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Blockchain For or Against ESG

Blockchain: For or Against ESG

The Blockchain Revolution[31] is here. Once regarded an enigma, blockchain has now flourished with the transformative potential to upend a wide range of industries. From smart contracts in real estate, to the recording of material in supply chains and transparent peer-to-peer transactions in finance, the possibilities it holds seem to be endless. Blockchain represents nothing less than the next wave of technological disruption and is enroute to permeating our lives. Could this new technology and its corresponding digital asset (“cryptocurrency”) be the future of everything?

With sustainability as the next frontier of business, the role of blockchain in sustainability is not to be dismissed. Blockchain could boost sustainability credentials, create opportunities in the energy market, reshape financial and legal systems, and expand business potential towards Environmental, Social and Governance goals. Despite its tantalising potential, the ripple that blockchain has left in the world of climate controversies is not to be forgotten. To the crypto-skeptic, blockchain’s massive carbon footprint remains an inherent climate catastrophe. Thus, it is imperative that companies wielding this powerful double-edged sword are able to weigh E, S and G implications as they look to reshape the dull 1.5°C outlook while mitigating long-term risks. This article weighs the pros and cons, exploring not just how blockchain may avoid a head-on collision-course with ESG, but whether it may be the key to unlocking ESG benefits.

Contents

What exactly is Blockchain?

Blockchain & Mining: An Environmental Catastrophe?

Or, Blockchain: the Key to Unlocking ESG Benefits?

Blockchain & The Environment: Friend or Foe?

Blockchain & Social Impact: Security or Volatility?

Blockchain & Governance: Navigating the choppy waters of Politics & Crime

Conclusion

References

What exactly is Blockchain?

Blockchain is an immutable system of recording information, a digitally distributed ledger of transactions duplicated across an entire network of computer systems. Every time a new transaction occurs, (i.e. new information is recorded), a block will be created and broadcast to all computers on the blockchain. Once this transaction is validated, the block will then be added to the chain. This process of validating transactions is known as blockchain mining. Data is stored in blocks, which are then chained together in chronological order, with each new block chained to the previous one. Notably, all sorts of information can be stored in blockchain – it is not limited to transactions.

Blockchain is marked by four inherent properties: accuracy, decentralisation, secure and private transactions, and transparency [14].

  • Accuracy: The blockchain network utilises thousands of individual computers in its verification process, reducing human error. In fact, any error can be easily detected as the error would only be on a single block. The other blocks will retain a copy of the correct information.
  • Decentralisation: Instead of having all information stored in one location, information is spread out across all computers participating in the blockchain network. This makes blockchain almost impossible to tamper with – in order to hack a chain, 51% of the blocks in the chain must obtain “consensus”, but such a large attack would undoubtedly be noticed.
  • Private and Secure Transactions: Blockchain networks are anonymous, and each transaction is recorded with a unique code rather than with identifying information. This way, we can be sure that the information recorded is secure and will not change.
  • Transparency: The chains are mainly open sourced and there is no single authority controlling the code. Anyone can view or participate in them.

Blockchain highlight: Blockchain Association Singapore

The Blockchain Association Singapore[5] (BAS) is a platform aimed at leveraging blockchain technology for business growth, as it recognises Singapore as a burgeoning hub for blockchain and blockchain’s tremendous potential value. Similar to the BMC, it promotes best practices and blockchain literacy, building a strong talent pipeline for the local digital economy. They host a variety of webinars and courses covering topics such as FinTech, enterprise blockchain and digital asset compliance, and are the organisers behind the annual Singapore Blockchain Week.

Blockchain & Mining: An Environmental Catastrophe?

Proof-of-Work mining, the most widely adopted validation mechanism used by both Bitcoin and Ethereum, is notoriously energy-hungry. Proof-of-Work mining requires miners across the globe to utilise highly energy intensive and specialised computers to generate as many hashes (strings of letters and numbers) as possible, at any given moment. Miners zealously race to solve arbitrary cryptographic problems, competing to create a hash that is identical to that of the new block. This is what ensures it absolutely secure and near impossible to tamper with[12].

