How can blockchain help in ESG Framework?

The term ESG refers to Environmental, Social, and Governance. It motivates us to pay closer attention to today’s severe global issues. Blockchain tech can help in many ways to achieve this goal. Let us discuss the ways how blockchain can help in the ESG framework.

Aside from fuelling the cryptocurrency surge, it’s interesting looking into the many applications of blockchain technology. This tech can support a broader spectrum of digital assets while facilitating fund transfers.

Furthermore, it plays a significant role in guiding trends in the ESG domain. The list of blockchain applications for promoting ESG outcomes has broadened to include transparent ESG reporting and expanding financial access.

Let us start with what is ESG framework.

ESG frameworks are strategies for standardizing ESG metric reporting and disclosure. They are often optional but are becoming compulsory for specific investors or regulations in some nations.

Nonprofit organizations, NGOs, corporate groups, and others create these frameworks. As a result, their areas of attention and the measures they prescribe differ significantly.

3 Pillers of ESG Framework

(i) ESG For Environment Sustainability: Environmental factors are associated with a company’s environmental impact. Sustainability practices have the assumption that corporate actions have the potential to endanger ecosystems, water, air, and human health. ESG elements in companies can include the following:

1. Efficient use of energy and adoption of renewable energies that produce fewer pollutants and contribute to lowering climate change;
2. Managing waste responsibly (for example, adoption of circular economy ideas);
3. Having responsible procedures throughout the value chain, such as no deforestation policies and animal welfare;
4. It provides transparency into all environmental regulations.
5. As a result, regulators anticipate favorable outcomes such as lower costs and increased profitability due to improved energy efficiency. This activity will also reduce the risks to one’s reputation.

For example, the Global Reporting Initiative (GRI) framework is a collection of standards for responsible environmental, social, economic, and governance conduct that covers many themes. 73% of the world’s 250 largest firms have adopted the GRI framework for sustainability.

Apart from fuelling cryptocurrency, blockchain has supported a wide range of applications. This tech supports a broader spectrum of digital assets while facilitating fund transfers.

Furthermore, it plays a significant role in guiding trends in the ESG domain. The list of blockchain applications for promoting ESG outcomes has broadened to include transparent ESG reporting and expanding financial access.

The World Economic Forum has documented various use cases of how blockchain technology can help collect ESG data.

The technology, for instance, may automate data collection at numerous locations along a company’s supply chain. As a result, rather than relying on data provided by their vendors, these businesses can better understand their environmental impact.

ESG in Social factor: Social aspects concern how firms treat and appreciate their employees. In other words, it concerns the impact businesses can have on their employees and society. What exactly do these businesses do?

1. Diversity and inclusion policies to eliminate all forms of discrimination;
2. Employee safety and health; labor standards across supply chains that provide fair salaries and human rights protection;
3. Good relationships with local communities, which provide a social license for businesses to exist;
4. Companies must also report on what they are doing in this area.
5. As a result, corporate productivity and employee morale rise, turnover falls, and reputational risks are more effectively controlled. Having a social license to operate makes it easier to work without being subjected to stakeholder pressure.

ESG in Governance: Governance factors concern corporate policy and how corporations run businesses. It clarifies stakeholders’ roles, rights, and expectations. It also helps reach a consensus and shareholder’s stake in the long run. Specific factors under which governance is examined include

1. Tax planning, corporate risk management, executive compensation; political donations and lobbying; corruption and bribery; board structure and brand independence; shareholder protection
2. It provides information on these subjects.
3. The effects of these measures might range from aligning shareholders’ interests with management to avoiding unpleasant financial surprises and gaining social acceptance due to more equitable wealth distribution.

ESG in Cryptocurrency

In cryptocurrency, ESG variables can help identify the influence of a digital currency on the environment, society, and government. While many companies have used ESG assessments to evaluate many other investments, utilizing the criteria for assessing bitcoin is a relatively new effort.

