Environmental, social governance (ESG) is “an approach to evaluating a company’s corporate social and environmental credit score compiled from data collected and related to the intangible assets of a company”. The social credit scores that are provided rank companies’ impacts on the world - for instance, pollution and modern slavery. Furthermore, the significance of ESG in determining the value of a company is gaining greater importance and attention from staff, clients, suppliers and shareholders. Globally, the value of assets now invested with an ESG mandate is estimated to exceed $53 trillion by 2025.

ESG-mandated assets are projected to be 50%+ of managed funds by 2024

Source: Deloitte

As mandatory corporate and sustainability reporting becomes common, accurate and verified documentation to support transparency becomes essential to satisfy various parties. Therefore, to comply with ESG standards, blockchain technology has increasingly been seen as valuable tool to help in verifying an organisation’s ESG credentials: 

• data reporting - access to accurate, standardised information is key. Blockchain-enabled reporting tools allow companies to collect verifiable data and produce trustworthy reports which demonstrate their ESG credentials. Blockchain enables data standardisation whilst also providing the platform needed to support data transparency. The automation of data collection can be braced with other digital technologies, which allows various devices to communicate with each other automatically and share data and information without the need for human intervention. For example, to reduce the global carbon footprint companies are able to report the entirety of their emissions through a single blockchain platform thereby making a standardised space for data to be collected and tracked reliably, and consequently allowing for meaningful measurements.

• supply chain transparency - an essential part of achieving the EU's sustainable goals is by improving supply chain sustainability. Blockchain technology shows the potential to transform supply chain management creating a database to record the transactions along the supply chain and bringing transparency, efficiency, traceability and reliability to supply chain management. Blockchains, coupled with Internet of Things (IoT), can automate data collection across different points of a company’s supply chain. This automation and real-time availability of information also helps companies detect issues faster and reliably trace the problem back to the source. Blockchain-powered platforms play a role in terms of responsible and ethical sourcing. The transparency it provides is crucial in tracking the materials and goods from source to end-use and helps ensure security for all participants by allowing them to access the records of transactions. This feature is particularly important when supply chains are global and can be complex, involving many different parties. 

Companies which are taking advantage of blockchain to support their ESG credentials:

As one of the leading energy companies in the world, Shell recently embarked on an ambitious energy transition agenda in a bid to move away from the use of fossil fuels and towards green and sustainable energy. It aims to reach net-zero carbon emissions by 2050 or sooner, and reduce emissions by 50% by 2030. To do this, Shell is leveraging game-changing technologies, such as artificial intelligence (AI), the internet of things (IoT), Web3 and blockchain. Blockchain's decentralised and tamper-proof nature makes it an attractive technology for global organisations such as Shell, which need both hyper-secure and scalable technology solutions to pilot a new generation of applications involving gathering and sharing of valuable data. Shell has created a blockchain-based system that can demystify the complex web of sources. 

Also, to ensure all-day consumption of green energy, Shell is creating highly granular certificates in real-time at the source of where the energy is generated so as to represent green energy produced every half hour. Every point of that electron’s journey, from production to consumption, is tracked and recorded on a blockchain. Aiming at increasing the availability and use of sustainable aviation fuel, Shell is collaborating with Accenture and American Express Global Business Travel to work on a new project, Avelia. This is one of the first public blockchain solutions that creates a credible and transparent way to help decarbonise the aviation sector.

The beauty sector:

For the beauty industry, which has a long-time dependence on agricultural ingredients (production practices for which have often not prioritised sustainability), hazardous chemicals, eye-catching packaging and constant replenishment, the adoption of sustainable values is particularly challenging. Unsurprisingly, the industry has recently been under pressure from both consumers and regulatory authorities. Regulators are vowing to tighten up regulations following reports of mislabelling of ESG investment products whilst consumers are also becoming more educated about ‘greenwashing’. As the demand for transparency increases, the sector is being compelled 'to do more' and to provide the evidence. Some beauty brands are considering the potential of blockchain as a tool to improve transparency whilst some have already adopted the technology. For example, in 2019, Provenance joined forces with British e-tailer, Cult Beauty, to provide “proof points'' on the product pages of participating brands. With these, customers can examine and compare claims made by brands (such as easily recyclable packaging or cruelty-free status) with the confidence that the information is unedited and has been independently evaluated, since it is in the blockchain. Positive Luxury is also using blockchain to improve transparency and to make it easier for brands to track their progress. This London-based firm accredits ESG efforts through its Butterfly Mark and Diana Verde Nieto, its co-chief executive, has said: “With our blockchain and QR code-powered pages, our portfolio brands will have an easy dashboard that will show them where they’re at, and the return on their sustainability investment”. 

