Blockchain Brings Transparency To ESG

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We all trade CO2 emissions today, such as when many of us buy a bottle of water or a hybrid car. We go to the supermarket, buy a bottle of water, and pay a recycling fee. As well, governments around the world give us rebates to encourage us to purchase hybrid cars. The transition to carbon credits in many ways is already underway.

Executives in large companies are starting to realize they too need to reduce their footprint to comply with environmental, social, and governance (ESG) regulations. Therefore, mid-level and senior managers, who make many decisions, are taking a crash course in blockchain, since it can solve numerous ESG pain points.

What Blockchain Does Well: Capture Data

Keeping track of emissions is a difficult problem. Currently, there are three “scopes” of emitters:

Scope 1: emissions one generates.

Scope 2: emissions related to the purchasing of power or resources used by purchasers.

Scope 3: Indirect emissions, such as how much gas a gas station sold. People burn that gas as fuel, and the station has to report those emissions, as well.

The blockchain will standardize provenance, because it allows better granularity in terms of tracked data. Companies will be able to exchange in transparent fashion greenhouse gas emissions certificates against some credit. 

If you are emitting greenhouse gasses, regulators could keep track with a blockchain database used to automate exchanges and record keeping. As soon as a transaction is validated on a blockchain system, it would directly update to a registry. Many costs and a lot of time would be saved, especially on automated reports, etc.

The Importance Of Price Discovery

Price discovery is important for markets. It helps markets to function properly, relying on data about supply and demand. Unless a system accurately captures supply and demand, no price ever properly reflects the allocation of capital and resources. The same is true of ESG.

Prices react to supply and demand. In the case of a carbon credit, the price represents a penalty for emitters and a reward for those who do not emit.  If we can track emission from the source and incorporate it into the price, we have clarity and can therefore price properly. In short, blockchain can deliver a global price for CO2.

The Challenges For ESG

ESG today is qualitative and subjective. It lacks analytics. Elon Musk criticized ESG rating programs for this reason. Exxon Mobil (NYSE:XOM) made the list of top 10 ESG companies while Tesla (NASDAQ:TSLA) did not. 

Tesla’s CEO tweeted his frustration over the news that his company failed to make the S&P 500 ESG index. “ESG is a scam. It has been weaponized by phony social justice warriors,” Musk wrote.

Tesla stated in its 2021 Impact Report that “current ESG evaluation methodologies” are “fundamentally flawed” because they have little basis in “real-world impact” on society and the environment. Tesla board member Hiro Mizuno said on Twitter that “current ratings often overweight reduction of negative impacts while neglecting positive impacts.”

The ESG industry needs to find new ways to be more analytical and quantitative, and needs to incorporate positive impact into its calculations, as well as the advice of visionaries like Elon Musk.

Blockchain can help. Blockchain-based carbon credits could bring much needed transparency to a rather opaque system, incentivizing stakeholders to measure a company’s ESG performance by time-stamping it on a verified and immutable blockchain.