One downside of using blockchain technology for ESG or sustainable activities was energy consumption. But also here, immense progress has been made last year! Earlier versions of blockchain used to consume high levels of energy since computers had to solve complex mathematical problems to verify transactions. However, Ethereum’s latest update cuts 99.9%+ of energy consumption, while the carbon footprint of third-generation blockchain protocol Tezos is equivalent to the average annual energy footprint of 17 global citizens. The decrease in energy consumption has helped blockchains to become more sustainable and align better with ESG principles.
Bringing liquidity to the green bond markets
Tokenization offers several benefits for green bonds, which suffer from low liquidity and high entry barriers. Tokenizing green bonds through smart contracts on a distributed ledger enables automated, compliant, verifiable, and tamper-proof financing, democratizing the green-investment market and bringing liquidity to a closed market. The benefits of tokenizing green funds include compliance enforcement, increased liquidity, cost-effectiveness, and 24/7 near real-time settlement. Digital securities that exist as tokens on a distributed ledger do not require intermediaries, and fractional ownership of assets further lowers the entry barrier for investors and creates liquidity in less liquid markets.
The tokenization of green bonds allows institutional and private investors to participate in green projects, while the decentralized nature of blockchain technology eliminates the need for a third-party intermediary to validate and approve transactions, making near real-time automated settlements a reality. The credibility of green bonds can be enhanced with the Green Bond Principles (GBP) guidelines for green investing vehicles, which provide clarity on what green is and how to measure environmental impact. As the whole process of tokenizing bonds is still a rather complex system, please take a look at the next integrated link to find a detailed description of every step of the way.
Tokenization and the benefits for CSRD and LkSG
As the world continues to focus on sustainability and the impact of business on the environment, German companies are facing new regulations in the form of The Corporate Sustainability Reporting Directive. This regulation will require companies to disclose information about their environmental and social performance on an annual base. Ten subject matter-specific standards that cover 84 discrete disclosure requirements respecting 1,144 quantitative and qualitative data points need to be considered in the reporting. In the focus are all ESG-connected KPIs, especially the value and supply chain. Besides the CSRD, German companies also face tighter regulation about the assessment of their supply chain nonetheless.
Due to the low level of implementation and the increasing social pressure for more transparent supply chains, the Supply Chain Due Diligence Act, LkSG for short, was finally passed in June 2021. The aim of this law is the mandatory monitoring of compliance with minimum standards in the supply chain. The LkSG will take effect from January 2023 and will gradually affect around 4,800 companies in Germany directly. Non-fungible tokens (NFTs) can create a solution for better data tracking, supply chain management and transparency, while simultaneously creating a more customer-centric approach and making reporting and compliance with the CSRD and LkSG easier. Each NFT is unique and uniquely identifiable, which makes it essentially different from “normal” tokens and therefore incredibly useful for reporting and tracking purposes.
NFTs have the potential to revolutionize supply chain management by enabling traceability of products, data sharing, and improving production, transportation, and warehousing. NFTs provide a transparent platform for customers to know the source of the product, and it can help companies identify the owner of the asset by quick scans. With real-time data and location tracking, inventory management is enhanced with fewer stock-outs, stock checks, and replenishment data is more accurate. NFTs can eradicate malpractices such as counterfeit products and ensure the viability of products while making it easier for the seller to track and trace the carbon footprint and making the assessment of players inside the value chain more transparent.
NFTs also improve data sharing by creating a transparent platform between companies and consumers, creating trust between parties. It can be used to build better supply chain collaborations by providing a sole source of truth. This promotes trust among supply chain partners, and companies can take collaborative advantage by sharing resources and data. NFTs can help reduce inventory runs, improve decision-making, increase profit margins, and create a more customer-centric approach. All of this will help to improve on ESG and CSR KPIs which play a vital role in the compliance with CSRD and LkSG.
In production, transportation, and warehousing, NFTs can help create a digital identity for every part included in a system. This can help identify defects faster and reduce recalls, saving companies millions. In the trucking sector, NFTs can provide details of every repair made to the truck and have a lookout for future breakouts, reducing the total landed cost. NFTW, or NFT Warehouse, allows multiple parties to execute an order at a single time and provides better tracking, transparency, and movement of goods, making data collection and reporting way easier! A great use case of how tokens could have helped in the identification of the whole value chain is an example from the COVID-19 pandemic. Based on a report by ABC Australia, there was a mix-up between a harmless saline injection instead of COVID-19 Pfizer vaccine in Melbourne. If every little vaccine dosage had a unique NFT, it would have been easy to identity which contained the COVID-19 vaccine and which did not. The NFT technology can help eradicate malpractices and mishaps carried out worldwide as the customers have visibility of the entire supply chain journey, the name of the producer, storage locations, and the product’s viability.
Prosumers and the energy industry
The global solar energy market is set to reach $2tn as the green economy continues to grow, and this can be facilitated by peer-to-peer (P2P) energy exchange. However, current energy consumers and traders have difficulty distinguishing between green and fossil fuel energy, which is where blockchain technology can help. The technology allows for secure and reliable ways to transfer valuables through digital tokens. The tamper-proof properties of blockchain can be used to store market-clearing results while the representation of assets of monetary value in digital tokens can be leveraged. The blockchain can be used to securely transfer digital tokens when energy is traded. P2P exchange can incentivize prosumers to invest in local distributed energy resources and consumers to purchase green energy certificates to consume only green energy. A more detailed look into the P2P energy exchanges can be found here.
However, challenges exist, including designing a decentralised P2P market that keeps a fair balance between economic efficiency, information privacy and stakeholder fairness, accounting for inter-temporal dependencies and inefficiencies, and practical implementation. Legal and operational barriers must be leveraged to reach the full potential of P2P energy trading, and energy companies will need to develop new value-added services around smart homes, e-mobility and smart buildings. The Tokenization of Energy use case is being explored by 2Tokens Foundation, supported by organizations including IBM and Rabobank.