Bitcoin, the world’s largest cryptocurrency, currently consumes around 150 TWh of electricity annually, surpassing that of the whole of Argentina with a population of 45 million[11]. An average Bitcoin transaction is estimated to consume roughly 1500 kWh of electricity, the same amount of power consumed by the average American household over 50 days[25]. It is no wonder Bitcoin mining has increasingly come under fire for its growing energy use. Even former bitcoin-enthusiast Elon Musk, an aggressive advocate for Bitcoin while the cryptocurrency’s price soared to delirious highs in early 2021, has now sold 75% of Tesla’s Bitcoin holdings. It was a hasty retreat, catalyzed by Musk’s announcement that Tesla would stop accepting Bitcoin payments due to environmental concerns in May of the same year[23].

Or, Blockchain: the Key to Unlocking ESG Benefits?

Blockchain technology itself, however, need not be diametrically opposed to ESG. It is no surprise that traditional Proof-of-Work mining consumes a great deal of energy, but as with any new innovative technology, could blockchain hold potential ESG value? The short answer is yes, and this claim will be critically examined below.

The potential ESG benefits of blockchain

Blockchain & The Environment: Friend or Foe?

As crypto miners have become increasingly environmentally conscious, the practice has begun to naturally gravitate towards cleaner and cheaper energy sources[22]. According to the Bitcoin Mining Council (BMC), the employment of sustainable energy in bitcoin mining is well underway. Founded in May 2021, the mandate of the BMC is to promote transparency, share best practices, and educate the public on the benefits of Bitcoin and Bitcoin mining. So far, the BMC’s research has continuously shown year on year improvements in Bitcoin’s green credentials, with the latest Bitcoin Mining Data review estimating that the global bitcoin mining industry’s sustainable electricity mix is now 59.5%, a 6% increase from Q2 2021 to Q2 2022[4].

According to the Bitcoin Clean Energy Initiative, Bitcoin could in fact encourage the use of renewable energy and accelerate the energy transition[3]. Bitcoin miners are unique energy buyers in two characteristic ways: Firstly, they are highly flexible, meaning they can mine anywhere as long as they are connected to the internet. Secondly, their load is easily interruptible, meaning their end use of electricity can be turned on or off at a moment’s notice. These combined qualities constitute an extraordinary asset for renewables and storage, as they directly address a key challenge of renewable energy deployment: intermittency (also known as the “duck curve”).  Solar and wind energy supply are either abundant or non-existent as the sun only shines during the day, and wind patterns vary, tending to blow more heavily at night. Thus, Bitcoin miners form ideal complements where they not only improve returns for solar and wind energy producers, but also allow for the construction of renewable energy projects before the completion of lengthy grid interconnection studies. They act as last resort buyers who can offtake energy until selling the grid becomes possible.

The notion that blockchain mining could act as a catalyst for the renewable energy transition is catching on globally. The Crypto Climate Accord comprising over 150 firms has been working to ensure a 100% use of renewables by 2030. Furthermore, Bitcoin mining and its future potential for energy efficiency was even highlighted at the COP 26 Climate Conference, serving testament to the emphasis placed on crypto sustainability and green solutions[9].

However, the offsets still come with big asterisks as pressing questions still need to be addressed: Will all miners transition to clean energy if it is based off self-initiative instead of regulation? If there is a scenario where there is more energy demand than what renewable sources can supply, where will these miners get their energy from? If more and more miners participate in this industry, wouldn’t that only increase the global energy demand making it harder for the global transition to clean energy?

Instead, Proof-of-Stake validation could present itself as the better call, an alternative validation mechanism that fundamentally does not require extra energy. It involves a network of validators “staking” their own cryptocurrency and locking their coins away to create a validator node, much like locking a deposit in a security bond[10]. Rather than having thousands of specialized computers chip away at arbitrary mathematical problems, the blockchain network simply algorithmically selects a winner to validate the block of transactions, an energy efficient alternative to competition-style Proof-of-Work mining. The algorithm allocates the rights to validation depending on percentage of cryptocurrency locked by each validator and how long their coins have been there. Where Proof-of-Work requires high-end graphics cards, Proof-of-Stake protocol could be run off the humble laptop[15].

