Over the years, Environmental, Social, and Governance rules (ESG) have constantly evolved. How Blockchain Can Help Measure And Prove ESG Milestones They are put in place to ensure that companies grow and protect the environment, people, and the company itself. ESG laws provide that organizations have a sufficient degree of corporate responsibility. Lately, ESG standards have had to be tightened due to the development and acceptance of new technologies, including artificial intelligence (AI), the metaverse, Internet Protocol version 6 (IPv6), and the Internet of Things (IoT). Similar to this, businesses all over the world are starting the digitization process quickly to stay up with the growing digital market. Businesses worldwide are becoming increasingly concerned about this because they fear that their operations and profits may suffer due to the tightening of ESG requirements and their objective of digitization. However, this shouldn’t be the case, as blockchain—another cutting-edge technology—holds the key to the answer.
Blockchain’s strong points extend beyond digitization; it may close the gap between this laborious procedure and effectively adhering to ESG rules. Blockchain technology offers an easily verifiable and auditable history of transactions due to its immutable data capture and storage capabilities.
This helps companies ensure that ESG rules are always followed and monitor and analyze their development. Furthermore, many of these regulations address energy use and the carbon footprint that blockchain leaves behind. Although many contend that blockchain uses a considerable amount of electricity, the technology becomes more sustainable and energy-efficient when scalability is considered and enabled. A scalable blockchain also experiences a decrease in transaction fees as it grows. Scaling, thus, guarantees the efficacy, durability, and affordability of digital systems. This makes it the perfect technology for digitizing and accomplishing ESG objectives. Big and small firms can afford to construct digital systems and platforms on a scalable blockchain because fees are lowered to the lowest feasible price, eventually cutting energy usage. Green Coding, a software development tool developed by digital transformation company GFT, is an excellent illustration of this.
This allows the decrease of electricity use in three main ways. Green Coding is “scaled up to servers and consumer devices worldwide; every line of code has the potential to reduce energy consumption and emissions,” according to its website. First, energy is conserved because the software is designed to automatically turn off devices once idle for a predetermined amount of time. Determining Determining if real-time processing or dynamic content is always required also helps prevent impulsive consumption. Thirdly, identifying areas to concentrate the most significant amount of time and energy makes energy allocation more efficient. Implementing these three Green Coding architectural concepts may increase a business’s energy efficiency. Blockchain may be used to close the gap between digitization and digitization, to name just one use. The possibilities are virtually limitless, particularly as a scalable blockchain can provide more potent features that can be used to solve ESG problems in a variety of different businesses.
Although blockchain and its supporting technologies have existed since the late 1970s, Bitcoin’s launch in 2008 gave them impetus. Although most people only think of blockchain technology as cryptocurrencies, there are many more uses. As more people understand the benefits of blockchain technology—which includes decentralization, decentralization intelligent contracts, transparency and traceability—the technology has advanced rapidly in recent years, adding new applications in various industries, including banking, supply chain management, healthcare, and others. The technology is anticipated to become widely used in the upcoming years. However, companies must adjust their operations to improve standards and accountability to comply with existing and future requirements. Environmental, social, and governance (ESG) is an issue that is gaining more attention. Blockchain technology presents a beautiful fit for businesses looking to manage pertinent reporting obligations and launch and integrate ESG efforts into their current operations.
This article explores the existing and expected obstacles associated with employing blockchain technology to address Environmental, Social, and Governance (ESG) concerns. Additionally, it will cover the implications for financial institutions (FIs) and the many use cases of blockchain in these areas.
When ESG and Blockchain Collide
An improvement in transparency, efficiency, and accountability across Environmental, Social, and Governance components can be achieved by using the core characteristics of blockchain technology, namely traceability, automation, and decentralization. Decentralization decentralization blockchain technology is still in its infancy, and ESG impact measurement and reporting procedures are still being developed; the potential confluence of blockchain with ESG is still in its early stages. Compared to the Social and Governance aspects, which are still in the exploratory phase, there are more use cases in the Environmental element because of the urgency and the practicality of applying blockchain technology.
