Why Blockchain is Essential to Support ESG Initiatives

by Mohan Venkataraman, Trust Your Supplier CTO

Recently, I was on a panel at Wake Forest University, School of Law, NC on this subject, and it triggered my interest in digging deeper into this space. Chainyard has been involved in ESG via its SaaS platform, Trust Your Supplier, since 2020. I occasionally participate in the Hyperledger SIG on Climate Change where many different topics are discussed. The goal of this article is to share my thoughts as I continue to expand upon that knowledge in the coming months.

What is ESG?

ESG expands to Environment, Social, and Governance. There have been many subsets of it in the past, but the current incarnation is a result of concerns about the climate, environment, and social justice. ESG is complemented by DEI which looks at diversity, equity, and inclusion in society and at the workplace.

Businesses have an impact on our Earth. It includes human and machine activity, and the use of natural resources including water, fossil fuels, raw materials, and minerals. These can result in greenhouse gas emissions like CO2, pollution of the air we breathe or water we drink, deplete natural resources, generating vast amounts of waste, etc. The ESG framework measures the degree to which a corporation adheres to sustainable and environmentally responsible practices.

Organizations have relationships with customers, partners, people, and communities.  ESG measures the social impact on people both internal to the company and customers and supply chain partners. Many questions arise such as how workers are treated, do they get living wages and good healthcare, are the labor practices acceptable, are the communities they serve benefitting, etc.

Governance refers to a corporation’s management practices related to ethics, regulatory and legal compliance, and transparency in reporting. Companies have to establish policies, procedures, guidelines, and measurement frameworks to achieve these goals. “DEI” or diversity at the workplace, equity in opportunities and wages, and inclusion are all part of governance activities.

According to Moody’s, a 2022 survey of their customers found among other insights,

“Customers also indicated that rising customer expectations, environmental, social, and governance (ESG), and future of work, are the trends expected to affect their business the most”

Saving the Planet

Fixing the damages caused to the environment by human activity requires a multi-pronged approach. Though it is generally accepted that the main contributor to the climate crisis is CO2 emissions, the environment has been seriously injured by many factors; key among them being the disposal of plastics, which is now the major cause of ocean pollution and the extinction of many species.

To address the crisis, there are several projects put in motion by NGOs, governments, and global institutions. Some of them are voluntary and others are imposed by regulation. These projects fall under several categories such as:

Emission Reduction

• Carbon Farming and Sequestering
• Migration to electrical energy
• Transition from Fossil Fuels to Renewable sources
• Carbon Offsets and Credits to compensate for emissions
• Carbon Insetting through corporate self-improvement initiatives

Plastics Management

• Plastic Waste collection, sorting, recycling, and disposal
• Discontinue single-use plastic items.
• Measuring the impact of micro-plastic pollution

Land and Water Management

• Forest management  (re-forestation, conservation, and afforestation)
• Restoration and protection of coastal wetlands and marine life
• Carbon-Friendly Agriculture

Waste Management

• Efficient and effective collection, sorting, and recycling of industrial and household waste.
• Reprocessing electronic waste to extract valuable metals and reduce the discharge of toxic chemicals into the environment.
• Excess inventory sharing by enterprises with others.
• Manufacturing products using sustainable processes and raw materials.

We are all familiar with how our government is pushing for a rapid transition to Electric Vehicles (EVs) and renewable energy from wind and solar power.

Carbon Offsetting, Credits, and Insetting

We need to understand what strategies corporations are using to achieve net-zero goals. Corporations make commitments to the industry or the government about becoming carbon neutral or reducing their emissions. In order to meet those targets, they invest in projects that address in part or full those commitments. These projects can be internally triggered, or the corporation can fund third-party projects.

It is generally agreed that 1 offset or credit is equal to 1 metric ton of carbon dioxide emission (CO2e). A typical tree planted in a reforestation program takes about 40 years to sequester 1 metric ton of carbon. The same amount is roughly emitted by an automobile in about 3 to 12 weeks.

Carbon Offsetting

Carbon offsetting is a mechanism by which a company that has been emitting CO2 and is not yet ready to fix its process, technology, and operations, funds offsetting projects in the voluntary carbon market (VCM). For example, ACME Corp. which has been emitting 100 metric tons of CO2 could invest in the MOSS Project which supports the preservation of the Amazon rain forests to offset its emissions. For a novice, offsetting works as shown.