Ethereum, another blockchain currency, has pre-eminently championed the move towards Proof-of-Stake. The Ethereum Foundation estimated that the transition, Ethereum 2.0 (Eth2) Beacon Chain, would plunge the energy usage of the platform by 99.95%[10]. Though this is great news for the green crypto enthusiast, the transition faces several technical challenges to be overcome. The Proof-of-Stake engine must be built and tested while having it run parallel to the existing Proof-of-Work system, and even after the engine is completely online it will have to run for some time while bugs are worked out. Time is also needed for the community to come  to a consensus and a time is set for the swap to happen. The official merge is estimated to go through by late 2022[7].

Blockchain & Social Impact: Security or Volatility?

Blockchain technology is also particularly relevant to emerging economies, where the use of blockchain could yield a host of social benefits[29]. In developing countries, blockchain represents an avenue for strengthened accountability, verifiable social impacts, and advancing financial inclusion.

Strengthening accountability to rural landowners: Reducing the prevalence of corruption: India’s shadow economy has been estimated to account for up to 50% of the country’s annual GDP, with the property sector emerging as the worst offender. It has been found that land transactions generate $20 billion to $40 billion of illegal money per year, equating to 1-2% of the GDP[27]. Thus, a consensus blockchain project had been pioneered in Chandigarh city, where blockchain is used to manage land ownership records[29]. As blockchain technology is secure and tamper-proof, it presents an unprecedented opportunity to prevent the changing of land records or ownership history via bribes. This could contribute to fairer compensation for rural landowners and increased visibility over whether informed consent has been attained.

Verifying positive social impact in supply chains: A report from the European Union Cybersecurity Agency precited a four-fold increase in supply chain attacks in the second half of 2021 alone. Private blockchain platforms present themselves as particularly apt supply chain management solutions as they provide traceability, transparency, real-time logistics tracking, and electronic fund or smart contract management[19]. Turning to procurement, blockchain could also enable both suppliers and customers to track the origins of products or materials they purchase. Applied to the food industry, blockchain allows anyone to verify the authenticity of product labels (i.e. organic, local, fair trade), ensuring that products bought have in fact contributed to positive social impacts. This is currently being rolled out by the IBM Food Trust[13].

Advancing financial inclusion in the developing world: Globally, 2.7 billion people have zero access to capital and most of them do not even own a bank account. Blockchain platforms such as BanQu or Humaniq provide the unbanked or under-banked, who may not have formal proof of identity, with accessible finance[28]. These platforms have leveraged blockchain technology using retina scans or selfies taken with mobile phones to create a unique hash of verifiable authenticity, like a social security number. Additionally, blockchain could make micro-finance loans more viable. Microfinance provides financial services to low-income groups that would not otherwise have access to finance. A key challenge in microfinancing is determining the creditworthiness of individuals who may not have any borrowing or financial records, as is often the case in rural areas. In Kenya, IBM partnered with Twiga Foods to provide a solution: a blockchain-enabled lending platform which utilises machine learning to ascertain credit worthiness before extending such loans to smaller food vendors[16]. These small businesses gained access to working capital through transparent fund transfers with lower risk of fraud. Smart contracts enabled by blockchain technology also drastically reduced the time taken to manually process and issue a loan.

While blockchain offers numerous possibilities and solutions within the microfinance industry, there are several gaps to be bridged before securing sustainable financial inclusion. The constant fluctuation and speculative nature of cryptocurrencies make them more of an asset, rather than cash. Relying on such a highly volatile asset always carries inherent risks. Low-income individuals or families would be especially vulnerable, should they have adopted the blockchain financing solution and their savings largely comprise of volatile cryptocurrencies.  Extreme fluctuations in cryptocurrency values clear precedents. In September 2021, China’s central bank banned all cryptocurrency transactions. This announcement immediately caused a crash in Bitcoin, with its price falling by more than US$2000[1]. Any unbanked and low-income individuals holding bitcoin would have immediately lost their savings.

