Opinion Environment Blockchain is the antidote to greenwashing Reporting ESG investments accurately is complex - companies need to embrace digital transformation By Nish Kotecha July 18, 2022 By December 2021 some $2.7 trillion of capital was tracking environmental, social and governance investment funds globally, with over $143 billion pouring in during the fourth quarter alone, according to Harvard Business Review. Since then, with the war in Ukraine and post pandemic supply shocks, the world has been turned upside down and some businesses and investors are now questioning the practicality of ESG-led investment strategies. When it comes to adopting more sustainable business models, short-termism is a curse. ‘Embrace digital, don’t just change the cushions’ says official$50bn climate change pledge critical to UAE’s oil reduction Do ESG funds outperform others? Financially, it seems not. The University of Chicago recently analysed the sustainability ratings of more than 20,000 mutual funds, only to find that the performance of the highest rated ones was in line with the lowest. Those seeking a quantifiable ESG outperformance were equally disappointed. In early June Asoka Wöhrmann resigned as CEO of DWS, one of Germany’s largest asset managers with €928bn of assets under management, after the group was accused of “greenwashing” – making false claims about – its ESG funds. This led to the police raiding DWS’s offices following investigations by Germany’s financial regulator, BaFin, and the US Securities & Exchange Commission. The practice of coupling ESG objectives with financial returns over the same time horizon is flawed. Such investments cannot be measured using the same financial return metrics, nor can its compliance be reduced to a checklist. There may be elements that can be assigned a numerical score, such as carbon emissions or increasing financial inclusion, yet others remain soft factors, such as eradicating modern slavery – for which a reporting framework remains a work-in-progress. An agreed international standard reporting framework is required combined with an infallible data capture, and evidence tracking. The push and pull factor Standards are coming, but not quickly enough to support ESG investment requirements. However, without the pull from investors seeking to do well by doing good, such standards will take longer to develop. Regulations are designed to protect the average Joe, but if he or she is not investing in ESG funds with the hope of making the world more sustainable, how can we enact change? Capital flows into sustainable projects, services and technology can be a source of good. If you believe that your investment decisions can make the world a better place, then why should you worry about poor financial returns in the short term? The world has changed since February 24, with rising energy costs and food price inflation driven by an unjust war. However, a potential antidote is in our hands: accelerating digital transformation. Yesterday’s business models need to transform to ones where we take out less from the environment than we put in, otherwise we are careering towards extinction. To deliver change, we need to record the transition accurately and honestly, collecting data at source throughout each supply chain. Enter blockchain. Immutable and transparent Blockchain technology can provide transparency, creating the supply chain agility required in the new normal. Blockchains are immutable, ensuring that each item of data can be traced back to each stakeholder providing recourse. Imagine where each ingredient or component could be assigned its own digital record or “passport” on a private permissioned blockchain. The passport would detail the provenance, its role in production, and its ESG compliance metrics. This passport can be passed between owners throughout the manufacturing process and be made available to buyers and regulators to substantiate all claims. This requires a set of interconnected networks where the passports can be read and stamped. Each network would be local as well as cross-border, tracking goods and services globally. Like the analogue process of stamping your passport when you travel between countries, the blockchain version would enable a secure and trusted management and storage of data. This trust will enable frictionless trade, reducing costs and thereby price and providing an antidote to inflationary pressures. Crucially, if blockchain-embedded business systems become the norm, blockchain will be a defence against greenwashing. It will provide an evidence-based data trail, generating trust through transparency in the system. If corporations support their ESG claims with data on a blockchain, then they will attract more capital from investment funds focused on these principles. Trust at all levels is the key. Remodelling to become a data-centric organisation requires a catalyst. Unfortunately, the pressure of short-term financial returns can be an unwelcome diversion. But adopting more sustainable practices through greater use of digital technologies and processes can start to offset some of those pressures. The short-term pain may in fact be the best catalyst to long-term sustainable gains. Nish Kotecha is a serial tech entrepreneur and banking professional. He is the co-chair and founder of Finboot.