It is vital to realize that every industry, no matter how small or huge, has some ESG influence. In crypto, measuring ESG entails examining a currency’s mining and transactional operations to determine its overall ESG impact. ESG analysis helps set a standard to examine non-financial return performance and compare cryptocurrencies to traditional investments and other cryptocurrencies.

This is how ESG is broken out in the crypto space:

The ESG environmental factor examines a cryptocurrency’s commitment to environmental sustainability. It considers the use and consumption of resources in mining and network operations.

The Crypto industry is dramatically changing traditional trading. As these changes are relatively recent in the context of currency, their societal implications may shift dramatically in the following years.

Since cryptocurrencies are decentralized, no single authority controls how they are run. This fundamental standard makes cryptographic procedures transparent. There are no individual prerequisites to begin mining cryptocurrency, making the world of cryptocurrency an open market.

In some ways, the underlying technology of cryptocurrencies and decentralized finance might even enhance the structure and effectiveness of conventional power organizations like businesses and governments.

Older, closed-door, and highly centralized methods will appear ancient once decentralized technology can operate efficiently at scale.

In the above discussion, we are talking about sustainability. Let us see,

What is sustainability?

Sustainability is the capacity to support or maintain a process consistently across time. In commercial and governmental contexts, sustainability tries to prevent the depletion of natural or physical resources to remain available in the long run.

ESG Vs. Sustainability

The shift from sustainability to ESG performance represents the maturity of corporate practices toward a more precise portfolio performance measurement. As the sector evolves, we must improve how we collect and track indicators to construct ESG management properly.

Sustainability managers work primarily on environmental projects to achieve results that can be measured using standard metrics like carbon equivalents, energy intensity, or gallons of water consumed.

They involve stakeholders in these activities through surveys, advertisements, and marketing efforts. In addition, they create sustainability goals that may include extensive carbon-cutting or offset activities encompassing all elements of their organizations.

These new projects all have one thing in common: they (a) fall under the strict definition of ESG and (b) are measurable. While quantitative measures such as energy use are more easily tracked, the breadth of what is material is broadening, so there are more ways to track and manage ESG programs. Policies either exist or do not exist and are implemented at a specified moment with documentation to verify them. Carbon reduction progress can be tracked and reported against a baseline.

All of these factors may combine to create a more sustainable firm. Still, at the time of implementation, these activities are much better understood when seen through the ESG perspective rather than the general sustainability framework.

Blockchain and Sustainability

Given its characteristics, blockchain has the potential to improve ESG risk management in three major areas: supply chain transparency, data protection, and energy efficiency.

Transparency in the Supply Chain

Because blockchain is a digital ledger that may be used to record numerous inputs or product qualities, IBM, for example, is collaborating with Walmart to integrate traceability systems into the food supply chain. Testing as part of Walmart’s pilot program indicated that adopting blockchain lowered the time it took to trace a shipment of mangoes from the farm to the shop from days to weeks to just two seconds.

Blockchain visibility can help businesses notice issues or dangers faster and accurately trace the problem back to its source. This feature allows them to immediately implement mitigation plans in the event of quality difficulties.

Data Security

Private blockchain provides data protection with three main benefits: reducing identity breaches, preventing data corruption, and protecting against cyberattacks. These features are promising, given the rise in malware, ransomware, and data breaches.

Existing authentication systems rely on a centralized database for validation, such as comparing a password to one stored in the database. There is no centralized system holding keys that may be manipulated when using blockchain; instead, each block has validation keys, making it more difficult for hackers to compromise identities, corrupt data, and infect computers with malware or ransomware.

Energy Conservation

Using blockchain as part of a microgrid where neighbors can purchase and sell confirmed solar electricity is one example of an energy-focused use case. The blockchain platform records all transactions and verifies their validity.

Another use is the management of power grids. Using IBM’s blockchain technology, Vandebron, a renewable energy startup, and TenneT, the Dutch national grid, have created a mechanism to work with electric vehicle owners to connect electricity from their car batteries to the grid safely.