Blockchain & Governance: Navigating the choppy waters of Politics & Crime

In September 2021, the president of El Salvador decided to adopt Bitcoin as legal tender[26], becoming the first sovereign government to do so. The government said that Bitcoin could save the country $400 million a year in transaction fees, though estimates from the 58 (utilising World Bank and government data) are closer to $170 million. While some might argue that $170 million is <1% of GDP, the real impact of this policy is in making transfers much more affordable for Salvadorans.

Many Salvadorans are faced with outrageously high remittance transfer fees. The global average cost of sending money is 6.5%, more than twice the Sustainable Development Goal target of 3% [30]. To residents of the low growth Central American nation and the large diaspora of Salvadorans in the United States, this is a substantial amount. Bitcoin thus offered a means to transfer value directly and globally without costly third-party intermediation. It is worth pointing out that following this legal tender, the Central African Republic (CAR) followed suit in April 2022, a visionary plan that the government argues would open economic opportunities and secure an independent financial future for the country[2].

However, El Salvador’s Bitcoin experiment seems to be struggling, as the government’s crypto offers have been cut in half, and the country faces more than $1 billion in debt in the next year following the fall in Bitcoin’s price of more than 70% from its November 2021 peak. Unsurprisingly, El Salvador’s credit scores have been knocked and negotiations with international lenders have been stalled for reasons such as skepticism towards cryptocurrency which is prone to extreme volatility. Recent data has shown that only 1.6% of remittances were sent via “Chivo Wallet”, a Salvadoran digital currency payment app trading in Bitcoin and dollars.

Still, Bitcoin enthusiasts continue to assert that the experiment has transformed El Salvador’s image to that of a technological trailblazer, and President Nayib Bukule himself has displayed unwavering enthusiasm for the cryptocurrency despite its price collapse[17], taking to twitter to boast about his Bitcoin purchases. Despite the blurry optics on the nation’s cryptocurrency future, perhaps increased consumer protectionism and legal certainty could revert it to the tool it was meant to be.

The European Parliament has also suggested that voting could be revolutionised by blockchain, citing that blockchain’s transparency and anonymity could potentially enable a fast and secure voting system[6]. This would simplify elections, make them cheaper, and lead to the development of stronger democracies by making voting more accessible. Fraud prevention could even be accommodated where voters are empowered to verify the voting records themselves.

Nevertheless, there have been several strong opponents to this, including Jeremy Epstein, the vice chairman of the Association for Computing Machinery’s U.S. Technology Policy Committee (ACM USTPC). He argues that blockchain’s security does not completely negate the risk of tampering. Firstly, there lies the possibility that the voter’s computer is hacked and contains malware before the voting even occurs. Additionally, there exists the risk of a large volume of information being hacked and everyone’s vote being leaked to the public. Even so, Epstein still agrees that there is still the potential that blockchain voting could work in the future if there were to be major technological breakthroughs, or fundamental alterations to the nature of the internet[20].

Given cryptocurrency’s libertarian ethos which touts anti-regulation and free-market ideals, it is unsurprising that this has inadvertently created headroom for a greater evil: Crypto-crime. For the crypto-criminal, blockchain network has manifested itself as rich lawless ground for anonymous data theft, ransomware attacks, fraud and illicit transactions. In particular, troubling trends have emerged over the past few years. Crypto-currency based crime doubled from 2020 to 2021[8], reaching a record high of $14 billion USD received by illicit addresses over the course of the year.

Non-Fungible Token (NFT) crimes have also increased exponentially. Financial losses from January to May 2022 were a whopping 667% higher than for all of 2021. The space saw twice as many hacks in 2022 than the whole of 2021[21], where cybercriminals are now regularly making off with millions in cryptocurrency. Rug pulls, a new lucrative scam type where fraudulent developers pump what appear to be legitimate cryptocurrency projects only to vanish soon after, has gained roaring traction due to its ease of execution[24]. Creating new tokens, having them listed on decentralized exchanges (DEX) within the decentralized finance (DeFi) ecosystem while skirting past code audits, and luring in unsuspecting investors  has become a relatively straightforward process. All that is left to do thereafter is siphon value away from funds, leaving investors with a worthless currency.

