There is more and more attention being paid by asset managers on environmental, social and corporate governance (ESG) principles-based sustainable investing, but how does ESG converge to Blockchain and vice versa ?
The fund rating service MSCI now publishes ESG ratings using AI to measure companies’ long-term resilience to ESG risks and so help asset managers in their portfolio construction.
Some fund managers like BlackRock – $6.47 trillion AUM – have put ESG and sustainable investing at the core of their investment process. So, unless the likes of Microsoft, Apple, Alphabet, Facebook take matters such as ESG seriously, they will find some asset managers more hesitant or not buying their shares.
Why should we pay attention to Blockchain Technology for ESG?
The question that then remains is: why, out of the many digital technologies available, should we pay closer attention to blockchain when it comes to sustainability goals?
It all goes back to traceability and those auditable records that prove progress. The principles of transparency and trust enshrined in its foundations, coupled with its immutability and ability to digitally represent assets moving along value and supply chains, make blockchain the clear choice to introduce traceability into industrial processes. Through the adoption of a transparent digital agenda, i.e., deploying blockchain technology to prove transparency in a way that no other digital technology can, businesses will improve their sustainability credentials and make reporting of it easier.
The International Institute for Sustainable Investing (IISD) found 4 advantages of using blockchain technology and smart contracts for ESG:
1. Increasing trust between parties
2. Promoting financial and social inclusion
3. Improving data collection and accelerating monitoring, reporting and verification processes
4. Incentivising behaviours that promote sustainability.
Blockchain technology – the Bitcoin main technology – can help ESG reporting so it is more consistent, standardised, and effective. As Forbes said,
“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”.
All blockchains are not environmentally equal: Proof-of-Work vs Proof-of-Stake Consensus
It is not very evident that a currency that exists digitally can also have a major environmental impact. The key factor is that “mining” or releasing new bitcoins into the network takes up a lot of energy and energy generation produces carbon dioxide emissions.
To put the energy consumption of the entire bitcoin network into perspective, consider this chart by Statista which ranks energy consumption of the network to that of entire countries.
The problem lies in the fact that most of the mining of bitcoins takes place in China, where the electricity is generated using polluting fossil fuels like coal.
But according to Laurent Barocas, Chief Client Officer & Product Manager at Trakx.io, a start-up backed by ConsenSys, renewables will not solve the issue.
“The whole system still uses thousands of times more energy than we had before. Supporting the energy-intensive cryptocurrency networks would then require more and more investment in renewables such as hydroelectric power, wind, or solar panels. However, building a solar panel, as example, releases significant amounts of emissions. Keeping pace with the demand for more energy will off-set the benefit gained from shifting to renewable supplies.”
Laurent Barocas, Chief Client Officer & Product Manager at Trakx.io
An option under consideration is to modify the current system of operations and to fix the problem at its root. There is a possibility of changing the bitcoin consensus from “proof-of-work” to “proof-of-stake” verification system.
Essentially, the “proof-of-work” consensus relies on huge amounts of computing power to verify if a transaction is valid. While “proof-of-stake” allows for virtual mining without the need for extensive computational power. Thus, it lowers investment in terms of electricity and computing power.
Although some statistics on the electricity consumption of the bitcoin sustem may be overestimated, addressing the sustainability concerns of the network will be essential for the long-term use of this type of cryptocurrency.
“At Trakx, we strongly believe that energy efficient blockchains leveraging Proof-of-Stake algorithms combined with the transparency and immutability of this technology will help companies to efficiently monitor and improve their ESG’s impact.”
Laurent Barocas
Article: Laurent Barocas – Trakx