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Rise of Blockchain for ESG Compliance: A New Era of Transparency and Accountability

  • Vrinda Mathur
  • Jul 04, 2024
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With the environmental, social, and governance (ESG) agenda so important to businesses today, an increasing amount of ESG information will be reported to the market. This will entail massive volumes of data, which must be gathered by firms and then examined and assured by auditors.

 

It's a difficult task, particularly when it comes to Scope 3 emissions data, which includes emissions generated by upstream and downstream operations in an organization's supply chain. Although some organizations are not required to report on Scope 3 emissions, it accounts for the bulk of many enterprises' emissions and is the most difficult to capture, quantify, and disclose.

 

What do you understand by ESG Investing?

 

Environmental, social, and governance (ESG) investing is a set of standards for a company's behavior that socially concerned investors use to evaluate possible investments.

 

Environmental criteria take into account a company's environmental practices, such as corporate policy addressing climate change. Social criteria assess how it maintains connections with employees, suppliers, customers, and the communities in which business operates. Governance encompasses a company's leadership, executive compensation, audits, internal controls, and shareholder rights.

 

ESG, an acronym for Environmental, Social, and Governance, seeks to assess firms' social and environmental responsibilities. As a result, it is extremely beneficial in assisting "socially responsible investors" in making investment decisions. Furthermore, environmental and social aspects are becoming increasingly crucial in assessing a company's value, with projections indicating that global ESG assets would be worth more than $53 trillion by 2025.

 

ESG reporting is frequently used to measure the level of sustainability, particularly among publicly traded corporations. However, due to a lack of data authenticity, consistency, and transparency, the ESG-based sustainability rating remains ineffective. As the importance of ESG measures grows, so does the demand for accurate data on them. There are no industry-wide standards,

 

Due to its tamper-resistant characteristics, blockchain can ensure data accuracy and transparency. It is a decentralized database of records, or "blocks," that can only be altered after all other blocks confirm the change. This ensures the accuracy of the saved data.

 

Notably, a blockchain is intended to address raw data authentication concerns. It functions as a light node, transferring data from smart infrastructure and devices to the blockchain network while maintaining privacy and transparency. Second, a smart contract mechanism is created to ensure the consistency of the raw data and the final ESG report. As obligatory corporate and sustainability reporting becomes increasingly prevalent, accurate and verifiable evidence to support transparency will be critical. 

 

How will blockchain affect how auditors ensure ESG information?

 

Blockchain creates a permanent record and a single source of truth, thus auditors must guarantee that all information entering the blockchain is correct and complete before it is published in the shared ledger. As a result, auditors' emphasis will shift to earlier stages of the data cycle. However, it will result in less verification of individual source documents and a lower possibility of manual error or inconsistencies.

 

Environmental, social, and corporate governance (ESG) has emerged as one of the most widely discussed, contested, and buzz-worthy subjects in recent years. Organisations face a considerable and growing pressure to increase their standards and accountability on a variety of issues that are widely regarded as ethical imperatives.

 

According to FTI Consulting's 2022 Resilience Barometer poll, an overwhelming majority—86%—of corporate leaders have increased their spending on ESG and sustainability, and the majority are under intense pressure to improve ESG. More than two-thirds stated that they lack the necessary competence to deal with increasing scrutiny.

 

In today's audit practice, a lot of effort is spent completing inquiries and conducting extensive testing of specific inputs and supporting documents, such as looking at invoices or initial source data such as meter  readings. Using the blockchain, all of this information becomes electronic, immutable once entered into the system, and eventually eliminates some of the specific precise labor that we would have done in the past. The blockchain profoundly changes the way auditors think about the risks that may arise while generating data and reporting that information, and as a result, the procedures that are used to handle those risks.

 

Also Read | BlackRock Inc: The Largest Money Manager in the World

 

Use Cases of Blockchain in ESG Management

 

ESG is a measure of environmental responsibility—how a company handles waste, water, and its influence on the environment; social responsibility—which employs metrics to assess how a company treats its employees and customers; and governance—a measure of how well a firm is managed. This is a useful framework for comparing firms, but it has always proven difficult to track.

 

Blockchain provides more detailed reports on environmental impact, automates reporting, and saves records. This provides consumers, managers, and investors with increased visibility into a company's processes.

 

Let's dig deeper into blockchain's specific application cases in ESG management.

 

  1. Increase consumer trust.

 

Blockchain technology can track ingredients along the supply chain, ensuring quality. This enables ESG managers to report on the environmental impact of goods produced across a supply chain and communicate accurate data with customers.

 

  1. Add Traceability to Supply Chains

 

We've discussed how to make supply networks more efficient. We can also use chain-of-custody records to source components. A recent Starbucks programme demonstrates how blockchain can track a bean from field to cup.

 

  1. Track Greenhouse Gas Emissions

 

Blockchain-based emission reporting modernizes carbon footprint monitoring through common governance, granular data, and standardized criteria. This provides ESG managers with complete insight, even down to the exhaust from a supply truck overseas.

 

  1. Meet the ESG compliance requirements.

 

ESG measures are self-reported, making it easier for large organizations with the necessary personnel. Smaller businesses face challenges when it comes to reporting. A distributed ledger allows all parties involved to readily track standards and automate compliance reporting.

 

  1. Smart Grid Management

 

Big changes begin at the local level. Greater visibility into energy usage in our cities, neighborhoods, and homes will assist utilities in coordinating with more renewable sources, resulting in sustainable wins apparent in ESG reports.

 

  1. Streamline Carbon Finance

 

Green bonds, carbon trading, and novel fintech solutions such as peer-to-peer payments are all available on a distributed ledger, allowing ESG managers to seek value-based investors and build a network of mission-buying consumers.

 

Also Read | What is Environmental, Social, and Governance (ESG) Investing?

 

Conclusion 

 

ESG reporting will be an essential component of next-generation financial function reporting requirements. ESG scope 3 expands the sustainability data demands of an organization outside its four walls, including the supplier chain and product usage. As a result, each party involved in value creation will require secure and efficient data management. Blockchain technology has these features, but it should be viewed as a utility for sharing data in a secure and distributed manner.

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