While the aforementioned figures are concerning, the numbers do not tell the full story. Total transaction volume across as cryptocurrencies grew 567% from 2020 to 2021. With blockchain’s widespread adoption, it is no wonder crypto-criminals have taken advantage of the DeFi boom. In fact, legitimate cryptocurrency usage has far outpaced that of illegitimate cryptocurrency usage as that saw only a 79% increase within the same timeframe, nearly a magnitude lower than overall transaction volume[8].

To further put crypto-skeptics at ease, regulation is visible on the horizon and mandatory measures to curb cryptocurrency crime at the exchange level seem to be high on the agenda. In Australia, cryptocurrency exchanges must be registered with AUSTRAC, in compliance with anti-money laundering and counter-terror financing obligations[18]. Another promising development is the growing ability of law enforcement to seize cryptocurrency from illicit transactions, such as IRS Criminal Investigations seizing more than $3.5 billion worth of cryptocurrency in 2021.

Conclusion

We are at a watershed moment in the age of digital transformation, and despite blockchain’s drawbacks, it is clear that it has already broken the shackles of mainstream business operation. Evidently, blockchain could have powerful ramifications on society if done right, realising its disruptive potential. No real business opportunity comes without risks, and the intersection between blockchain and ESG markets should be traversed with caution. Blockchain offers a means of supply chain resilience, improvements in product governance, and in operational and social efficiency that could not only reduce ESG risks, but also boost cost savings. Nevertheless, cryptocurrency remains the most common application of blockchain technology, and as a nascent asset it is still in the price discovery phase. Thus its price volatility must be accounted for in implementation, in order that stakeholders may be put at ease. While blockchain solutions will not be in everyone’s cards at this juncture, it is still imperative that businesses keep an eye on the technology, to stay competitive in the years ahead.

