Over the past year, questions about crypto’s sustainability hit a fever pitch as the sector’s phenomenal growth from fringe to mainstream reached US$3 trillion ($4.08 trillion) in market capitalisation.
Mounting criticism equally extended to the non-fungible token (NFT) ecosystem. This comes amid its global sales increasing by more than 570 times the previous year to surpass US$18.5 billion ($25.2 billion) in 2021, effectively painting the sector to be an unsustainable fad.
Most recently, the European Parliament — grounded in existing promises made on the back of the United Nations Climate Change Conference (COP26) — even came close to banning proof-of-work-based digital currencies for fear of their energy-intensive impact. In the case of Bitcoin, its energy consumption is equivalent to that of some countries, burning 141.33 terawatt-hours each year.
The facts are clear: The broader crypto space needs to confront its environmental footprint, but pushing the blame on its underlying technology is a myopic oversight. Blockchain, an immutable and traceable ledger, bears utility that promises more than just virtual currencies.
As an emerging technology, it could play a critical role in mitigating the insurmountable challenges in achieving a greener future. With climate change still an unsolvable threat, are critics being shortsighted about what blockchain can bring when it comes to enabling businesses and governments to meet their sustainability goals and alleviate the damage from climate change?
Ongoing battle with climate change
Even before crypto’s surge in popularity, carbon emission was already set on an exponential rise — a trajectory that even 50 years ago expected the planet to warm by over two degrees Celsius, triggering extreme weather that could disrupt global production and supply chains.
In truth, little tangible progress has been made by businesses and governments to meaningfully decarbonise. The UN Intergovernmental Panel on Climate Change’s latest report proved that climate change is already worse than expected and the move to switch energy sources is coming a little too late to move the dial.
Furthermore, making long-term carbon emission pledges is insufficient to quell global warming. A panel of climate experts warn that countries would need to double or triple their reductions or face a minimum of US$2 billion in economic losses a day from extreme weather heightened by human-induced climate change.
Driven by bottom lines, countries and companies are often reluctant to prioritise sustainability at the expense of economic development. Stuck at crossroads, the carbon credits market is the most reliable way forward for markets to meet their sustainability commitments while keeping pace with their economic goals.
While the issues of climate change are decades old, the technological solutions available are improving each day, providing new opportunities to bolster today’s ESG (environmental, sustainable, and governance) standards.
Powering green projects
Pushed by the growing sustainability agendas, it comes as no surprise that ESG investments have hit new records, reaching US$2.3 trillion in 2Q2021. This year alone, the ESG investment sector has captured more inflows of funds — as much as US$51.1 billion of net new money, doubling that of the previous year.
However, most of these investments have been disproportionately concentrated in already wealthy regions in Europe and North America. This leaves only 32% of sustainable assets to Asia, Africa, the Middle East, and South America combined, which makes up approximately 85.2% of the global population. Without the necessary funding, it is usually the most vulnerable countries that are hit hardest by climate change.
Closer to home, Asia is already expected to be most impacted by global warming, with more people living in coastal cities than other cities in the world combined. Yet, making matters worse, ESG is still not a priority for investors here.
Nearly half of Asia’s asset owners are not considering or are undecided on introducing an ESG policy statement due to the lack of activity in the region. Investors even blame the potential risks from green-washing to insufficient transparency and data on sustainable investments as reasons deterring their receptivity towards ESG assets.
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As the world is still confronted by a US$2.5 trillion annual financing gap that urgently needs to be bridged in order to reach the UN’s Sustainable Development Goals, the lack of capital to power green projects is not due to insufficient funding but an inherently fragmented landscape.
In enabling new inflows of capital, blockchain-based exchanges can lower the barrier to financing green projects across the globe. Tokenising sustainable infrastructure by creating digital representations of an asset to enable fractional ownership can lower ticket sizes, raise liquidity and increase optionality. This presents more opportunities for investments in the sector. Furthermore, blockchain can create greater access and transparency on where funding is being channelled to and where else it needs to be diverted to.
Breaking the data barrier
In order to understand where green capital needs to be allocated, a clearer picture of the sustainability landscape needs to be painted. However, the lack of accountability for carbon emissions makes it much too easy for countries and organisations to slip through the cracks.
At least 8.5 billion to 13.3 billion tonnes of emissions are under-reported each year, possibly pushing the world even further back from our global sustainability targets. This is made worse by lacklustre data sources, issues of access, and double-counting — where multiple parties lay claim to the same carbon emission reduction.
It might surprise you that much of today’s carbon reporting is done using Excel-based methods, even by countries when reporting their emissions to the UN. Such manual practices open doors to high incidences of human error and miscalculations during the process, making it even harder to accurately understand where we stand in the global fight against climate change and how much more we need to do.
In fact, we already have the solutions to strengthen ESG standards in our back pocket by leveraging blockchain technology — and it is a matter of cutting through the criticisms on digital assets and understanding the potential that such emerging technologies hold.
Using such technology, every step of the carbon reporting process can be placed on the blockchain, ensuring information will be kept immutable, traceable and transparent.
Even the Organisation for Economic Co-operation and Development (OECD) sees the value and utility of blockchain to strengthen data standards across the sustainability ecosystem.
Able to track data in real-time, blockchain helps to also address one of the most challenging aspects of the Paris Agreement (COP21). This lies in accurately accounting for and tracking carbon credits, while imbuing greater integrity and trust in the sustainability sector, as well as providing clarity to make more meaningful next steps in addressing climate change.
Raising the bar
Establishing clear guidelines for sustainability frameworks is no longer as big a hurdle with blockchain. As the final missing piece of the puzzle, leveraging such technologies can improve the rigour in carbon calculations and verification of neutrality, standardising ESG compliance across the world.
With Asia — particularly Southeast Asia — shaping up to be a blockchain frontrunner, its technological expertise and capabilities could be the reprieve from its global warming vulnerabilities, placing it in a position to lead the combat against climate change.
Whether it is the fragmented green funding landscape, the lack of transparency in capital or inaccurate carbon emission data, the challenges across the broader sustainability ecosystem have critical implications for ESG investing. However, merely highlighting its shortfalls will do little to stamp out climate change challenges.
Instead, looking to solutions across newfound technologies such as blockchain can remedy these systemic barriers. Creating a greener future is a global mandate, and it is the responsibility of every nation and organisation to step up and make their own concerted efforts to explore all new possibilities to address age-old problems. Only then can we start seeing real progress in addressing climate change.
Bai Bo is the executive chairman and co-founder of MVGX