ESG: what it is and how it affects you.
ESG stands for environmental, social, and governance, which are metrics considered by investors when scouting for prospective investments. These non-financial factors, which have come to the forefront of investors’ decision-making in the last couple of years, play a pivotal role in a risk evaluation model. ESG is divided into 3 pertinent parts:
- Environmental: This here refers to the ecological relationship between a company and the environment, the impact and sustainability of said business or industry, for which information such as carbon footprint, carbon offsets, pollution, sustainability practices, and future ecological goals are considered.
- Social: A criteria based on the company’s interactions with employees, customers, communities, workplace ethics, privacy, data protection, and so on. This focuses more on societal issues such as the industry’s stance on human rights and labor standards, diversity, and so on, important variables for consideration.
- Governance: looks closely at how the company is being run, the policies, and the decision-making processes. It examines the board composition, potential for corruption, transparency, and other pertinent areas of interest.
ESG criteria are complex and therefore require clear milestones, data collection, curation, and analysis. ESG requires a clear and concise framework in order to be functional. A functional ESG-compliant society entails more responsible organizations, less pollution, healthier work environments, and so on. This essentially means a greener, more humane world for everyone.
Just how big is the ESG market?
Over the last couple of years, we’ve seen a growing number of investors and investment companies looking towards ESG-complaint companies and organizations. There’s been a rather notable uptick in ESG investments. For instance, in 2021, a record 120 billion dollars was pumped into sustainable investment, twice the size of the total investment for the year 2020. The “environmental” in ESG is without doubt the biggest and most rewarding aspect of sustainable investing, as we’ve seen a shift of resources towards organizations that are passionate about how their activities affect the environment. Some other important criteria for ESG investment are climate change, anti-corruption, sustainability, and usage of natural resources, with each of these accumulating trillions of dollars from investors.
S & P Global speculates that the sustainability market in 2019 has peaked at 30.7 trillion dollars, with various cadres of investors now seeking to invest in more sustainable and ESG compliant organizations. By the year 2021, the ESG market will have added an extra five trillion dollars in valuation, led by countries in Europe, the United States, Australia, New Zealand, and Canada, all of which have seen a significant spike in ESG investment over the last five years.
The ESG market has recently seen astounding and astronomical growth, and it has been implied that ESG assets, currently valued $35 Trillion, could increase to $50 Trillion by 2025.
How can blockchain technology improve ESG?
- Immutable database
The Blockchain functions as an immutable database, for which all the information it holds is regarded as infallible due to its tamper-resistant nature. This attributes a high level of accuracy and transparency to data collection and validation in the form of “blocks.” The blockchain allows for the facilitation of data, guaranteeing its authenticity while accounting for transparency and privacy of data. This is a comprehensive solution to the data reporting problem currently hamstringing ESG reporting and rating.
ESG reporting requires validated information, as this is the basis on which investors’ decisions are to be made. However, a major stumbling block is coming up with a standardized ESG rating and reporting system, as it currently requires a level of global coordination that currently does not exist. There’s also the possibility of false data by business/corporation owners whose main aim is to make a profit. We’ve seen reports of greenwashing in the ESG market over the last couple of years.
- Standardized data collection
As earlier implied, standardized data collection is pertinent to the growth of the ESG markets. The utilization of blockchain-enabled reporting systems will allow for the collection and verification of raw data to produce trustworthy reports. The automation of these processes using “smart contracts” will introduce a level of standardization that has been missing in the ESG rating system.
- Improve supply chain management
Blockchain can also help with supply chain management. The utilization of automated procedures using smart contracts will improve transparency, traceability, and efficiency, allowing for next to no errors in the supply chain systems. Blockchain technology is advancing at an astonishing rate, with its capabilities being discovered as we learn more about what possibilities it can unlock. There is, however, no doubt about just how much it can improve the current ESG systems.
Are ESG investments the future of investing?
ESG investing is the decision to invest in companies or organizations that demonstrate the necessary level of commitment to environmental, social, and governance issues. We’ve seen an increase in ESG investment in recent years for a variety of reasons, including:
- Individuals wanting to live more sustainably by offsetting their carbon footprint on the planet (Check out how to live more sustainably here),
- The idea of building a better, peaceable and more thoughtful world,
- Ensuring future financial sustainability, as we’ve seen a clear shift of funding towards corporations that are ESG compliant.
Why, then, do ESG investments appear to be out of reach for most retail investors?
At the recent COP26 climate conference, Bill Gates reiterated a salient point, he spoke about the need to reduce the ‘green premium’ to drive greater adoption of renewable energy. “If we’re going to avoid the worst effects of a climate disaster, it’s not enough to invest in zero-carbon alternatives — we need to make sure they’re affordable and accessible enough for people all over the world to use them.” Sustainable investments are running in the trillions of dollars, but largely inaccessible to retail investors even though they show interest, there are limitations such as most of these opportunities being confined to stocks and bonds only, inaccessible to most retail investors managing their own portfolios.
A recent rise in crypto investments that are ESG compliant has created a way for investors to easily access these opportunities, hassle-free. FUND THE PLANET is utilizing blockchain technology with NFTs to provide individuals and institutional investors alike with easy and affordable access to sustainable investing by tokenizing the protection of rainforest. Other cryptocurrency companies such as Capital.com are seeking ways to incorporate ESG data into their database to allow for investors to get direct and immutable information to aid ESG investment. The ESG market is projected to be valued at $50 trillion over the next 3–4 years, and presents a unique opportunity for investors to be at the forefront of what could well be the future of investing.