How Can Blockchain Foster Green Finance

We have much to do to enable sustainable and inclusive economic growth and not to endanger society’s long-term needs and well-being. One of the most important game – changer is to appropriately build ESG (environmental, social and governance) factors into decision making processes. This will redirect capital flow towards more green investments. The pressure is rising on the companies and financial institutions to disclose their actions regarding sustainability and how well they do on fiduciary duties.

EU law introduced mandatory non-financial reporting for the annual reports from 2018 onwards for large public-interest companies. In addition, EU is drafting regulation that will introduce disclosure obligations on how institutional investors and asset managers integrate ESG factors in their risk processes. In US sustainable, responsible and impact investing already represented 26% of all assets under professional management at the start of 2018, as reported by Bloomberg.

Free Bird Flying in Green Environment

Consumer demand for environmentally friendly goods and services increases. Moreover, the investment community quickly rises sensitivity about corporate ESG performance. As a result, companies sometimes find solution in greenwashing. They want to promote the perception that their products, polices and behaviour are sustainable when they might not be or to lesser degree. This gives rise to consumers’ and investors’ scepticism about green claims.

Green Certificates/Labels on Blockchain

Blockchain technology can provide a useful solution to tackle greenwashing and scepticism. It can be used to keep records of green bonds certificates/labels. Green bonds are instruments where proceeds are dedicated to finance projects with clear environmental benefits. There are several standards to  certify an environmental quality of financial assets. Blockchain with its single version of truth and immutability can be used to keep records of green certificates or other green/eco labels. This could as well foster a greater unification and can increase the level of green certification. Investors could easily follow the principle: you trust when you verify.

Transparent Reporting to Maintain Trust

Issuing a green investment instrument is usually related to increased issuance costs. However, it can only partially contribute to the lower investment/borrowing cost. Credit risk of a green bond is usually the same, but overall risks can be reduced. Green Bond Principles, Green Loan Principles and Climate Bonds Standard recommend an external review from an independent party. This can be in different forms: second party review – opinion, audit, green rating, green/climate bond certificate. Consequently, it provides different levels of assurance for the investor. But it brings the issuer additional cost.

Further, there are cost from monitoring the usage of proceeds and from transparent communication of the results. Sufficient disclosure gives investors comfort the proceeds have been used as originally announced and certified. On this field blockchain/ distributed ledger technology can contribute to the transparent and efficient reporting to maintain trust among investors. This can encourage more issuers to consider green instruments to finance environmentally friendly projects. Efficient transparent reporting can as well satisfy shareholder demands for sustainable business behaviour.

Improved Access for SMEs

Platforms built on blockchain technology can facilitate market access for small and medium sized enterprises to the green capital. This will make them less reliable on banking funding. Increased access and cost reduction can contribute to the higher growth of green investments.

New Gateway for Large Green Issuers

The new gateway in the form of tokenized instruments can be a fast and cost-efficient way also for large issuers to reach a growing investor community focussed on sustainable investments. It can also contribute to liquidity.

More Green Investments in Energy Sector

Important contribution of the blockchain technology and smart contracts to the green investing are new business models and increased efficiency in energy sector (and elswhere). Blockchain can enable small scale renewables and consumers to efficiently participate in a more decentralised energy market. It can also bring greater operational efficiency in internal processes and lower costs. The use cases of blockchain technology are here but we have only seen the beginning.

Blockchain Environmental Sustainability

An important task left is to improve the current state of the blockchain technology. The technology itself is currently low on environmental sustainability. Energy consumption of public/permissionless blockchains with proof of work consensus mechanisms is extremely high. The consumption improves if other consensus mechanisms are used (proof of stake) and on the expense of limiting decentralisation. Switching to private/permissioned or federated blockchains increases efficiency. In order to be sustainable in terms of survival blockchain technology needs to evolve in the way to resolve this issue.