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Here's How Blockchain Can Help Organizations With ESG Initiatives

Here's How Blockchain Can Help Organizations With ESG Initiatives

Explainers

03 Nov 2022

While it is often confused with Corporate Social Responsibility (CSR), the goals and tactics of a comprehensive Environmental, Social, and Governance (ESG) strategy are very different.

Environmental, Social, and Governance (ESG) initiatives are increasingly seen as the ultimate measure of sustainability and resilience of an organization. These criteria are progressively being used to reinforce strategic goals, operational execution, and the reporting of sustainable business practices to key stakeholders and customers.

While it is often confused with Corporate Social Responsibility (CSR), the goals and tactics of a comprehensive ESG strategy are very different. CSR is about how the company is ‘giving back’ to its stakeholder communities, for example, by funding a local charity. ESG, on the other hand, holds details on how an organization protects the natural environment and reduces the negative impact of its operations, improves social concerns such as diversity and inclusion, and maintains transparent reporting standards for policies and procedures.

An ESG strategy is a company-wide initiative that requires buy-in from the top level of an organization, such as the Board of Directors, all the way down to the frontline staff that will truly embrace the company’s goals and methods of improving the world. As such, it can be very complicated to formulate, implement, and track a proper ESG initiative that has the potential to drive real change.

To assist with their ESG initiatives, some organizations have turned to blockchain technology.

How Blockchain Can Help With ESG

On the ESG scorecard, blockchain provides clear benefits to the Social and Governance aspect. However, many detractors still doubt how well the technology could perform on the Environmental side of things. Thankfully, the crypto industry has improved its game a lot in the past when it comes to reducing environmental concerns.

Social Aspects of Crypto and Blockchain

  • The Social dimension around crypto includes consumer protection, financial inclusion, human rights, and diversity

  • Digital assets can have a positive social impact and drive financial inclusivity.

  • Tokenization enabled by digital assets could foster impact investing, where investors seek to generate financial return through investment in projects with positive social and environmental impact.

Governance in Relation To Crypto and Blockchain

  • Blockchain technology presents an opportunity for better anti-corruption compliance.

  • Manipulating information stored in Distributed Ledger Technology (DLT) solutions is almost impossible due to the high costs and their distributed nature.

  • This model enables unprecedented insight into past actions, making the entire audit process for a transaction much smoother.

  • Programmability offers another groundbreaking advantage in the compliance space:
    • Smart contracts could facilitate compliance checks automatically, bringing another level of security to the ecosystem

Environmentally-Friendly Blockchains

Energy consumption related to PoW blockchains has increased rapidly over the last few years. This became a greater concern as NFTs projects were based on the Ethereum blockchain. However, these issues were put to bed with the Ethereum Merge - as the second largest protocol switched to a PoS consensus mechanism that has effectively cut energy consumption by 99%. There are also many other Layer 1 protocols specifically designed to be environmentally friendly, such as Algorand and Polygon.

These Layer 1 protocols enable entrepreneurs and large corporations to build numerous applications to further ESG initiatives. We already know that blockchains enable simple mechanisms for proving ownership and transferring a wide range of assets, from intellectual property to health records to real estate, art, collectibles, and financial securities. This could also strengthen the carbon credits system.

How Blockchain Can Assist with Carbon Credits

Carbon credits were devised as a mechanism to reduce greenhouse gas emissions.

Companies get a set number of credits, which decline over time, and they can sell any excess to another company. Carbon credits create a monetary incentive for companies to reduce their carbon emissions. Those that cannot reduce emissions efficiently can still operate at a higher financial cost. This system is already in place but requires trust in the record-keeping abilities between companies and governments. With blockchain, the system could operate on a trustless basis, enabling anyone to verify the balance and transfer of all carbon credits.

There are also plenty of projects and experiments that seek ways to capture redundant energy and use that to power Bitcoin mining operations.

How The Blockchain Space Is Currently Evolving

In the early days, the decentralized finance (DeFi) sector was designed to provide an inclusive financial system that provides equal access to everyone around the world. Many of the unbanked population globally don't have a way to participate in the traditional financial system by opening a bank account, for example. DeFi changed all that by offering financial services and products to anyone with an internet connection. You can receive payments, put those towards savings, or borrow more against collateral, make payments, and indeed invest in early startups, all without having to clear the obstacles many TradFi banks would impose.

The space has evolved a lot since then, and Move-to-Earn apps, for example, are a way blockchain can help promote health and well-being by paying people who meet their exercise goals. On the educational front, some organizations are experimenting with a Web3 native educational approach that rewards users for unlocking achievements or passing milestones on their way to obtaining more knowledge and learning new skills.

Lastly, when it comes to governance, the Decentralized Autonomous Organization (DAO) model may not apply to traditional corporations but to the immediate transparency of how DAOs are run and, more importantly, how decisions are made. Too often, corporations make the news for the wrong reasons. Whether it’s bribery or falsified reports to meet stakeholder expectations, when accurate record-keeping comes down to trusting an organization to self-regulate, the battle is already lost.

As an immutable record of digital information, blockchains can enable organizations to guarantee the integrity of their operations and provide transparent ownership of structure and control. It doesn’t have to be on a fully public blockchain if that proves too hard at first. Even a permissioned blockchain is an upgrade from the current system, provided that a sufficiently dispersed number of parties have a stake in validating all informational transactions on the private blockchain are indeed accurate.

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