By Darren Toh
A changing of the guard is taking place right now, as the Baby Boomer generation moves into retirement and Millennials form a growing proportion of total capital investments. This will be the largest generational wealth-transfer in recorded human history. One of the most striking trends observable in this transition is the Millennial’s greater focus on verifiable and robust social and environmental governance practices by the companies they invest in. Millennials vote with their wallets and have overwhelmingly favored businesses with ethical and sustainable business practice frameworks.
This emerging trend has led to a growing number of companies responding with environmental, social, and governance (ESG) frameworks to foster more sustainable corporate business practices. This movement has even permeated legislation worldwide, with many individual countries and the U.N. itself taking action by mandating sustainability through legislature. Many countries now nurture rapidly-growing ESG investment sectors.
Rise of ESG Globally
We have seen Asia lead the way in ESG & CSR investments and practices in recent developments. Ever since the US shifted away from the Paris accord established by the UN’s Framework Convention on Climate Change (UNFCCC), its Chinese and European counterparts have ostensibly picked up the baton and led the charge towards sustainability. Most recently, at China’s 19th National Party Congress, Chinese President Xi Jinping reinforced China’s dedicated national focus on sustainability.
According to the Asia-based Chartered Financial Analyst (CFA) Institute, Asia has a dynamic and growing ESG investment sector with around US$500 billion ESG assets under management. This makes up about 2.2% of the global ESG market of assets under management, which is currently estimated to be US$23 trillion. This trend is expected to continue as a new generation of investors opt to support investments with demonstrable frameworks for social responsibility and sustainable development. The ongoing generational transfer of wealth over the next decade as older generations retire will fuel increasing growth in the ESG sector, particularly in Asia.
The largest market for ESG assets under management in Asia has been Japan, which currently constitutes 90% of Asia’s market in ESG assets. Other countries are expected to make similar progress as they also begin offering sustainable investments. Leading Asian markets include Hong Kong, Malaysia, and South Korea, which together make up about US$52 billion in ESG assets under management.
Another trend we have observed is Asian stock exchanges requiring sustainability reporting from its listed businesses. Thus far Singapore, Hong Kong, Malaysia, and Thailand have implemented this requirement across their securities exchanges.
Importance of ESG as Traditional Institutional Investors Move into Blockchain
It is clear that traditional institutional investors have yet to participate significantly in blockchain projects. However, the development of more robust regulatory frameworks to facilitate institutional investment is well underway globally. Many agree that this lays the foundation needed for institutional capital to flow freely into the currently nascent cryptocurrency sector. As the flow of traditional capital increases with time, so too will the ESG obligations that apply to blockchain projects.
This presents both a significant challenge and opportunity for blockchain projects raising funds. In order to comply with emerging regulatory trends and best practices, blockchain projects will need to implement ESG structures in order to access this already significant and growing source of capital. Blockchain projects will increasingly need to make ESG a vital component of their overall governance plans. Moving forward, it is very likely that we will start to see governance measures like sustainability reporting incorporated into blockchain protocols.
Massive Carbon Emissions from Blockchain
An increasingly apparent area of key concern for blockchains relates to their enormous energy consumption levels. Some estimates claim that Bitcoin alone, which employs the energy-intensive proof-of-work (POW) mechanism, accounts for as much energy consumption as Ireland. While other blockchain projects might employ less energy-intensive mechanisms, they still account for very significant levels of energy consumption. The Ethereum network, for example, is estimated to release 35kg of carbon dioxide for each transaction.
In order for blockchains to develop meaningful ESG frameworks and demonstrate sustainable governance, a system is needed to neutralize the carbon footprint generated by such significant energy consumption.
The carbon credit market designed to tackle carbon emissions is presently geared towards nations, large industry players and institutional purchasers. Putting aside existing problems in the global carbon market structure, there is also no clear way to efficiently implement carbon credit schemes into blockchain. Access at the retail level is not available as credits are typically sold in large consolidated lots. This leaves everyday consumers with no practical way to offset their own carbon footprint. We expect to see this trend change drastically in coming months.
Using Blockchain to Combat Climate Change
In an effort to introduce the core principles of sustainability into blockchain, there have been a few projects announced that aim to incorporate the inclusion of REDD Carbon credits. This would allow users to neutralize their energy consumption and carbon footprint by paying a small fee in addition to normal cryptocurrency transaction/gas fees. This would have some impact on significant energy usage issues associated with blockchains. This would also be a substantial improvement over the current REDD carbon credit trading markets. However, many detractors have labelled such schemes scams and ineffective in their current form. This highlights five current pain-points that hinder the effective implementation of carbon credit markets into blockchain:
- Difficulty in certification
- Lack of transparency and accountability
- Top-down approach and ineffectuality at an individual level
- Large lot sizes for buyers (no way to buy smaller disaggregated units)
- Lack of public awareness
Utilizing blockchain and its immutable public ledger would solve these issues by providing transparency, accountability and awareness, allowing for the fractional purchase of credits, track certifications and eligibility. A number of carbon market based blockchain projects have recently emerged, including Carbon Grid Protocol, Carbon X, Veridium, Poseidon, and others. Each of these carbon-based projects are working to leverage blockchain technology to address climate change.
However, from an ESG perspective, Carbon Grid Protocol is the only project from this growing field of carbon initiatives that assists other blockchain projects to develop their own ESG frameworks. The first Asian partner of the UN supported Climate Chain Coalition, its protocol layer platform is focused on helping blockchain projects to both assess and offset their carbon footprint. In doing so, Carbon Grid Protocol also seeks to leverage the rising blockchain-enabled economy to drive innovators in the space to the forefront of ESG compliance and sustainable practices. Their longer term vision is to create an alliance of blockchain companies that offer robust and transparent ESG structures to satisfy the increasingly rigorous requirements of traditional investors catering to socially and environmentally conscious Millennials.
As regulation and compliance obligations become increasingly prevalent, so will the demand for blockchain focused-platforms that assist projects in developing ESG compliant frameworks from the outset.
Darren Toh has been involved in the carbon industry for over a decade and is an advisor to Carbon Grid Protocol and several other blockchain projects.