Drawbacks to using blockchain to enhance ESG credentials: 

There has been much negative press regarding the vast amounts of energy used to power the Bitcoin blockchain. When Elon Musk stopped accepting Bitcoin as payment for the Tesla Range, he stated that: “Tesla would stop accepting the cryptocurrency as payment because the so-called mining of the coins used too much fossil fuel-generated electricity.” Even with the current dip in the cryptocurrency market, a single Bitcoin is worth around $23,500 but there has, however, been awareness of the impact on the environment when investing in Bitcoin. Given these environmental concerns surrounding cryptocurrency and the increasing importance of ESG, an appropriate question to ask is if these two developments are compatible. According to the University of Cambridge Centre for Alternative Finance, Bitcoin mining consumes more energy than the UAE or the Netherlands. It consumes about 0.4% of global energy and up to 150 TWh of electricity per year. This immense energy usage has generated much concern, especially as the focus on climatic change increases. Another consideration is the social plan, since blockchain and ESG both conflict with this. The social component of ESG includes human rights, diversity, financial inclusion and consumer protection. Although blockchain protects the vulnerable from oppressive governments and permits the purchase of cryptocurrencies by interested individuals (thereby promoting financial inclusion), it may also promote illegal conduct, such as evasion of exchange regulations and tax fraud. Also, the exchanges on which cryptocurrencies transactions are made are poorly regulated - leverage is provided by a shadow bank that is not regulated as a bank - and this may violate consumer protection. Due to its loose regulatory and enforcement structure, cryptocurrency is appealing to those people who want to boycott the network of regulations and fines that control traditional currencies and financial markets. Its decentralised nature and pseudo-anonymous structure make it a useful tool to avoid financial sanctions. 

Conclusion:

The increasing interest and popularity of blockchain has brought light to the various impacts it has. It is a technology with far-reaching possibilities. Although there are certain incompatibilities and challenges, there is however the potential for digital assets and blockchain to assist a green transition and address ESG concerns. 

The hype built around NFTs makes it difficult for some to have an understanding, and many others get the wrong idea about these digital assets. For instance, some think of it as a Ponzi scheme and struggle as to why NFTs have attracted the interest and money that they have to date. The below table shows the total turnover of those NFTs that have been in excess of $0.5billion, as well as showing the numbers of buyers and number of transactions todate.

NFT collection rankings by sales volume (all-time)

Source: Cryptoslam

A brief explanation of NFTs is that they are unique codes which prove ownership of assets using blockchain technology. Anything can be an NFT, be it pictures, songs, videos, contracts, tickets, even data such as details about your home or your vehicle. NFTs have diverse use cases and are being used globally by different industries in many jurisdictions as well as major brands such as Adidas, Nike, Hermes. Below are some of the different uses for NFTs:

• to sell tickets directly to people

• to help content creators connect with their audience

• for the identification and verification of health documents

• for the representation of academic credentials at a time when falsifying academic records is still an issue.

• for deployment across a supply chain

• in artwork tracking

• to transfer and record the ownership of properties - this covers intellectual and landed properties and patents.

With the different types of NFTs being established, it should be noted that there are many NFT marketplaces - i.e. some are niche-focused, whilst others are general marketplaces. The biggest NFT site is OpenSea, which has seen its value rise to be worth over $13.billion compared to only $1.5billion six months ago.

NFT landscape

Source: NFT TECH

Other significant NFT platforms include:

• Rarible - with a ‘Spotify-like’ layout, this NFT marketplace is primarily focused on digital collectibles. RARI is the governance token here

• Crypto.com - this allows users to trade digital collectibles from brands and celebrities

• Foundation - with over a year in operation, most viral meme NFT sales, such as Pak’s Finite, Nyan Cat, etc, happened on Foundation

• ZORA - a decentralised auction focused on helping artists take back the value which most brands, labels, or galleries take traditionally. Zora is built on ERC-721, which is the common standard for NFTs

• SuperRare - this is a P2P marketplace focused on the trading of single edition artworks

However, unsurprisingly, there are both advantages and disadvantages of dealing with NFTs.

Advantages:

• easy authenticating and record of ownership

• NFTs can generate on-going income for the owner of intellectual property (IP) - similar to music royalties - as each time the NFT is re-sold, the creator can earn a % of the sale price

• marketplace efficiency

• since NFT stands for non-fungible tokens, the non-fungibility aspect makes them irreplaceable

• profit potential

• fractionalisation of ownership of physical assets

• NFTs offer a new way to have greater diversification in an investment portfolio

Disadvantages:

• uncertainty in value as the purchase does not always translate to ownership of the copyright 

• NFT prices are volatile and can be illiquid

• the value that comes with owning actual physical art means it cannot be digitised

• from an environmental standpoint, some blockchains can be energy intensive - this has serious implications for the environment

• NFTs can be used fraudulently with people selling them without the owner of the IP being aware

• there can be legal challenges as to what rights an NFT confers

Some feel NFTs, will fizzle out as it is thought to be a Ponzi scheme. However if anything, we could see NFTs being used in the metaverse - which is something Citigroup believes could be worth up to $13trillion by 2030 alone. Art has only ever been worth the value its collectors and proponents place on it. When recently talking to Jai Patel, CEO of Kasei Holdings, (quoted on the AQUIS exchange and managing a portfolio of cryptos), he explained that: “NFTs can be seen as similar to car number plates. The most expensive number plate for sale is in California MM selling for $24.3million and you cannot even see it when you are driving your car. But is does have an NFT etched on the back of the number plate. Then again if you are able to afford $24.3million for a number plate you may are possibly not driving but being chauffeured”. 

NFTs have captured the imagination and indeed the headlines as with any asset class it has also attracted its fair share of nefarious characters. In essence we are only really beginning to understand how NFTs can be used in a variety of situations, yes there are legal challenges such as the potential court action between Rothschilds and Hermes. However, these concerns do not appear to have dissuaded luxury brands from being involved with NFTs as can be seen by the recent announcement in the F1 world as Mercedes looks to issue NFTs with FTX at the Miami Grand Prix. However, regardless of this, if you plan to invest in NFTs, do so responsibly to avoid being financially, mentally and emotionally bankrupt yourself and try to avoid the brouhaha and fancy marketing campaigns.