Some typical projects include:

• Forest conservation
• Wind farms, hydropower projects, solar power plants
• Other renewable energy projects such as fusion
• Landfill gas capture and management
• Providing energy-efficient appliances to local communities such as the recent push in NY To ban gas stoves.
• Farm power, methane capture, and biogas production, something very common in Asia and Africa
• Waste management

Carbon Credits

These are regulated credits also referred to as Cap-n-Trade. The Government or the Regulatory Body sets caps on carbon emissions which translate into “Emission Allowances”. These allowances are available for purchase as “Carbon Credits. Business entities purchase “Carbon Credits based on assigned emission allowances. These allowances are gradually reduced over time to realize tangible emission reductions.

Carbon Insetting

Insetting refers to a Business Entity reducing its own emissions through the adoption of new technology, optimizing supply-chain processes and practices, and improving efficiency. Insetting is more important as it enables a company to take ownership and responsibility for its emissions.

Actions a company may take include deriving more of its energy from renewable sources, management of resources such as water and raw materials, and enforcing ESG across their upstream and downstream partners.

Key issues in the Measurement and Reporting of ESG initiatives

Currently, there are many projects by various organizations in the voluntary carbon market. There is no consistent way to verify if these projects are genuine and truly deliver the benefits they promise. Some of the issues are:

• Consistency in the application of policies and regulations
• No single or integrated verifiable and trusted project registry
• Too much focus on CO2 emissions though the environment is harmed by various other activities.
• Potential Double Spend problem (accounting of credits and offsets)
• Traceability of Offsets & Credits throughout their lifecycle from issuance to retirement
• Transparency of project status and benefits
• Consistent and verifiable (regulatory) reporting

Why Blockchain?

Blockchains have a bad reputation for being energy-intensive, and thus not climate or carbon friendly. Well, that comes from Bitcoin mining and other public blockchains that supported the proof-of-work (PoW) consensus protocol. PoW is very CPU intensive and consumes a lot of energy to solve a mathematical challenge essential for block verification and earning crypto. However, most other blockchains support better protocols such as proof-of-stake, BFT, or proof-of-authority which are much more energy friendly.

A blockchain is a valuable tool that can help address many issues. It extends enterprise solutions and can work cohesively with IOT and AI/ML technologies.

• An immutable record of data enables “track and trace” of projects, the provenance of lifecycle events, and transparency. All this depends on stakeholders including applications and things recording data into the ledgers.
• Smart Contracts can help with governance, enforcing policies and business rules, and managing tokens issued as offsets, credits, and incentives.
• Decentralized Identity is a relatively new concept and can be applied to projects, people, organizations, and things. Every project can be assigned a DID and tagged with verifiable credentials by bodies such as Carbon Action Reserve, Verra, and the like. DIDs are cryptographically verifiable, universally resolvable, and enable Proof-of-Existence and Proof-of-Verification
• Consensus protocols such as Proof-of-Stake allow validators to verify transactions and maintain consistency and integrity of the ledger
• Privacy and Anonymity are very important for organizations. Using encryption and secrets, organizations can be transparent about their commitments and actions, yet implement privacy and confidentiality to avoid exposing their business secrets and intellectual property.

Three use case patterns where blockchain can augment ESG initiatives are:

1. Provenance, and Track & Trace of ESG Projects
2. Facilitating the trading and trustable record-keeping of Carbon offsets and credits (tokens)
3. Supporting risk, audit, and compliance reporting

These patterns cut across many domains such as supply chain, health care, real estate, and energy,

Organizations and Bodies involved with Sustainability Initiatives

It was enlightening to see the number of organizations and companies involved with climate initiatives and ESG.

Some of the notable ones are:

• Verra is one of the most recognized and trusted providers of standards and guidelines for sustainable development. The Verra registry is a repository of certified and verified projects.
• Climate Action Reserve is approved to serve as an Offset Project Registry (OPR) for the Compliance Offset Program under California’s Cap-and-Trade Program. They also maintain project registries and support various carbon offset programs.
• GHG Protocol According to their website they provide standards, guidance, tools, and training for businesses and governments to measure and manage climate-warming emissions. One can download worksheets and tools to measure and record carbon emissions footprint.
• The Gold Standard is another reputed and recognized organization that provides standards, verifies and certifies carbon projects, and maintains project registries.

