Environmental and Social Governance (ESG) ratings are changing the investment community.
The value of an investment is no longer about returns; it is to make a difference in society and the world--that's the true purpose of ESG based on the principles drafted by Kofi Annan, the father of these measurements.
- Do ESG ratings deliver something?
- Are highly-ranked ESG companies more focused on society's prosperity and committed to the environment?
- Are they more concentrated on good corporate governance?
- Can we measure these metrics better?
The global shift in investors' and consumers' attitudes has forced corporations to embrace ESG as a part of their day-to-day operations.
Unfortunately, it is complex, confusing, political, and most organizations use the measurements in their value propositions to greenwash investors and consumers into believing they are investing socially responsibly.
ESG compliance requires all investors and companies to embrace that it significantly increases business costs and the impact of the high prices on the corporation's bottom line.
ESG Ratings And Authenticity
All large institutions utilize ESG ratings and research for investment decisions to drive new outcomes and create a global awareness for the transition to a new era of investing.
Here lies the challenge. While ESG factors impact a company's bottom line, they also impact its reputation, causing lasting damage with factors like product quality issues, data security, industrial relations, or supply chain problems.
Twisting The Reality of ESG
Companies and investors can drive environmental and social change by properly enforcing corporate governance. However, the present state of ESG needs to be clarified and simplified. With the EU's lead, a precise definition, global standards, and regulations are critical for monitoring the application of ESG by multinational corporations.
However, to bring these measurements to reality, we need to address the following:
- Validity is attained through properly defining ESG and setting global standards;
- Clarified disclosures and measurements for Transparency, accountability, and sustainability;
- Requirements to forge a path toward a common international language for sustainability;
In addition, in this environment, ESG can only be assessed concerning the broader sustainability agenda and the role of public policy in driving a fundamental change to the relationship between economies, society, and the environment.
The Blockchain Value
Blockchain technology can advance the markets for environmental, social, and governance policies by diversifying the set of credible assets and data sources.
Focalizing the blockchain's role to this specific use case, we can see some improvements area:
New, Verified Assets
Companies need help to monetize ESG characteristics positively in goods, as the lack of standards creates incentives to trim corners and occasionally exposes overblown affirmations.
Blockchain can bring traceability to previously illiquid assets by verifying the provenance of claims and data sources.
It can facilitate renewables and certified low-emissions natural gas and hydrogen use by tracking the emissions accounting.
Governance is the most difficult metric to manage from the ESG suite, and failing to govern the internal and external relationships are the easiest way to lose profits.
Blockchain makes voting and power more decentralized, bringing inclusion, control, and oversight.
On-chain governance is enabled by built-in smart contracts that empower stakeholders who receive governance tokens for their stakes to vote without the need for a central authority.
As the world continues to tackle massive challenges, investors, corporations, organizations, and countries must work together to leverage the real benefits of ESG commitments at scale, not for more marketing materials or political power, but for the planet Earth.