ESG (environmental, social and governance) is a value driver that increasingly influences property markets and guides key aspects of due diligence, acquisition strategy and capital management. Real estate stakeholders are beginning to understand that beyond public interest in ESG and the need to comply with government regulations regarding ESG, there is also a good economic rationale for them to set and achieve ESG and sustainability goals. As the importance of ESG metrics increases, so does the demand for monitoring ESG performance, generating and tracking reliable data, and improving transparency, trust and data security.
As a central business goal, many companies set themselves goals to reduce their carbon footprint by using environmentally friendly building materials or optimizing energy consumption in buildings. Many jurisdictions impose mandatory requirements for sustainability disclosure, such as the EU’s directive on corporate sustainability reporting. In the US, the Securities and Exchange Commission has indicated that it will adopt rules for ESG disclosure that will contain guidelines for greenhouse gas emissions, which build on existing standards such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol. Companies also participate in voluntary reporting programs, such as the Leadership in Energy and Environmental Design (LEED) rating system.
The challenging part is to demonstrate concrete progress, to develop a meaningful measurement program across portfolios, and to build connections between stakeholders to guarantee transparency and traceability. Managers are tasked with collecting and processing a large amount of data which in turn challenges their ability to make informed decisions in real time. Questions also arise as to whether companies actually operate in ways that are as environmentally friendly as they claim. Stakeholders require a viable solution to monitor ESG implementation.
Blockchain: A single, standardized platform
To collect and track reliable and trustworthy data, generate ESG reports and automate the management and measurement process, many companies are now turning to modern technologies such as blockchain, AI and the Internet of Things. Blockchain is a combination of technologies – including digital signatures, asymmetric key cryptography, distributed ledgers and peer-to-peer communication – that together support a network of information cryptographically stored on the chain. When used to measure aspects of ESG performance, blockchain provides a single, standardized platform for meaningful measurement. The technology can be used to generate reports showing ESG performance and compliance. It also ensures that all data is collected, transmitted and recorded in a consistent, immutable and tamper-proof manner and enables data standardization to guarantee transparency and preserve data security and privacy. When supported with other digital technologies, such as the Internet of Things, this data collection process can be automated and optimized.
For example, blockchain platforms can be used to monitor energy production, storage and consumption. Blockchain technology can also help track how building materials are produced, used and recycled. Managers can use blockchain-based data systems to monitor ESG issues throughout the life cycle of a building and make informed decisions in real time to strengthen sustainable investments, control the ecological footprint of the entire portfolio and optimize team efficiency.
Tracking the social component
The “social” component of ESG also plays an important role in real estate investment. Innovative green financing mechanisms have unlocked investment in sustainable real estate as investors look for projects that will have a positive social impact, such as affordable housing, green office space and renewable energy. Many companies are implementing changes to improve the well-being of their workforce, which may include increased ventilation and air circulation, optimized space, hygiene and lighting.
More often, real estate companies rely on sensors and devices installed in their buildings to determine whether the amenities they offer represent the optimal use of building space. These devices provide property managers with real-time occupancy rates and historical usage data, which can be recorded on the blockchain. Blockchain tracking can also help property managers automate routine maintenance tasks, such as ordering new light bulbs, optimizing HVAC1 systems by immediately streamlining the heating and cooling of a room, detecting malfunctions and defects, and measuring and adjusting energy consumption via AI-based machine learning.
Control component tracking
The “governance” component of ESG requires a self-regulatory mechanism that reflects a company’s commitment to accountability and community well-being. Strong governance is built on fairness, transparency and security. Blockchain-based smart contracts can make this process easier and more efficient by enabling transparency and immutability in property transactions and corporate policies. Using blockchain technology, companies can gather information that promotes sustainability goals, while protecting all personal information collected while managing tenants, selling real estate, and serving investors, employees, and contractors. Privacy issues can also be addressed on-chain by using permissions to prevent access where necessary or through zero-knowledge secure technology.
But there are limits
Of course, blockchain technology is not the answer to all ESG challenges, and it does not exist in a vacuum. Any blockchain-based solution must comply with legal and regulatory obligations and technological limitations, and address these concerns as they are integrated into ESG policies.
For example, a blockchain-based smart contract is often used to automate and protect transactions and data flow, facilitating automation, security and efficiency. A key concern is the potential risk and liability arising from inadvertent programming errors in the coding protocol, which could result in financial or other losses to transaction counterparties and pose a risk to a company’s wider reputation, triggering disputes leading to costly litigation.
Smart contracts are designed to work largely without intermediaries. But there is – at least for the foreseeable future – a need for human oversight, intervention and interpretation to conduct interface code audits, maintain industry-specific safeguards and best practices, and address legal disputes and risk allocation resulting from smart contract malfunction, compromise of a party’s access to the blockchain, or potential hacks.
All these issues must be dealt with in separate traditional text-based contracts. A court is likely to view the text and code as a single, unified agreement as it determines the rights and obligations of the parties.
New rules appear
Given concerns that the collection and storage of digitized data in the chain may reveal sensitive and confidential data, new regulations and guidelines are emerging that focus on accountability and responsibility with regard to securing and disposing of data, privacy policies, appropriate use of personal data, notification of data breaches and other sensitive areas. While the blockchain is considered relatively secure against hacking, backdoor attacks through wallets or other means can exfiltrate data from the blockchain. Confidentiality, security and privacy assurances at various levels are necessary to ensure that a business complies with regulatory bodies and regulations such as HIPAA2 and GDPR.3
This means that companies should each develop a comprehensive implementation strategy to monitor data flow, improve security measures, conduct periodic risk assessments, minimize the collection and sharing of confidential data, and assess trustworthiness among participating parties. Prudent companies should consider adding customized blockchain-related data protection and privacy provisions to their commercial agreements and impose obligations on counterparties to comply with such regulations and implement appropriate security measures.
There is more to remember. Due to technical concerns such as transaction processing time, privacy, anti-money laundering, know-your-customer and other regulatory concerns, the blockchain requires a certain degree of permitted functionality – i.e. restricts platform access only to certain known participants and restricts the rights of those participants on the platform . This is why consortium and hybrid blockchains tend to be commonly used. This in turn raises several questions regarding such concerns as blockchain governance, designing consensus mechanisms among participants and deciding how rights and obligations between the parties should be documented.
Move forward in this emerging landscape
In recent years, a company’s strong ESG performance has in many cases led to greater access to capital and a higher quality of the investor pool focused on measuring real estate portfolios against sustainability benchmarks. Regulatory Forwarding ESG is expected to increase, and real estate companies are likely to be increasingly affected by ESG-related legal and regulatory disclosures.
In this emerging landscape, real estate companies should be aware of their ESG characteristics and the concerns of investors, regulators, lenders and other stakeholders. Blockchain and other modern technologies can help, offering a verifiable, efficient and transparent tool to navigate ESG implementation. But companies looking to use blockchain technology to enable and track their ESG journey need to be aware of the potential technical and legal issues ahead of time.
