Blockchain - the perfect tool for sustainability measurement and investment?
A combination of blockchain and monitoring technologies allow new types of highly automated instruments such as sustainability-linked debt instruments to be issued.
Sustainable finance is currently too complicated and expensive for SMEs. It is also unclear how much impact on Sustainable Development Goals it really makes. One of the main advantages of sustainable finance digitalisation is the reduced transaction and intermediation costs resulting in higher levels of accessibility for people and communities.
Low-cost transactions bring more available instruments and more opportunities for projects and communities to get investments, and more transparent, fast and direct finance flows for more people affected by climate change.
At the same time, financiers will not invest in projects simply because this is the right thing to do morally. They will do it if there is enough trust and economic sense.
Blockchain increases speed, reduces time and eliminates intermediaries, enabling the issuance of fully programmable and traceable sustainable finance instruments. Digital finance also brings new revenue opportunities through the tokenisation of real assets or securities (equity, debt, revenue sharing instruments, etc.) as well as enabling their fractional ownership and usage. Finally, blockchain provides a golden source of truth regarding financial and impact data for all stakeholders involved.
However, this tremendous potential may only be unlocked by the introduction of clear governmental regulations in the digital finance sector and the emergence of regulated platforms for secondary trading.
Blockchain is the perfect traceability tool for ESG impact calculation
Due to the geographical distance and outdated IT infrastructure, investors don’t have access to the physical sustainability risk and impact data of financed projects. This causes problems: lack of trust between investors and SMEs, lack of accuracy and transparency in impact measurement and reporting as well as greenwashing.
The integration of blockchain with monitoring tools such as satellites, drones and Internet of Things (IoT) enable higher transparency, traceability and immutability of impact data. It also helps to assess sustainability risks and automate impact reporting. Once collected directly from the project site, the impact data would answer the question of whether corporates and financiers are really changing their investment practices, promoting a long-term thinking approach, increasing reporting transparency and public accountability for real targets behind the ESG policies.
More than that, a combination of blockchain and monitoring technologies allow new types of highly automated instruments such as sustainability-linked debt instruments to be issued. With such bonds or loans, the financial parameters are linked to real-life impact measurements. This allows investors to track and manage the finance and impact flows with unprecedented accuracy and transparency, solving the greenwashing issue.
Are blockchains still voracious consumers of energy?
There is a lot of speculation about this, because no one so far has undertaken credible holistic research comparing the carbon footprint of various blockchains vs. the traditional financial system. All we know for sure is that the carbon footprint of Bitcoin, Ethereum and blockchains that are based on the Proof of Work consensus mechanisms is very high and, on the contrary, the blockchains that use Proof-ofstake census have a very low carbon footprint. A good example here is Polkadot blockchain that has been recently named as the most low-carbon blockchain by the Crypto Carbon Ratings Institute.
To unlock the potential of digital tech for climate finance and figure out all the pros and cons, the United Nations Framework Convention on Climate Change (UNFCCC) has established two flagship initiatives:
Climate Chain Coalition that unites more than 300 members from 60 countries who are exploring the implementation of blockchain for sustainable development.
UN Climate Change Global Innovation Hub that was recently launched at COP 26 in Glasgow.
Another interesting initiative by private actors is the Crypto Climate Accord.
At the same time, we should bear in mind that blockchain is still a young technology and has just started its wide-ranging industry adoption. Chances are high that we will see more sustainable blockchains as well as encouraging use cases that can bring us closer to the attainment of the UN Sustainable Development Goals.
Alexey Shadrin, Co-Founder and Managing Partner, Evercity