Blockchain brings transparency to ESG

We all trade in CO2 emissions today, 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. In addition, governments around the world give us rebates to encourage us to buy hybrid cars. The transition to carbon credits is in many ways already underway.

Leaders in large companies are beginning to realize that they also need to reduce their footprint to comply with environmental, social and governance (ESG) regulations. Therefore, mid-level and senior managers, who make a lot of decisions, are taking a crash course in blockchain, as it can solve many 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 you generate.

Scope 2: emissions related to the purchase of power or resources used by buyers.

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

The blockchain will standardize provenance, because it provides better granularity when it comes to tracked data. Companies will be able to exchange greenhouse gas emission certificates in a transparent manner for a certain amount of credit.

If you emit greenhouse gases, regulators can 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 will be updated directly to a registry. A lot of 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 function properly, based on supply and demand data. Unless a system accurately captures supply and demand, no price accurately reflects the allocation of capital and resources. The same applies to ESG.

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

The challenges for ESG

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

Tesla’s CEO tweeted his frustration at the news that his company failed to make the S&P 500 ESG index. “ESG is a fraud. It has been weaponized by fake 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 impact” on society and the environment. Tesla board member Hiro Mizuno said on Twitter that “current assessments often overemphasize reduction of negative effects while neglecting positive effects.”

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

Blockchain can help. Blockchain-based carbon credits can 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.