Focusing on the “G” in ESG: can blockchain help?

Today, more than 90% of S&P companies publish environmental, social and governance (ESG) reports in some form, while more than three-quarters of investors believe companies should make investments that address ESG issues, even if it reduces the profit in a short time. term. Between 2018-2021 alone, inflows to global sustainability funds increased from $5 billion to nearly $70 billion.

But for all the growing ESG efforts, little attention has been paid to the discrepancy between the “G” of the “E” and the “S”. It is often clung to the end of the acronym as an afterthought; regarded as the less important and less interesting of the three letters. But in many ways governance is actually the most important pillar. By increasing our focus on “G” to strengthen governance, we can implement imperative processes to tackle today’s environmental and social challenges.

New tools such as distributed ledger technology (DLT) have emerged as a means to achieve this. By examining where the need for better governance lies, and how DLT meets this demand, organizations can implement successful frameworks to truly increase their sustainability.

Put ‘G’ before ‘E’ and ‘S’

Financial institutions are setting increasingly ambitious ESG targets, and rightly so. However, one of the biggest criticisms of ESG is that it is not measurable.

Against increasing pressure to cut carbon emissions, the temptation to greenwash a problem is greater than ever. Even if there are internationally recognized guidelines such as the Global ESG Disclosure Standards, what is to stop an institution or investors from using cherry picking methodology and statistics to distort the reporting of their own ESG scores just to save face?

This is where the importance of governance comes into play. Governance and transparency are intrinsically linked. Without transparency and accountability, an organization cannot determine the right course of action to meet ESG goals or verify claims of being a good corporate citizen. In other words, “G” holds the key to the realization of “E” and “S”.

It is also the key to keeping the population motivated. After all, it is difficult to try to realize environmental and social goals without knowing whether these efforts make a difference.

Furthermore, if profitability is the core underlying motivator of businesses, having greater transparency across their processes can make operations more efficient, help minimize energy waste, and ultimately protect profits.

DLT can strengthen governance

DLT exists at its most basic level to build trust in complex systems. Blockchain maintains a complete history of past transactions in the network, meaning the user can track the data with full transparency.

The immutable nature of data recorded on DLT and the sharing of information by all relevant parties means that organizations can digitize physical assets with full visibility and security, increasing accountability for all corporate affairs.

This technology can be used in a variety of use cases. Take supply chains for example. At their most basic level, supply chains consist of several steps, including extraction of raw materials, production of those materials into basic parts, sale of finished products to end users, and delivery to consumers. DLT makes it possible to track these assets in real time from the beginning to the end of the supply chain cycle. This enables a company to accurately verify the carbon emissions involved throughout the process.

The same level of accountability can also be applied to a waste chain. Asset tracking and tracing enabled by DLT enables an organization to verify exactly how much of its material is being recycled versus how much material is simply being used for recycling. By increasing overall visibility, a company can understand where resources are most needed and allocate accordingly. This will not only help a business identify whether it has met the sustainability goals it originally set, but also enhance ROI, as it becomes easier to make intelligent decisions around waste minimization and the profitable use of resources.

A new approach

It is impossible for companies to truly move the needle on ESG unless they have the profitability motivation to do so, a clear view of the challenges and the ability to measure their efforts with reliable data.

We must therefore start putting “G” first in our approach to ESG. DLT has emerged as a truly transformative prospect in this transition. Although blockchain is associated with crypto and all its energy-intensive baggage, integrating this technology into existing systems is where its real value lies. Doing so will open up a new area of ​​transparency and accountability, and help shift the basis on which ESG requirements are anchored.