Blockchain and the environment
Use cases for blockchain technology in the environmental sector are expanding, especially at the infrastructural levels, where it may enhance efficiency and transparency in areas like energy management, renewable energy, recycling, and other related sites. However, monitoring, trading, and compliance are the three primary use cases of blockchain technology that are now being used in various businesses.
The blockchain’s unchangeable ledger makes the supply chain more transparent. The ability of businesses to monitor the flow of materials from the place of origin to the destination allows them to identify areas of inefficiency, energy use, and carbon emissions. With the help of traceability, businesses can more effectively cut down on waste and carbon emissions, ensure that manufacturing is conducted sustainably, and encourage material recycling and customer transparency. For instance, Food Trax provides farm-to-fork traceability solutions that use blockchain technology to reduce food loss in storage and incorrect operations while improving customer visibility. To cover every stage of the supply chain, the firm is creating a system to gather and track different data points using RFID, variable data printing, scanners, mobile computing platforms, and other tools. Increased income and greater customer brand loyalty are the results of transparency.
One of blockchain’s primary benefits is its capacity to provide a more effective and faster settlement process since nodes and validators validate transactions and ensure that all network participants have the same record, which minimizes the neem inimizesonciliation. Blockchain may be the foundational technology for the trade of environmentally friendly financial instruments like green bonds and renewable energy certificates (RECs). Additionally, tokenizing real-tokenizing like carbon credits might facilitate more efficient trading by decreasing the investment ticket size from fractionalization, fractionalization discovery, and market liquidity, enabling almost real-time settlement. As a result, companies and individuals may participate in and encourage the expansion of sustainable production and renewable energy. Toucan Protocol, for example, is creating technology that will enable carbon credits to be added to an open blockchain, making the carbon markets accessible to all. To tokenize the carbtokenizets, the protocol created Carbon Bridge, which mints TC02 carbon tokens and transfers verified carbon credits onto Toucan’s system. Toucan offers carbon pools that are connected to credits with comparable attributes. TC02 carbon tokens can be staked into these pools to obtain carbon pool tokens, which are fungible tokens backed by a single tokenized carbon, enabling the trading of carbon pool tokens on decentralized excdecent ralizedeir usage as collateral in lending markets; this method paves the way for Web 3’s green building block.
Blockchain’s transparency combined with smart contracts—self-executing programs that carry out specific tasks automatically when particular criteria are met—may make it easier for businesses to adhere to ESG requirements. Because the firms can track their supply chain, they can record emissions and trade carbon offsets more accurately. Moreover, smart contracts can potentially automate the implementing of ethical and sustainable practices. Smaller businesses with fewer resources and time may find this helpful in their ESG reporting and monitoring efforts. Diginex is one of the businesses that uses blockchain technology to assist businesses in complying with ESG reporting requirements. With its DiginexClimate tool, companies may comply with regulatory reporting obligations about several frameworks, including TCFD, SASB, and GRI, by incorporating climate-related data into their current ESG reports. With this approach, businesses adhering to ESG standards might save significant money and effort.
Blockchain x Social
Unquestionably, the mainstream media frequently associates cryptocurrency with illegal activity. However, just 0. According to Chainanalysis24% of all Bitcoin transactions in 2022 will be linked to criminal behavior; on the other hand, blockchain technology and cryptocurrencies may benefit society by offering ways to advance financial inclusion and support charitable endeavors. The most advanced use cases are domestic, international, and humanitarian payments.
Blockchain technology enables decentralized trade centralized middlemen, making cryptocurrency transactions more affordable, inclusive, censorship-free, and quick. This implies that cross-border transactions may be conducted for considerably less and in smaller amounts than typical money transfers. According to an analysis by Oliver Wyman and J.P. Morgan, digital currencies save multinational firms $120 billion annually in processing expenses associated with cross-border payments. They may be superior to cash in nations with unstable or declining indigenous currencies domestic Deals.