Other organizations include

• American Carbon Registry
• CSA Group Registries
• Climate, Community & Biodiversity (CCB) Standards: Certification to the Climate, Community & Biodiversity (CCB) Standards demonstrates that a project simultaneously addresses climate change, supports local communities and smallholders, and conserves biodiversity
• Task Force on Climate-related Financial Disclosures (TCFD) – Increased reporting of climate-related financial information.
• Verra – SD-VISta The Sustainable Development Verified Impact Standard (SD VISta) – Premier standard for certifying the real-world benefits of social and environmental projects, from gender equity and economic development to affordable clean energy and restoration of wildlife.
• The United Nations’ Sustainable Development Goal 7 (SDG 7) focuses on reliable and clean energy modern energy services, as defined in its Target 7.1
• Paris Accord on Scope 1/2/3 reporting
• United States – Environmental Protection Agency
• European Commission (2020) Circular Economy Action Plan
• Open Earth Foundation
• Hyperledger Foundation – Climate SIG

Many projects support ESG such as the MOSS Project, Toucan, Plastic Bank, Save The Planet, Klim DAO, and Greenly. The notable ones that need mentioning are:

Trust Your Supplier – Chainyard is a SaaS blockchain network focused on supplier risk and qualification. Workflows help customers capture supplier ESG initiatives and actions and get them verified through third-party verifiers who provide ESG rating scores.

TYS has standardized the information capture to gather ESG information that can be used by organizations to support Scope 1 & 2 reporting today, and a goal of Scope 3 in the future.

Title Chain – Borsetta is an evolving network that enables asset track and tracing of energy micro-grids, helps secure their title, and tokenizes the grid and energy production among other functions. Though it is not directly related to ESG, it mainly targets microgrids that support renewable energy ecosystems, including the energy they produce and the excess quantity sold to the national grid. Microgrids serve campuses and are seen as the future of community-driven energy production.

Digital Credentials for Carbon Accounting is an initiative by the British Columbia government in Canada. The initiative known as “Traction” set up under the Energy & Mines Digital Trust supports the BC Government’s requirement for certified annual sustainability reporting. The solution is built on a blockchain platform based on Hyperledger Aries and Indy and leverages the Decentralized Identity (DID) standards protocol. The mining companies collect data for sustainability reporting, which is verified by organizations such as PWC resulting in the issuance of a Verifiable Credential that can be shared with the government.

ESG and Blockchain (A conceptual architecture)

Earlier in this article, we discussed how a blockchain complements ESG solutions. Can blockchain add value beyond Carbon Offsets and Credits? Yes, there are many reasons.

The Blockchain can serve as an ESG BUS providing access to various services such as project verification and tokenization

Many institutions maintain verifiable registries of carbon projects, some enabled by blockchains, and others provide APIs. A decentralized identifier can be assigned to every project. Decentralized identifiers are a W3C-enabled standard and specification to define the structure, attributes, and architecture of DID and its constituents. DIDs are universally resolvable to “DID DOCS” which are JSON documents present authentication schemes, digital signatures, and service endpoints to access various aspects and details about the project.

The blockchain can record hashes (aka digital fingerprints) of data received from IoT sensors that track emissions or watch human activity, thus providing immutable tamper-evident proofs for later audit.

Carbon offsets and credits are offered by various organizations. A unified solution can act as an interface for enterprise blockchain to have access to those marketplaces and exchanges.

Enterprises having insetting programs can record the lifecycle of their projects against commitments, thus offering transparency into their programs. Solutions such as TYS capture and/or process such information in their risk assessment workflows. Blockchain “Oracles” assist in making those connections and ensuring the reliability of the source and the received data.

AI ML algorithms and third-party rating providers can calculate ESG scores. which can be recorded with proofs and signatures. Today many companies such as Bloomberg, Ecovadis, CDP, Moody’s, D&B, S&P Global, and other analytics firms provide the service and can secure their ratings on a trusted decentralized ledger.

Lastly, both enterprise and public blockchains have a role to play.

Summary

Governments across the world and global conferences such as the World Economic Forum-Davos, United Nations Climate Conferences held in Kyoto and Paris, and UN Climate Action i.e. COP27 are focused on actions to address climate change. The “E” in ESG is not just limited to carbon emissions but includes plastic waste and other human and industrial waste, non-carbon pollutants. and management of our forests, coastal and marine life. While Carbon offsets have been used as a tool by individuals and industries, it does not make them responsible for their actions. The impact of offset projects has been difficult to measure and report. Insetting as a goal puts more responsibility and accountability on corporations to improve their process and technology. Blockchains can help bring more trust, transparency, accountability, and compliance to ESG management. Also, it is unclear, how much of the geo-political events and industrial disasters are taken into account such as the war in Ukraine, the Norfolk Southern toxic spill in Ohio, or the dairy explosion that occurred in Texas.

About Chainyard

Chainyard is a boutique blockchain consulting and advisory firm based in Morrisville, NC. As the first Hyperledger Certified Service Provider, it has executed over 50+ projects. Chainyard’s Trust Your Supplier enables supplier risk assessment and qualification including ESG-related risks. To learn more, please send me an email or visit our website.