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Commentary

Time to Focus on the ‘G’ in ESG

Chris Ford, Head of Government Affairs EMEA at R3, sets out how blockchain can strengthen corporate governance.

Today, more than 90% of S&P companies publish ESG reports in some form, while more than three quarters of investors think that companies should make investments that address ESG issues, even if it reduces profits in the short term. Between 2018-2021 alone, inflows into global sustainability funds rose from US$5 billion to nearly US$70 billion.  

But for all the mounting ESG efforts, little attention has been paid to the discordance of the ‘G’ from the ‘E’ and the ‘S’. It is often left clutching on to the end of the acronym as an afterthought; seen as the less important and less interesting of the three letters. But, in many ways, governance is in fact that most significant pillar. By enhancing our focus on the ‘G’ to strengthen governance, we can implement imperative processes to tackle today’s environmental and social challenges. 

New tools like distributed ledger technology (DLT) have emerged as a means of achieving this. By examining where the need for better governance lies, and how DLT meets this demand, organisations and investors can implement successful frameworks to truly boost their sustainability. 

Putting the ‘G’ before the ‘E’ and ‘S’ 

Financial institutions and investors are setting ever more ambitious ESG goals, and rightly so. However, one of the greatest barriers to reaching ESG targets is measurability of progress.  

Against growing pressure to cut carbon emissions, the temptation to greenwash away a problem is greater than ever. Internationally recognised guidelines such as those issued by the International Sustainability Standards Board are tackling this problem by delivering investors with a comprehensive global baseline of sustainability-related disclosure standards. However, adherence to these standards is not yet mandatory and may be subject to differences in implementation and interpretation. This means there is still room for institutions to use cherry picked methodologies and statistics to potentially distort the reporting of their own ESG scores. 

This is where the importance of governance comes into play. Governance and transparency are intrinsically linked. Without transparency and accountability, an organisation or investor cannot determine the right course of action to meet ESG goals or verify any claim to be coming from a good corporate citizen. In other words, the ‘G’ holds the key to the realisation of the ‘E’ and the ‘S’. 

Moreover, if profitability is the core underlying motivator of corporates and investors, then having greater transparency across their processes can make their operations more efficient, helping to minimise energy wastage and ultimately protect profits. 

DLT can strengthen governance 

DLT exists at its most fundamental level to simplify and build trust in complex systems. Blockchain maintains a complete history of past transactions within the network, which means that the user can track the data with full transparency. In the carbon market, for example, the application of blockchain has significantly reduced the complexity of how carbon credits are registered, traded and managed, leading to an increase in quota utilisation. 

The immutable nature of data recorded on DLT and the sharing of information by all relevant parties means that organisations and investors can digitalise physical assets with full visibility and security. This helps heighten accountability of a company or an institution’s affairs.  

This technology can be applied in a range of use-cases. Take supply chains, for instance. At their most basic level supply chains comprise of several steps, including the extraction of raw materials, manufacturing these materials into basic parts, selling finished products to end users, and delivering them to consumers. DLT makes it feasible to track these assets in real time from start to end of the supply chain cycle. This enables an investor or corporate to accurately verify the carbon emissions involved across the entire process. 

The same level of accountability can also be applied to a waste chain. The tracking and tracing of assets made possible by DLT enables an investment firm or corporate to verify exactly how much of its material gets recycled against how much material is simply put into recycling. By increasing overall visibility, a company can understand where resources are needed most, and allocate accordingly. This will not only help a business identify if it has met the sustainability goals it originally set out, but also strengthen ROIs, as it becomes easier to make intelligent decisions surrounding minimising waste and using resources profitably. 

A new approach 

It is impossible for investors or corporates to truly move the needle on ESG unless they have a motivation of profitability, an easy-to interpret view of the challenges presented, and the ability to measure all efforts with trusted data.  

We must therefore begin putting the ‘G’ first in our approach to ESG. DLT has emerged as a truly transformative prospect in this transition. Although blockchain is associated with crypto and all its energy consuming baggage, integrating this technology into existing systems is where its real value lies. Doing so will reveal a new realm of transparency and accountability, helping to shift the ground on which ESG claims are rooted.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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