References

[1] BBC News. (2021, September 24). China declares all crypto-currency transactions illegal. https://www.bbc.com/news/technology-58678907
[2] BBC News. (2022, June 6). Why the Central African Republic adopted Bitcoin. https://www.bbc.com/news/world-africa-61565485
[3] Bitcoin is Key to an Abundant, Clean Energy Future. (2021, April). Bitcoin Clean Energy Initiative. Retrieved August 26, 2022, from https://bitcoin.energy/
[4] Bitcoin mining electricity mix increased to 59.5% sustainable in Q2 2022. Bitcoin Mining Council. (2022, July 19). Retrieved August 26, 2022, from https://bitcoinminingcouncil.com/bitcoin-mining-electricity-mix-increased-to-59-5-sustainable-in-q2-2022/
[5] Blockchain Association Singapore. Retreived August 26, 2022, from https://singaporeblockchain.org/
[6] Boucher, P., Nascimento, S., & Kritikos, M. (2017, February). How blockchain technology could change our lives (No. 978–92-846-0549–1). STOA – Science and Technology Options Assessment. https://doi.org/10.2861/926645
[7] Cawley, N. (2022, July 15). Ethereum 2.0: Switching to Proof-of-Stake (PoS). DailyFX. https://www.dailyfx.com/forex/market_alert/2022/07/15/Ethereum-20-Switching-to-Proof-of-Stake-PoS.html
[8] Chainalysis Team. (2022, January 6). Crypto Crime Trends for 2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity. Chainalysis. https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction/
[9] https://cointelegraph.com/news/crypto-sustainability-and-green-solutions-highlighted-at-cop26
[10] Frost, L. (2021, May 20). Ethereum Foundation: ETH 2.0 Will Use 99.95% Less Energy. Decrypt. https://decrypt.co/71353/ethereum-foundation-eth-2-0-will-use-99-95-less-energy
[11] Hertig, A. (2020, December 16). What Is Proof-of-Work? https://www.coindesk.com/learn/2020/12/16/what-is-proof-of-work/
[12] Hinsdale, J. (2022, July 28). Cryptocurrency’s Dirty Secret: Energy Consumption. State of the Planet. https://news.climate.columbia.edu/2022/05/04/cryptocurrency-energy/#:%7E:text=How%20much%20energy%3F,of%20Argentina%2C%20population%2045%20million
[13] (n.d.). IBM Food Trust – Blockchain for the world’s food supply. United Kingdom | IBM. Retrieved August 26, 2022, from https://www.ibm.com/uk-en/blockchain/solutions/food-trust
[14] Iredale, G. (2022, August 15). History of Blockchain Technology: A Detailed Guide. 101 Blockchains. https://101blockchains.com/history-of-blockchain-timeline/
[15] Kaplan, E. (2021, June 1). Cryptocurrency goes green: Could “proof of stake” offer a solution to energy concerns? NBC News. https://www.nbcnews.com/tech/tech-news/cryptocurrency-goes-green-proof-stake-offer-solution-energy-concerns-rcna1030
[16] Kinai, A. (2019, July 19). IBM and Twiga Foods Introduce Blockchain-Based MicroFinancing for Food Kiosk Owners in Kenya. IBM Research Blog. https://www.ibm.com/blogs/research/2018/04/ibm-twiga-foods/
[17] Kurmanaev, A., & Avelar, B. (2022, July 5). El Salvador’s Bitcoin Bet Isn’t Paying Off. The New York Times. https://www.nytimes.com/2022/07/05/world/americas/el-salvador-bitcoin-national-currency.html
[18] Lane, A. M. (2022, February 3). Crypto theft is on the rise. Here’s how the crimes are committed, and how you can protect yourself. The Conversation. https://theconversation.com/crypto-theft-is-on-the-rise-heres-how-the-crimes-are-committed-and-how-you-can-protect-yourself-176027
[19] Lundqvist, J. (2022, January 5). Fighting fraud in the supply chain with blockchain. Information Age. https://www.information-age.com/fighting-fraud-supply-chain-with-blockchain-123498278/
[20] Mearian, L. (2019, August 12). Why blockchain-based voting could threaten democracy. Computerworld. https://www.computerworld.com/article/3430697/why-blockchain-could-be-a-threat-to-democracy.html
[21] Migliano, S. (2022, May 5). Cybercrime Statistics: Blockchain Crime and Malware Around The World. Top10VPN. https://www.top10vpn.com/research/cybercrime-statistics/
[22] Musharraf, M. (2020, October 1). Report: 76% crypto miners use renewables as part of their energy mix. Cointelegraph. https://cointelegraph.com/news/report-76-crypto-miners-use-renewables-as-part-of-their-energy-mix
[23] Novet, J. (2022, July 20). Tesla has dumped 75% of its bitcoin holdings a year after touting “long-term potential.” https://www.cnbc.com/2022/07/20/tesla-converted-75percent-of-bitcoin-purchases-to-fiat-currency-in-q2-2022.html
[24] Puggioni, V. (2022, February 6). Crypto rug pulls: What is a rug pull in crypto and 6 ways to spot it. Cointelegraph. https://cointelegraph.com/explained/crypto-rug-pulls-what-is-a-rug-pull-in-crypto-and-6-ways-to-spot-it
[25] Reiff, N. (2022, July 9). What’s the Environmental Impact of Cryptocurrency? https://www.investopedia.com/tech/whats-environmental-impact-cryptocurrency/
[26] Silver, B. K. (2021, September 8). Bitcoin crashes on first day as El Salvador’s legal tender. BBC News. https://www.bbc.com/news/business-58459098
[27] Srinivas, B. A. (2012, December 10). India: Why land is at the centre of all scandals. BBC News. https://www.bbc.com/news/world-asia-india-20457766
[28] Staff, K. A. W. (2017, November 17). How Blockchain Technology Can Serve the Have-nots. Knowledge at Wharton. https://knowledge.wharton.upenn.edu/article/blockchain-technology-can-serve-nots/
[29] Staff, K. A. W. (2018, November 28). How the Blockchain Brings Social Benefits to Emerging Economies. Knowledge at Wharton. https://knowledge.wharton.upenn.edu/article/blockchain-brings-social-benefits-emerging-economies/

