Kryptolesson #24

What is ESG and why does it matter?

Today´s world faces two megatrends: One, the upcoming ecosystem of blockchain technology, as it has profound potential to revolutionize the way we as humans interact with each other in various fields of life. The other, a shift toward more sustainability, as the way we as humans live wields tremendous impact on our species, as well as for all other living individuals on our planet. We believe that the only true way toward a both economic and ecologic healthy future is one which accomplishes that these two trends work together, hence the question: How can blockchain be used to build a more sustainable future?

In business practices, sustainability can be split into three key areas: environment, social, and governance. Together, these are labeled ESG. Now, how can blockchain technology serve the topics of ESG, and therefore contribute to making our world a more sustainable place?

We start with E – environment. In the general public, blockchain was target of heavy criticism to be environmentally unfriendly due to high energy consumption. We must put this into perspective: what this refers to is the mining of blocks in the Proof-of-Work mechanism, where multiple computers compete for solving a mathematic puzzle. This process is indeed highly energy-consuming. However, awareness has raised within the industry, and Proof-of-Stake ↗ was invented. This novel mechanism for mining is estimated to use 99.9% less energy than existing Proof-of-Work, as no longer computers simultaneously compete for mining processes. Instead, the networks’ native tokens are used to select block proposers. One of the largest public blockchains, Ethereum ↗, is currently implementing a comprehensive update where the mining process is fully converted from Proof-of-Work into one of Proof-of-Stake. Through blockchain, it is also possible to track the production of clean energy: smaller-scale energy producers could be enabled to trade energy peer-to-peer with consumers in their local area, rather than submitting it into the grid. Such an initiative has alredy been launched by the british energy company Centrica ↗.

For S – Social, blockchain provides the opportunity for greater financial inclusion as value can be seamlessly transferred in all parts of the world via a monetary network that is robust, censorship-resistant and resistant to intervention by state. Also, blockchain could combat forced labor as employee labor agreements could be verified through smart contracts. For example. Blockchain could possibly even fight vote rigging in elections, as it could run votes and elections transparent and unforgeable.

The potential of blockchain for contributing to solve global environmental and social challenges begins to become recognized by the public. For example, the non-profit organization BSIC ↗ (blockchain for social impact coalition) was founded by the United Nations Organization in order to incubate, develop, and collaborate on blockchain products and solutions that address environmental and social issues. To name a few, they list human rights, education, identity & vulnerable populations and financial inclusion. BSIC encourages such projects to take part in the program in order to leverage the full potential behind innovative ideas that solve social and environmental challenges with blockchain technology.

Last G – Governance. For blockchain-based companies such as any other businesses, governance-related considerations include questions such as: Does the management body take into account sustainability issues in the course of business? Does the firm operate with tax transparency? Is financial crime, bribery, and corruption risk adequately managed? Does the operation have systems in place to protect against cyberattacks that could result in losses for investors and breaches of privacy? There are yet few regulations in place for answering these questions for blockchain, governance will organically improve as digital asset businesses move to become more mainstream. In March 2021, the new so-called regulation of the EU on sustainability-related closures in the financial services sector 2019/2088 ↗ (also known as SFDR, sustainable finance disclosure regulation) came into effect. The regulation represents the most ambitious transparency offensive for sustainable financial products so far. With this law, the EU strives to combat greenwashing in the financial and banking sector more effectively. It requires financial products to be more transparent and more due diligence. Together with the alertness of investors for sustainability aspects, the enforcement of the SFDR law in March 2021 is core in giving direction toward a more governed blockchain ecosystem as it provides transparency for investors.

In sum, the answer is: Yes, blockchain and sustainability can effectively work together, when blockchain is used as a means for ESG goals. The time has come now for perspicacious ideas to pave the way for fully leveraging the potential of Blockchain toward a more ecologically friendly, socially inclusive and well-governed future.

Photo by Tanmay Padalikar