ESG goals are easier to achieve with blockchain technology

by Arthur · April 19, 2023

Web3 and ESG are two of the biggest trends in business right now, and whether you like them or not, there’s no stopping either.

In this piece, I will explore how the use of blockchains can help organizations when it comes to ESG initiatives.

Work certificate and proof of effort

Before we get into the intricacies of how Web3 and ESG come together and what positive changes and challenges this will bring, let’s first update on the two types of blockchain: Proof of Work (PoW) and Proof of Stake (PoS).

Proof of Work is the consensus mechanism that governs Bitcoin. In PoW systems, networks of computers solve mathematical problems to build new blocks and process transactions. The first computer to guess the correct hash builds the next valid block, earns the bitcoin grant in it and gets the transaction fees. This process is called mining, and yes, it requires a lot of computers and energy. Critics of PoW point to this as unsustainable or wasteful.

Proof of Stake is an alternative consensus mechanism where new blocks are added to the network by whoever has the most coins. Holding these coins proves participants’ stake in the network, hence the name. Doing things this way reduces the energy required to build blocks and validate transactions, but critics have pointed to the fact that PoS systems lead to an unchallenged oligarchy that controls things, which is a security flaw. PoS is the consensus mechanism used by blockchains such as Ethereum and Cardano.

Now that we’ve defined both terms, let’s look at how they affect various ESG initiatives.

How blockchain technology can impact ESG

Environmental, social and governance initiatives are becoming increasingly important for how business is done globally. Organizations want to reduce their environmental impacts, promote social responsibility by behaving ethically and fairly, and engage in good governance practices by having effective oversight and accountability.

As it happens, blockchain technology can help any organization, whether private or public, to implement its ESG programs. Let’s explore some of the ways this new technology can help.

Environment influences

Most blockchain thinkers and enthusiasts would say that PoS has a smaller environmental footprint, and on the face of it, that’s true. While this costs money (security) and is only half the story (proof that blockchains can be extremely efficient at scale), we won’t delve into debunking these myths today. Suffice it to say that both types of blockchain have their pros and cons, and there are trade-offs in any system.

Blockchain technology can help an organization reduce its environmental impacts by dramatically increasing the transparency and traceability of its operations. For example, entire supply lines can be tracked and traced on the blockchain, bad actors can be identified and squeezed out, and organizations can prove with 100% certainty that they are making an effort to deal with other parties with the same ESG goals.

Right now, where an organization gets its supplies, how other parties in the supply chain act, what happens to the waste after the products have reached the end of their life cycle, and other factors related to environmental impacts are difficult to determine. With blockchain, everything can be discovered, discovered and managed, thanks to the complete picture made visible by tracking everything in an immutable database.

When an organization in another country fails to properly dispose of its waste and dumps it instead, it can and will be visible on the public blockchain. Companies, authorities and other parties can then choose to no longer deal with that organisation, and stimulate good environmental practice through the threat of exposure and financial consequences. For good actors, it will be much easier to prove that they are acting to reduce environmental impact for the same reason; everything is visible on the blockchain.

It is the loss or deliberate falsification of records that makes it difficult to detect bad actors in things like supply chains today. With the verifiable data visible in one place, organizations will be able to make informed decisions about how to reduce their environmental impact as much as possible and will know who to deal with (or not) based on that organization’s practices.

Social responsibility

Social responsibility is harder to measure than physical attributes such as environmental impacts, but it can still be done, thanks to the unprecedented transparency of blockchain technology.

Social responsibility means that an organization operates in an ethical manner, respects human rights and benefits local communities. It’s not hard to imagine how a blockchain-powered world of Web3 apps interacting with and feeding underlying systems and an endless stream of data could help here.

Want to make sure a supplier is ethical? In a blockchain-powered world, you’ll see everything relevant about it, including where it sources material, any regulatory or legal violations it’s been involved in, and even its track record for keeping its word.

What about ensuring that a business benefits the local communities? It will be possible to see what donations it makes, whether it sources what it can locally, whether it hires from local labor pools that include all members of the community, and more. By using micropayments, it will be possible to handle even the smallest suppliers and the lowest paid workers.

Once again, the key is to have all the data in one place. Although it is possible to find out many of these things about a given organization today, the data is stored in different places, is difficult to collect, aggregate, analyze and is often unreliable.

In a Web3 world, organizations will upload this data via applications to the immutable public blockchain, where it will be time-stamped, verified and attested by whoever is responsible within an organization and potentially third parties such as regulators.

Such a system would allow organizations to prove that they are involved in socially responsible initiatives and to find and deal with other organizations while avoiding those that are not.

Good management system

The third element of ESG is good governance. This means ensuring that an organization has effective oversight, transparency and accountability. If you’ve read this far, it should be obvious how blockchain technology helps with this.

To clarify, scalable public blockchains mean that data can be uploaded for all to see. Organizations of all kinds can keep track of everything from their current financial position to inventory to who in the organization has access to a given area at a particular time. This data can be private, so that only those who need to know know it, and it can be attested (cryptographically signed) by those involved, creating real accountability.

Of course, all of this helps with transparency, oversight and accountability. It will be possible to know everything down to the smallest details from minute to minute, and ensure that those who violate ESG practices are held accountable and make it possible to prove that an organization has followed the regulations and kept its ESG promises.

How about managing the blockchains themselves? While PoS systems lead to unbreakable oligarchies where one or a handful of large players can control networks by amassing a massive stake, PoW systems allow communities, individuals and organizations of all kinds to be included in the governance process by joining distributed mining pools.

Which type of blockchain is better for an ESG-focused organization?

The attacks against PoW blockchains are well known and have been largely debunked. Yes, they create e-waste, but so do Teslas, and this can be managed responsibly by miners who are also motivated to use renewable energy to gain a competitive advantage.

At scale, PoW blockchains are unmatched in terms of efficiency. For example, while the PoS network Ethereum can only handle 20 transactions per second and will require all kinds of convoluted second layers to scale, the original Bitcoin blockchain can handle 100,000 transactions per second and scales faster than any other system.

What would happen if the world’s financial transactions and databases migrated to the Bitcoin blockchain? A dramatic decline in energy use would certainly follow, and an era of unprecedented transparency and accountability would result.

While PoS systems appear to use less energy on the surface, it is unclear that they do in reality. What is the total energy use of each computer that mints coins, and how much electronic waste do they produce? There is no clear way to measure it. Likewise, no PoS system has yet proven that it can scale to enable the kind of data governance outlined in this article, meaning that many of the benefits associated with transparency and oversight are lost.

PoW blockchains win the ESG debate hands down. But if you have a different opinion, we’d love to hear it. Which brings us nicely to…

Join us at the London Blockchain Conference

If you are interested in learning more about how ESG will be managed in a Web 3 world, join us at the largest global blockchain conference – the London Blockchain Conference – between 31 May and 2 June.

Although we believe that Bitcoin SV is the ultimate utility blockchain that will underpin the systems that allow more effective ESG initiatives, we welcome different alternatives provided that those who share them are engaged in the legitimate business and do not promote unregistered securities.

To secure a speaking spot, book a booth, or simply attend and mingle with other blockchain enthusiasts interested in how massive scaling of blockchains will change the world, visit the London Blockchain Conference website now.

See: ESG Compliance & Blockchain

New to Bitcoin? Check out CoinGeeks Bitcoin for beginners section, the ultimate resource guide for learning more about Bitcoin – originally envisioned by Satoshi Nakamoto – and blockchain.