[30] Subacchi, P. (2021, June 30). El Salvador’s adoption of bitcoin as legal tender is a wake-up call | Mint. Mint. https://www.livemint.com/opinion/online-views/el-salvador-s-adoption-of-bitcoin-as-legal-tender-is-a-wake-up-call-11625069109048.html

[31] Tapscott, D., & Tapscott, A. (2018, June 12). Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies Is Changing the World: Tapscott, Don, Tapscott, Alex: 9781101980149: Amazon.com: Books. Amazon. Retrieved August 26, 2022, from https://www.amazon.com/Blockchain-Revolution-Technology-Cryptocurrencies-Changing/dp/1101980141

hygiene and impact factos sustainability reporting

Beyond basics: Hygiene & impact factors in sustainability reports

By Nicole Lim

The last decade saw a remarkable increase of interest in companies’ sustainability or environmental, social and governance (ESG) performance by investors, regulators, and consumers.  The charts below show the increasing demand from investors and regulators alike for companies to report on their ESG issues.

UN PRI Signatories growth

Number of signatories to the UN Principle of Responsible Investment (UN PRI).  Image from UN PRI

10 year progress on exchanges ESG requirements

Image from 10 Years of Impact and Progress, SSE (2019)

 

When the impacts of the pandemic first made waves through the global economy, many questioned if the momentum for sustainability will be put to a halt as societies and economies move into crisis survival mode and focus on rebuilding economies. However, with COVID-19 dubbed a “stress-test” on business resilience, ESG and sustainability practices have become evermore crucial for companies to manage their non-financial risks. BlackRock also noted that sustainable funds have been able to weather the pandemic storm and financial returns outperformed peers in the first quarter of 2020. Specifically, global sustainable mutual funds and ETFs had inflows of $40.5 billion in the first quarter, up 41% from the same year-earlier period[1].

“These inflows during a period of extraordinary market drawdown suggests a persistence in investor preferences toward sustainability,” BlackRock said. “They upend an oft-cited concern pre-Covid crisis that during sharp market downturns, investors will de-prioritize sustainability.”

Even in such extraordinary times, ESG issues and sustainability has proven yet again to be here to stay.

As sustainability / ESG reporting evolves and is now more mainstream than ever before, how can companies take this opportunity to go beyond ticking boxes, meeting regulatory requirements, and on to creating more meaningful impact?

Based on several reports and upcoming trends, we have identified disclosures that companies today should be reporting on (Hygiene Factors), and other metrics that shows a company is creating wider impact (Impact Factors).

Hygiene Factors (“must-haves”)

The International Business Council (IBC) along with the World Economic Forum (WEF) launched an initiative to “identify a core set of material ESG metrics and recommended disclosures that could be reflected in the mainstream annual reports of companies on a consistent basis across industry sectors and countries”. In January 2020, WEF prepared a report[2] proposing a set of 22 well-established, quantitative core metrics and reporting requirements. These factors were defined as “core” based on information currently popularly being reported on or information which should be easily obtainable by companies.

Core Metrics for Sustainability Reporting_Adapted from WEF

Adapted from Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, WEF (2020)

The metrics and disclosures proposed here have been organized in four pillars that are aligned with the SDGs and principal ESG domains: Principles of governance, Planet, People and Prosperity. They are drawn wherever possible from existing standards and disclosures (such as the Global Reporting Initiative, Sustainability Accounting Standards Board, Task Force on Climaterelated Financial Disclosures etc.)

More details on the 22 metrics can be expected by the end of 2020.

In Singapore, the top 10 most disclosed Material ESG Factors by listed issuers also mirrors the 22 metrics proposed by the WEF[3].

