Verifiable climate credentials and standards of environmental and social governance (ESG) reporting are becoming a focal point for investors, consumers, and policymakers. However, the system to evaluate ESG-based sustainability metrics is in disarray.
The core competencies of blockchain technology, transparency, efficiency and data-driven objectivity, can be leveraged to improve ESG reporting, as well as ESG supply chain tracking.
A variety of financial and societal pressures are forcing corporations to prove their environmental performance with accurate metrics. International climate initiatives such as the The Paris Agreement are playing an important role in setting climate impact targets.
Policymakers in the EU and the US are also moving quickly to enact stringent legislation. In March, the SEC proposed rules to enhance and standardize climate-related disclosures for investors. The rules will require publicly listed companies to include certain climate-related disclosures such as greenhouse gas emissions in their registration statements and periodic reports.
Similarly, the EU has adopted the Carbon Border Adjustment Mechanism (CBAM) and the Corporate Sustainability Reporting Directive. This is to put pressure on companies to adopt a more sustainable course.
Corporations: Blockchain to the rescue
In response to these proposals, corporations who wish to be seen as sustainable as well as financially viable are responding quickly. Over half of S&P 500 companies are incorporating science-based targets for reducing greenhouse gas emissions into their frameworks.
Even more striking is that more than 2,600 companies have signed up to join the Task Force on Climate-Related Financial Disclosures.All of this means one thing: climate disclosures are driving decisions and strategies. They are increasingly important in determining how a business maximizes its market value.
For climate disclosures to be implemented, it is necessary to innovate our current ESG practices. They are currently plagued by data quality issues, measurement and reporting inconsistencies, siloed platforms and infrastructure challenges.
Since ESG systems attempt to solve a global problem that requires global coordination, they are challenging to design. In addition, they are not managed by one company or country. Blockchains offer a potential solution to bridge this issue, as they are able to handle coordination globally without a single company or team shouldering the effort.
Blockchain could be utilized to build a strong ESG strategy with robust data reporting mechanisms. Companies require credible measurement and reporting of environmental data. This is all the way from the extraction of raw materials to the production and consumption of everyday products.
The infrastructure used in blockchain provides a platform that can support data transparency, whilst also enabling data standardization.
No doubt, there are environmental impacts of the technology. But much of that is specific to Proof-of-Work consensus mechanisms. Commitments to alternative consensus mechanisms are contributing to improvements. Rather than dismissing it in its entirety, we must consider the important use cases for the technology that go beyond economic benefits.
Due to its tamper-resistant nature, blockchains are a reliable and transparent way to ensure data integrity. The tools used in blockchain networks are uniquely designed to enable companies to collect verifiable data and generate trustworthy reports. This proves their ESG credentials. Because of this, it possesses the potential to reshape ESG and supply chain reporting for the better.
At present supply chains are responsible for 90% of companies’ emissions and environmental impact. Blockchain’s decentralized digital infrastructure would enable supply chain partners to comprehensively account for goods moving along connected supply chains and their associated emissions.
By investing in blockchain-based monitoring and reporting tools, corporations will be able to enhance transparency and verifiability in the ESG reporting process. They can gain a better understanding of their supply-chain emissions. As a result, corporate entities will no longer have to rely on inaccurate data from error-prone suppliers to determine their environmental impact.
Humans are only beginning to grasp the full extent and interconnectivity of the climate crisis. The reality is we have one shared planet, and we cannot tackle climate change in national silos. Reaching net-zero by 2050 will require innovative solutions on a global scale.
By using blockchain networks as an alternative tool, ESG reporting methods can be replaced with something that is far more open and verifiable.
Blockchain networks are particularly well suited to delivering this increased transparency, and verifiability, enabling enterprises to monitor supply chain operations and their associated emissions.
About the author
Marc Johnson works on Filegreen Coin at Protocol Labs. Protocol Labs is an open-source research, development, and deployment laboratory. Projects include IPFS, libp2p, and many more. The aim is to make human existence better through technology.