the farmer uses computers to track all information about their crop. From the weather to the soil content, date of harvest, the weight and size of the product, who handled it, where it was stored, for how long and to whom it was sold. That same tracking process follows the crop through the supply chain as it is transported, processed, exported/imported, sold and resold, and eventually retailed. Every person in that value chain from the farmer to the customer can, theoretically, know and trust the origin and destination of the product and who touched it at every stop in between.
Blockchain is particularly useful for any transaction involving a contract. Traditional paperwork, and even digital data, can be easily lost, destroyed, stolen or manipulated. Because of blockchain’s capability to save, store and send detailed data privately, all parties in the transaction can be sure their contract is accurate. Because the data is digital, it can also be reported and analyzed for ESG purposes through software platforms. Shipping companies, manufacturers, insurers, practically any industry which writes many contracts per year can benefit from a better system to manage their workload. Digital “smart contracts” can also be self-executing, so when certain parameters are met, the transaction takes place. For instance, once a product is confirmed received by the buyer, the contract automatically transfers a payment to the digital wallet of the seller with absolute surety.
As another example, the verification of carbon credits is vital to ensuring that carbon offsets are real and helping the environment. Blockchain company Devvio, based in Albuquerque, New Mexico, is the first ESG-specific blockchain where ESG project data is tracked with full data and transparent provenance. The trust that comes with fully verified carbon projects is a major catalyst for more companies, organizations and even governments to increase their investment in carbon removal and offsets.
Blockchain becomes especially powerful for ESG purposes because it can build a community. When a blockchain platform focuses on sustainability, it attracts other like-minded organizations. For instance, many new blockchain platforms are working to become “green.” Traditional blockchains like Bitcoin and Ethereum are absurdly energy intensive because of the vast computing power necessary to validate information. Newer “green” blockchains address this energy consumption problem using a fundamentally different and less power-intensive system to validate transactions while still delivering the same basic value of encrypted secure transactions. As a result, they are attracting investors seeking to reduce their carbon footprint, and don’t want to use a dirty blockchain to do it.
Businesses on an ESG blockchain then inherently become connected through the platform. They can also connect with each other in the physical world. Manufacturers and suppliers and financiers and venture capitalists and entrepreneurs all working to develop and improve their businesses begin to interact via and through the blockchain platform.
Now, companies can search for and find providers and suppliers and partners who have high ESG ratings and a good record of sustainability. In this way, the blockchain platform creates, incentivizes and rewards companies that take steps to be more sustainable. Instead of creating laws and regulations to force companies to do the right thing, their economic future depends on it.
Entire supply chains and industries are already working to reduce their carbon footprint. In a blockchain environment, they can not only measure and track the output of their individual companies, but their collective output can be accurately audited and compared one against the next.
All of this depends on the ability to trust the validity of the data, which is precisely what blockchain does well.
Blockchain is a confusing subject because it is new and unfamiliar to many. But, as technology evolves and becomes better, it is also becoming more practical. People are learning how to use it and harness it for valuable purposes. Along with that, they are making software platforms that make it possible for even the uninitiated to manage an entire ESG program with relative ease.
By comparison, in the U.S., filling out tax forms is notoriously complicated. To help customers manage the process, tax preparers have built software — like TurboTax — that guides the taxpayer through the process. Basically, the system asks relevant questions about their life situation and assets and liabilities, then guides them to the right course of action to fill out their taxes accurately. The filer enters their personal data, and the software calculates the results. The system might then recommend ways to improve their tax situation in the next year. That’s similar to how a blockchain for ESG platform can be used by a company’s sustainability officer to determine their organization’s ESG impacts and plan for the future.
Blockchain has earned a bad reputation for its historic and seemingly endless need for energy. That problem has largely been solved by newer chains. Many people also believe blockchain is only used for illicit transactions like drug deals and criminal activity, but that too is becoming a law enforcement footnote as blockchain becomes better known and managed.
What’s less known, are the ways blockchain can be applied for good, honest and even high-minded purposes. As the need for sustainability grows, blockchain will likely become a cornerstone of corporate ESG efforts by validating environmental, social and governance projects and making them transparent to stakeholders.