Top 10 Material Issues Disclosed in Singapore

Image from Sustainability Reporting – Progress and Challenges, SGX & CGIO (2019)

Globally, these are the top material issues reported on by member companies of the World Business Council for Sustainable Development (WBCSD)[4].

Priority material issues of WBCSD companiesImage from Reporting matters, WBCSD (2019)

 

From the observations above, robust disclosures on issues such as good governance and ethics, climate change management (TCFD-aligned), ecosystem impacts, employee health, safety and wellbeing, and an organisations’ wider contributions to community/social development have become common practice. As investors and regulators increasingly look for comparability between companies and as quality of reports improve, basic disclosures on these “hygiene factors” will be expected of companies within their reports.

Additionally, in the COVID-era, we can also expect increased focus on social disclosures, particularly on expansion of employee workplace safety.

Impact Factors

Besides these “must-have” factors, there are other issues organisations can look at within their sustainability strategy to strengthen impact. These Impact Factors may not necessarily be separate material topics. In most cases, these are a strengthening of disclosures around similar material issues.

In the same report by the WEF, further 30 “Expanded Metrics” were proposed[5]. These metrics have “wider value chain scope or convey impact in a more sophisticated or tangible way, such as in monetary terms. They represent a more advanced way of measuring and communicating sustainable value creation, and companies are encouraged to report against them as well, when material and appropriate.”

Some notable metrics and disclosures include,

Extended Metrics for Sustainability Reporting_Adapted from WEFAdapted from Toward Common Metrics and Consistent Reporting of Sustainable Value Creation, WEF (2020)

For the full list of “Expanded metrics”, please see refer to the report.

Other key disclosures could stem from emerging trends in sustainability, particularly in the expected role of business within these trends. These include technology breakthroughs for climate mitigation, inevitable climate change adaptation, circular solutions, sustainable consumption, supply chain transparency and sustainability, biodiversity protection, and sustainable finance[6], among others.

Leadership

Ultimately, what defines leadership is not reporting on a large laundry-list of material factors, but rather, in doing it well. Many reports, publications and studies[7],[8],[9],[10] have emphasised the importance of key principles and aspects of best-practice sustainability reporting. They include clearly stating the purpose of the organisation, defining material issues from stakeholder engagement and operating context, balanced reporting, strengthening alignment with global reporting and sustainability frameworks (GRI, SASB, TCFD, SBT, SDGs etc.), articulation of board responsibility, and integrating ESG risks and opportunities within the wider business model. Paia specailises in applying these principles to individual client circumstances, and working with clients to produce leading edge reports with impact.

 

Paia has a long track record of helping companies with their sustainability strategy and reporting. Do take a look at our areas of expertise here, or reach out to us if your organisation is looking for support on your sustainability journey.

 

[1] https://www.bloomberg.com/news/articles/2020-05-18/blackrock-joins-allianz-invesco-saying-esg-funds-outperformed

[2] https://www.weforum.org/whitepapers/toward-common-metrics-and-consistent-reporting-of-sustainable-value-creation

[3] https://api2.sgx.com/sites/default/files/2019-12/Sustainability%20Reporting%20-%20Progress%20and%20Challenges.pdf

[4] https://www.wbcsd.org/Programs/Redefining-Value/External-Disclosure/Reporting-matters/Resources/Reporting-matters-2019

[5] https://www.weforum.org/whitepapers/toward-common-metrics-and-consistent-reporting-of-sustainable-value-creation

[6] https://sustainability.com/wp-content/uploads/2020/01/sustainability-annual-trends-2020-1.pdf

[7] https://www.forbes.com/sites/deloitte/2020/01/21/why-doing-good-is-good-for-business/#3c1698416b29

[8] https://globescan.com/wp-content/uploads/2019/07/GlobeScan-SustainAbility-Leaders-Survey-2019-Report.pdf

[9] https://www.wbcsd.org/Programs/Redefining-Value/External-Disclosure/Reporting-matters/Resources/Reporting-matters-strategy-targets

[10] https://api2.sgx.com/sites/default/files/2019-12/Sustainability%20Reporting%20-%20Progress%20and%20Challenges.pdf