Can blockchain technology in green finance attract more investors and deter bad actors?

The world could get its first government-issued blockchain-based green bond later this year, the Hong Kong Monetary Authority announced Monday at the city’s Fintech Week.

The government said it has laid the foundation for green finance on the blockchain through private and public partnerships such as the United Nations Global Innovation Center and the Bank for International Settlements (BIS).

Proponents say the digital ledger could help governments fight greenwashing and increase trust and participation in climate-friendly markets.

Greenwashing, the misuse of an environmentally friendly label, has been so widespread that some governments such as the UK and Australia have passed laws to fine entities for exaggerating their sustainable actions when raising money.

“There have been certain issues with green finance, from greenwashing to traceability to the effectiveness of the projects,” said Musheer Ahmed, an external consultant to the Bank of International Settlements and an adviser to the Dubai-based Virtual Assets Regulatory Authority.

“Through the initiative, you will be able to get better transparency because you will be able to track how and when these carbon credits are generated,” Ahmed said.

Green bonds are debt instruments, the sale of which is theoretically used for green projects in areas such as energy production or waste management and recycling. However, a Bloomberg report last month found that the majority of funds raised by green bonds in Europe are tied to weak or irrelevant climate goals.

Hong Kong authorities said the planned digital green bond will address greenwashing through stronger accountability on the digital ledger.

Data transparency

Data collection is one way blockchain can improve accountability for green bonds, according to Hong Kong-based Allinfra, a sustainability data management software company. Allinfra’s blockchain-based platform collects climate-relevant information directly from assets and allows it to be stored, monetized and verified.

By collecting data on green-financed projects and linking that information to digital financial instruments on the blockchain, it creates a “permanent immutable record” and more trust, said Allinfra co-founder Dave Sandor.

“It is these two elements together that really help to improve the provenance of climate-related products, reduce fraud, reduce greenwashing and make it easier to monitor where funds are spent,” he added in an interview with Discard.

Democratization

Another aspect of green finance where blockchain technologies are implemented is within the carbon market. Carbon markets work by setting a price on the use or storage of carbon, which can be bought and sold by countries or companies to offset emissions.

According to forecasts, the size of the carbon market could reach $2.4 trillion in 2027, up from $211.5 billion in 2019. But the market is still too closed and distant from even the most sophisticated investors, said Michael Chin, CEO of InterOpera, which builds . Web 3.0 infrastructure.

“Every country will soon have a national carbon credit exchange, but so far only large companies and professional investors are participating,” Chin said at Hong Kong Fintech Week on Tuesday. Carbon markets need to become more like traditional capital markets and welcome more everyday investors, he added.

Tokenized carbon assets expand the reach and impact of carbon markets, according to Josh Knauer, co-founder of ReSeed Carbon Assets and co-chair of a World Economic Forum working group on carbon credits.

ReSeed is a blockchain platform that plans to sell digital blockchain tokens that identify farmland that has an estimated metric ton of carbon stored in vegetation and soil.

The digital “carbon protection credit” can be linked to live satellite images of the farmland, which use artificial intelligence to confirm the amount of carbon protected. That way, buyers can ensure the quality of the credit and easily prove and report their ownership of the protected carbon, according to ReSeed.

The efficiency of tokenized carbon credits in measurement, reporting and verification makes it easier for ReSeed to create smaller and more affordable bundles of carbon to be sold to individual investors and family offices rather than just large institutional investors, Knauer said.

The company will start selling credits linked to around two million tonnes of carbon from over 8,700 smallholder farmers by the end of this month, he added.

Knauer added that public-private partnerships such as Hong Kong’s green bond initiative can help boost innovation in the market.

“We need everyone involved, from the nonprofit sector to the private sector to government,” Knauer said.

“Fundamental questions we should all be asking are, where is this carbon credit from? How was it generated? What is its quality? And the transparency of data that blockchain can provide is the best way to start the dialogue between all sectors.”