Why Blockchain is Necessary for ESG Investing

There are small businesses or large corporations that claim to stand by sustainable practices, fairtrade production, and humane manufacturing plant conditions. But how much of what companies say is actually true? Besides a select few businesses that make everything public, there is no accountability and we are forced to take the businesses’ word. Blockchain technology is the solution. Blockchain will increase trust between all parties with its public digital ledger, improve data collection and accelerate monitoring, reporting, and verification processes, and incentivize behaviors that promote sustainability.

What is ESG?

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ESG stands for environmental, social, and corporate governance data which is calculated by a corporate social credit score. For example, Coca-Cola Co has an ESG score of 25.2(Medium) compared to Pepsi at 17.7 (Low), where the lower the score of ratings is better.

Millennials and Gen Z spurred the enormous growth in ESG investing and holding companies accountable for inhumane practices. Millennials have gained a reputation for being value-driven in their approach to spending money. The buzz started back in the 2010s but now every generation wants in. Through the 2010s only $5 billion was sustainably invested compared to $51.5 billion in 2020.

What is Blockchain?

Blockchain is a data structure that holds transactional records and while ensuring security, transparency, and decentralization. In other words, it is a system of recording information in a secure way that makes it impossible to change or hack the system. The recording of data occurs on one block in the chain and each time a new transaction occurs a new block is added creating an immutable record of every change or transaction interacting with the blockchain. Companies like Walmart, Square, Amazon, IBM, BMW, and many more use blockchain technology to be more proficient in organizing and storing data.

What is the connection between ESG and Blockchain?

The younger generations of people demand sustainable products and brands and are willing to pay more to get them. But how many of these brands do you legit check before buying? Companies such as Lush, Korres, Nike just to name a few have all used environmentally friendly marketing tactics to portray their brand. Consumers know if their products are actually produced environmentally friendly, have fair trade practices, or have fair and safe labor laws because consumers don’t know where their suppliers are located and they probably haven’t stepped foot in a manufacturing plant. All these companies may actually be doing what they say they are doing but the blockchain is a way to provide more credibility and transparency to every customer. The argument is not that blockchain needs to be used in every way possible, rather than blockchain will be an important tool to create transparency and traceability.

Current Use Cases

  1. Supply chain traceability — having an accurate record of where a product has come from and who has been involved can be invaluable for responding to product recalls or understanding the exposure from issues being found with a specific supplier. For example, JD.com uses blockchain technology to monitor their meat supply chain, Dell is tracking all of their recyclables making all the data accessible to customers and Nestle is using blockchain to increase transparency in sustainable food sourcing and product traceability to customers
  2. Blockchain creates incentives for healthy lifestyles. An open-source wellness platform called Clinicoin rewards users for having healthy behaviors. The project aims to improve global health, wellness, and research. You can earn Clinicoin for showing up to the gym on time, going to doctor appointments, taking your medicine, and doing many other activities.
  3. Impact tokens and investing describes a group of digital tokens used on a blockchain with the specific goal of investing in projects with positive social and environmental impacts, which seeks to generate positive, measurable social and environmental impacts alongside a financial return.

Future Use Cases

  1. Banks can create products that provide financing to asset producers who follow certain sustainability or environmental standards. Asset managers could provide real-time data on the actual carbon footprint of their impact investments. Insurance companies would be free to offer premium discounts to those customers able to demonstrate certain certifications or levels of standards compliance.
  2. Emissions and carbon credits on a global blockchain providing transparency and access to data. This can help prevent double counting carbon credits, verify certificates, and promote market integrity. Regulatory functions can be implemented with code inside of the system to create a transparent book of past transactions and changes. Blockchain can also help to support the Paris Agreement by providing access to more data that can be measured.

Written by Bennett Thompson, 2nd year honors student at Northeastern University student double majoring in Computer Science and Business Administration.

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