Will blockchain quickly become the solution for ESG?

The following is a guest post by Fly Air Inc CEO Stuart Bullard.

ESG is in the spotlight, and managers in large companies are beginning to take sustainability seriously. Companies understand that they must measure, report and manage their emissions effectively. Some have even set their net zero liabilities, which creates many challenges to overcome.

Carbon compensation or carbon credits are permits. Owners may emit a certain amount of carbon dioxide or other greenhouse gases. Bank of America estimates that carbon offsets to ensure that companies meet these sustainability obligations will need to grow 30 to 50 times. Some suggest the true number is closer to 300 times.

It won’t be cheap. Microsoft has annual emissions of around 16 million tonnes. Based on what a carbon offset costs now, which is between $2-$20, it could cost Microsoft tens or hundreds of millions to comply.

Capital allocation and regulation

Needless to say, companies face significant challenges in meeting both of these disclosure requirements and managing their exposure to these issues. Blockchain can help in two general categories: capital allocation and regulation.

Many who manage capital for the energy industry want to move away from fossil fuels to cleantech. The fossil fuel sector has a legacy of detailed and well-known parameters at play – credit exposure, types of risk, capital allocations, etc. Banks, financial institutions and investors are familiar with this process, where spreadsheets can calculate exposure risk decades into the future.

The clean tech industry does not have that history nor the same degree of models. On the one hand, it is an advantage for those companies without a real income stream because they receive capital from authorities that do not look at credit exposure. They are most concerned with allocated capital to preferred industries, products and services. On the other hand, private enterprises would not touch these companies due to their lack of profit.

Blockchain can help private capital enter sustainability markets, especially in terms of pricing. Europe is currently working on creating pricing standards so that private capital can examine models to decide how capital should be allocated. Blockchain’s ability to manage the origin of a carbon emission—where it occurred, if it can be resold, who the governing bodies are, etc.—helps with associated risks around legal ownership and more. There will be a variation in pricing for carbon emissions, and the market will be constantly changing. Blockchain can keep track.

Many companies around the world are now facing requirements that they must report emissions. They are asked to take measurements along the entire hydrocarbon value chain to get the numbers required by disclosures. (For example, UNICEF has proposed track and trace capabilities along the entire value chain for specific industries)

Blockchain is a good candidate because it can track chunks of data as they change provenance, and is also immutable, which energy companies prefer. ESG can use the same methodology to trigger the potential for increased transparency along the value chain to better report on ESG. This also makes the jobs of regulators easier.

A logic application for blockchain

The players in the energy industry have existed for a long time. And their systems and processes have existed for 30-40 years. As companies adopt new carbon offsets and credit allowances in the trading world, they will be working in a technological environment that dates back to the seventies.

Let’s consider how to get a price for raw materials such as CO2 emissions. It behaves in the same way as the traditional commodity markets, creating a bearer document that can be exchanged for a commodity. Blockchain can improve the industry with smart contracts, smart invoicing, price clarity, validation, etc.

It can also increase efficiency, make business processes faster and smarter, leading to adoption and enabling and improving sustainability. By automating smart contracts on a secure and immutable blockchain, entities along a supply chain can be motivated to contribute to sustainability goals.

There is no time for delays. One can already today buy credits from a farmer’s field in Saskatchewan or the rainforest in Brazil, and blockchain will promote the overall stability of the system while providing a protocol that is accessible and testable. Blockchain can standardize global markets and create a transparent and immutable system of carbon credits.