Each country has two schools of thinking about how cryptocurrency payments should be regulated. Thailand and China are countries with tighter views on cryptocurrency as payment. Thailand forbids using cryptocurrencies as income while having laws promoting companies that deal in digital assets. Because of their volatility and expensive transaction costs, digital assets do not increase market efficiency, according to the Thai Securities and Exchange Commission (Thai SEC). China eliminated bitcoin mining and trade. Conversely, cryptocurrency transactions are now allowed in El Salvador and Ukraine. El Salvador aims to become a centre for cryptocurrency activity and has legalized Bitcoin. Legislation establishing a legal framework for the cryptocurrency business in Ukraine was enacted in 2022. The initial use case was taking Bitcoin and other donations for its military defence against Russia.
Reimbursement for Benevolent Pursuits
In addition to their potential for use in commerce, cryptocurrencies may also help charitable endeavours. An initiative run by the UNHCR and the charity Stellar Development Foundation, which promotes the expansion of the Stellar blockchain network, is one of the best examples. UNHCR discovered that several refugees need bank accounts and find it challenging to transport cash. The two groups are collaborating with Circle Internet Financial, the firm that issues the USDC stablecoin, and MoneyGram, a money transfer business, to implement a substitute system that would allow relief to be sent directly to Ukrainian refugees using cryptocurrencies. Through the Stellar network, the UNHCR provides USDC to refugees’ digital wallets installed on their cell phones. The refugees then go to the MoneyGram locations and convert USDC for local cash.
Blockchain x Governance
Decentralization Decentralizationoponents of blockchain technology encourage good governance since there isn’t a single point of failure. The network is not under the authority of one party. However, it will take time for stakeholders to engage, create, and implement stable rules, sanction bad actors, and control the networks entirely and effectively. Two new use cases for blockchain technology that might improve transparency in the governance space are blockchain voting and tracking and evaluating ESG milestones.
ESG Milestone Measuring and Evaluation
Decentralized Decentralized chain networks may enable organizations to validate ESG milestones. Vendors, suppliers, and internal business divisions may use the web to exchange labour conditions, carbon emissions, and product tracking data. Without requiring human interaction, data may be disclosed automatically through the use of smart contracts that are incorporated into blockchain networks. Regulators or reliable outsiders might safely access the information gathered to confirm that the companies adhere to the requirements. Blockchain technology has the potential to increase transparency.
Voting on Blockchain
Voting on blockchain has been discussed worldwide. This use case is still in its infancy, and before it is implemented nationally, several pilot tests will need to solve several issues. Nonetheless, several nations have made attempts to support blockchain voting. Cointelegraph revealed in October 2022 that Greenland was investigating the possibility of developing an online voting platform based on blockchain technology. South Korea became the first nation to use an online voting system based on blockchain technology in November 2022, ensuring that every vote is safe and unchangeable. Blockchain-based voting has been trialled in India for the 2021 municipal election in Telangana. Although the pilot displayed encouraging indicators, further pilots must complete the system’s implementation.
Difficulties in Applying Blockchain in the ESG Domain
Although blockchain technology has many potential advantages to help ESG activities, specific issues must also be considered because blockchain could be better. The technological layer and blockchain’s applications in governance, social justice, and the environment highlight the present technology difficulties.
Primarily, blockchain serves as a backend enabler.
Blockchain technology is a facilitator that makes processes more efficient, not a guide for organizations to gather, measure, or validate. Since uploaded data cannot be modified, deciding which kinds of data—verified or unverified—should be posted to a distributed ledger or establishing guidelines for differentiating between them is crucial. This will help businesses comply with ESG requirements and appropriately use data.
The field of blockchain technology is still relatively young.
One category of emerging technology is blockchain technology. Even though it can upend several sectors, the infrastructure has yet to reach its full potential. Furthermore, businesses from all industries are only beginning to incorporate blockchain into their existing processes. As a result, the technology is still in its early stages of development and must be worked on through trial and error in tandem with ESG activities.
