Environmental, social, and governance (ESG) reporting initiatives continue to accelerate, with billions of dollars of investments announced on an ongoing basis.
That said, ESG reporting is not without its challenges; blockchain has the potential to help tackle several headwinds keeping ESG from having the impact it otherwise should.
A common example of the issues with ESG reporting are the arguments that carbon emissions reporting creates- even attempting to establish frameworks and guidelines around this issue is often met with fierce debate and pushback.
At first glance the convergence of blockchain with (ESG) reporting might seem to be contradictory or unusual, but that is only a partial view of how these two trends are related.
Digitization and automation are not new trends, but blockchain is perhaps the highest profile manifestation of these trends in the last decade or so. Sustainability reporting, and a focus on corporate governance are also not new or emerging trends, as organizations across industry lines have been reporting various types of non-financial data for decades. In other words, both broader trends have been steadily – if slowly – making inroads into organizational management and the reporting landscape.
The difference is that now, however, both broader trends have moved into much sharper focus. Blockchain has rapidly transformed, even as the cryptoasset price market continues to trundle along at lower levels, into a financial reporting and attestation tool discussed at the highest levels of markets. At the same time, the importance of ESG has never been more pronounced.
Economic and societal inequality, concerns about human rights abuses the world over, and the need for effective governance frameworks to address these issues, have created a near perfect environment for blockchain to enter the conversation.
Let’s take a look at a few of the specific issues and pain points related to ESG reporting that continued blockchain integration can assist in solving.
Supply chain traceability. Improving the traceability of supply chains is old news in terms of goods, but supply chains are much bigger than that. Data is often mentioned as the lifeblood of organizations in the present and the future, and understanding where that data is being processed, stored, and analyzed is a critically important issue. Whether it is the possibility of hacks and data breaches, potential abuses and misuse of this information, or the pilfering of intellectual property, the issues are nearly endless. In addition to helping reduce the risk of conflict minerals and human rights abuses, securing the information that drives business decision making, at all levels, is an area in which blockchain can deliver quantifiable value.
The fact that the U.S. Air Force has provided funding to several firms to build out a multi-use blockchain for supply chains is a prime example of how organizations (public and private sector) are already taking advantage of this opportunity.
Standardized ESG reporting. One of the largest issues with ESG reporting is the simple fact that there are no globally enforced reporting and compliance standards for ESG and other sustainability information. For financial reporting, and fully acknowledging the inconsistencies and issues with those standards, there at least are standards in the form of Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). Increasing the transparency and consistency, via blockchain reporting frameworks and standards, will lead to the increased usefulness of this information.
A recent report by the Governmental Accountability Office (GAO) in July 2020 emphasized the fact that ESG disclosures and reporting are not always clear or helpful for decision making. If reported information is not useful for decision making, the question must be asked, what purpose does it serve in its current state?
Smart city development. Much has been written about smart cities, sustainable infrastructure, and the importance of ensuring that as development occurs, it occurs equitably. Increased digitization and interconnectedness of infrastructure will be an inevitable part of the 21st century global economy, and ensuring that these developments create opportunities for every segment of society is arguably more important than the developments themselves. In order for the developments, and associated benefits, to occur as promised there needs to be confidence in both the technology and insights generated from these technologies.
The Organisation for Economic Co-operation and Development (OECD) published a recent report, outlining specific areas in which continued blockchain integration with sustainable infrastructure can be beneficial. This include, but are not limited to, decentralizing the financing of infrastructure, emissions certification, and making better use of existing infrastructure assets.
Blockchain is a fast growing space – most commonly associated with crypto – but the potential for this technology far eclipses the cryptoasset space. Alongside the growing expectation for more varied and continuous information, blockchain has the opportunity to assist ESG reporting become more consistent, standardized, and effective.
Technology and sustainability do not always go hand-in-hand, but the simultaneous rise of blockchain and demand for ESG has the opportunity to change that for the better.