Blockchain: The Truth Serum For ESG Claims
Blockchain, an immutable notebook, can impeccably record and track the ESG activities of a company in a transparent and reliable way.
In the past decade or so, most businesses across the globe have been striving to perform well on ESG (environmental, social, and governance) criteria to meet growing investor demands, comply with new-age regulations, enhance reputation, reduce risk, satisfy consumers, and get easy access to capital.
At the same time, several companies, including industry leaders, have been penalised by regulators for fudging sustainability data and presenting themselves as ESG-compliant, though their actual practices are below the mark.
In April this year, German prosecutors fined asset manager DWS €25 million ($27 million) after a probe found the firm guilty of greenwashing and making misleading statements about its environmental and social investing credentials. DWS had publicly claimed that ESG was an integral part of its DNA.
Closer home, Adani Green’s recent questionable governance practices put several ESG fund managers on the wrong side of the sustainability narrative.
Building A Good ESG Reputation
As companies make grand promises to go green, adopt sustainable practices, and meet high standards of corporate governance, it’s becoming a challenge to assess and verify what they’re really doing.
Without proof, it’s hard to tell whether a company is actually recycling materials, or reducing emissions, or sourcing raw materials ethically as it claimed in its sustainability reports.
That’s where blockchain can come to the rescue of all stakeholders.
Blockchain, an immutable notebook, can impeccably record and track the ESG activities of a company in a transparent and reliable way.
Once the entries have been recorded in the system, they cannot be modified or deleted. Let’s take an example:
Currently, businesses serious about building a good ESG reputation rely heavily on manual tracking of self-reported data. But this conventional system has some inherent inefficiencies, and it is open to misuse and mistakes — inadvertent as well as intentional.
Blockchain can help such sincere companies by clearly establishing that their ESG efforts are not only real but also measurable. It gives accurate data on various parameters such as energy used, emissions reduced, and materials recycled.
Fixing The Problem
Let’s take the example of carbon credits that companies buy to offset their carbon emissions. This opaque and fragmented market, lacking central oversight, has some inherent problems, such as double-counting and poor tracking.
Blockchain can fix this by assigning each credit a unique digital identity, allowing everyone to see and verify when the credit was issued, who bought it, and when it was used.
Similarly, the recycling industry can also benefit from blockchain, which can precisely track the collection of waste, its origin and who processed it.
This not only ensures fair compensation for the recyclers but also gives credible data on whether recycled materials are being used.
Let’s take another example:
Suppose you are a staunch sustainability supporter and you only wear apparel made from organic cotton. In the existing system, a rough, brown card on the apparel declaring organic credentials in all caps is your only assurance.
But if that apparel manufacturer is on a blockchain platform, the journey of the cotton—from farm to factory to store — is recorded step by step. This improved traceability means by scanning a code on the apparel, you will see all the details about the product and know whether it’s meeting your standards.
Likewise, blockchain can also help in decentralised energy systems such as rooftop solar panels. It can record how much electricity it produced, and that data can then be used for peer-to-peer energy trading. Next, smart contracts — self-executing code on the blockchain — can handle the payments automatically, making the system fast and transparent.
Final Words
The credibility of ESG disclosures has suffered primarily because of immeasurable reporting, mismanaged supply chains, and poor auditing practices.
But blockchain technology offers a reliable solution to these challenges by adding a certificate of truth and a seal of authenticity at every step, helping everyone see what’s really happening. It’s indeed a boon for companies looking to grow responsibly in an ESG-compliant way.
At the same time, businesses need to keep in mind that blockchain cannot be integrated into the existing ESG systems without some upfront investment, technical expertise and stakeholder re-skilling.
These hurdles notwithstanding, the long-term benefits of enhanced trust, data security, and automation most likely outweigh the initial challenges companies will face.
This series is brought to you in partnership with Algorand.