Blockchain Applications in Various ESG Domains
(E) Making an influence on the environment by using energy-inefficient blockchain
Utilizing a blockchain with Proof of Work (POW) consutilizesuch as Bitcoin is highly energy-inefficient since competing miners must consume much electricity to solve computational tasks to validate transactions and get rewards. Instead of attempting to address the environmental damage, it causes new issues. To reduce carbon emissions, it is imperative to utilize energy-efficutilizeockchains, such as Proof of Stake (POS) consensus or POW blockchains, that use renewable energy sources.
(S) The cryptocurrency industry has been beset by cybercrime and fraud.
The fact that cryptocurrency transactions cannot be undone and that no personal information is needed to obtain cryptocurrency for a non-custodial wallet draws fraudsters to continue taking advantage of user funds due to the nature of blockchain. The security of user cash is frequently jeopardized, resulting in significant losses for the users. Decentralized and centralized organizations must centralize their technological stacks and codes to boost platform security, better ID-proofing without making onboarding more complex, and employ data enrichment tools to learn more about customers. These fixes could make it harder for con artists to engage in cryptocurrency-related operations.
(G) Bias and conflicts of interest are additional concerns associated with blockchain.
Although blockchain technology offers advantages in automation and transparency, human biases can introduce flaws in any blockchain architecture that incorporates human decision-making. When those responsible for the code design do not prioritize the users’ neeprioritizelict of interest, it also results. It is possible that some user groups—particularly minorities or marginalized populations—are marginalised differently, denied access to certain products or services, or have their data improperly maintained. Regulations and an ethical code of conduct may be able to resolve the problems and control blockchain technology. To use the technology fairly and appropriately, one must be aware of the hazards involved, as there is no foolproof solution.
The Application of the Concept to Financial Institutions
In addition to blockchain’s use as a backbone technology for financial institutions (FIs), institutional adoption of Web 3.0 is gaining traction as digital assets are thought to diversify portfolios and increase returns in treasury accounts and portfolios. Regenerative Finance (ReFi), a relatively new idea, is also being addressed about the role Web 3.0 and FIs may play in responsible financing by accounting for social and environmental concerns.
Web 3.0 is complex, even though it allows users complete control over data and assets. The lack of clarity surrounding legislation, the complexity of the user experience, and the constraints on scalability and interoperability impede the institutional adoption of this domain. Web 2.5 could assist with the problem. Blockchain companies operating between Web 2.0 and Web 3.0 are called Web 2.5 firms. Web 2.5 is predicated on the notion that users desire the benefits of a blockchain-based platform. However, They prefer to avoid the complications that frequently accompany blockchain-based media, according to DropChain.
By emphasizing privacy and nature, with whildecentralized simplicity of use and accessibility, Web 2.5 benefits from the best of both worlds. Blockchain technology is implemented at the infrastructure level, and suitable Know Your Customer (KYC) procedures are implemented to reduce the risks associated with sensitive financial data.
Boost Internal Systems
Financial institutions might create and implement blockchain-based infrastructure for data collection, tracking, and tracing related to the origination of green loans, ESG-linked bonds, and credit ratings. Web 2.5 might close the gap by offering a transparent, safe, and user-friendly platform to all stakeholders engaged in ESG measurement, from data collection to validation.
Work Together with Outside Parties
Financial institutions may work with outside parties by forming partnerships with blockchain startups or using their strong compliance skills to access new markets and develop new goods and services. FIs might provide partners and clients modular services, including KYC services, to lower risks and adhere to existing regulations and ESG requirements. Financial institutions (FIs) should collaborate with reliable blockchain startups to enhance financial inclusion and promote open finance efforts. This may involve offering international workers unsecured personal loans or low-cost cross-border payment services.
While blockchain technology has great promise for advancing sustainability, it is not a magic bullet for all sustainability problems, and several obstacles need to be solved before blockchain can fully realize its potential. Fire Alize institutions and other businesses must identify their sustainability goals before implementing strategies to determine which partners, tools, and technology will best help them achieve significant results for the organization and society. organization