Blockchain Will Provide ESG Transparency

Blockchain is an important component for inclusion within a company’s ESG implementation framework. 

Efficiency is no longer the only focus of a company’s supply chain. Operations that ran with little margin for error were completely disrupted by the global pandemic leading to shortages and rising prices. Now these systems are being rebuilt and, in response to consumer and investors‘ requests, their impact on ESG considerations are being addressed.

Precise and timely information is required to allow for periodic adjustments to assure the company’s ESG goals are being met.  Environmental pollution, shortages of raw material and natural resources, workforce health and safety incidents, labor disputes, corruption/bribery and geopolitical considerations are just some of the ESG factors that must be closely monitored. The verification of the accuracy of this information is crucial. And it is exceedingly complex when the supply chains cross multiple geopolitical boundaries. Blockchain, a relatively new technology known best for cryptocurrency, can play a key role. 

As recently noted, “Transparency and trust are the founding principles of blockchain…By using blockchain to verify transparency in a way that no other digital technology can, businesses will dramatically improve their sustainability credentials and reporting procedures.”

Some companies, such as BMW, have pioneered the use of blockchain, “…in purchasing to ensure the traceability of components and raw materials in multi-stage international supply chains.”

Launched in 2018, Topl, provides blockchain sustainability verification to companies that may not have the internal resources to implement this relatively complex technology. The CEO of Finboot, another company providing blockchain based supply chain verification said, “Using blockchain technology, companies are able to record the journeys of their products more accurately and more cheaply…every time a product changes hands within the supply chain, its precise location and time-stamp is documented…from its manufacture through to its sale.”

Blockchain has its own ESG issues to resolve. The process requires high energy consumption, especially “proof-of-work” cryptocurrencies like bitcoin, although other, less energy demanding alternatives (proof-of-stake) are becoming more popular. Blockchain can also play a role in promoting greater use of renewable energy and to enable carbon offset

The momentum for blockchain and ESG is growing. Forbes notes, “…the potential for this technology far eclipses the cryptoasset space. Alongside the growing expectation for more varied and continuous information, blockchain has the opportunity to assist ESG reporting become more consistent, standardized, and effective. Technology and sustainability do not always go hand-in-hand, but the simultaneous rise of blockchain and demand for ESG has the opportunity to change that for the better.”

Besides giving companies better control of their supply chains, blockchain based information allows stakeholders and rating services to identify potential greenwashing. Integrating blockchain technology into a company’s decision-making processes will greatly increase economic efficiency and promote a sustainable future.

ESG and SDGs. Two Complementary Frameworks

The origin of the ESG or Environmental, Social and Governance framework can be traced back to the 70s. Sustainable Development Goals (SDGs), established by the United Nations General Assembly in 2015, set forth 17 critical areas to address economic, social, and environmental challenges by 2030.

Both frameworks operate under the same principle; the need to establish a sustainable and just global economy.

ESG provides a corporate perspective that encourages companies to highlight their efforts to be socially and environmentally responsible under effective governance. The compatibility with the 17 SDGs, on the left, can be seen in the diagram below.

The ESG framework encourages companies to adopt internal and external policies that change their operations and improve communication with stakeholders including investors, customers and governmental agencies.  The business sector accounts for 72 % of the GDP of the 38 member counties of the Organization for Economic Co-Operation and Development (OECD). With ESG goals, strategies and policies that are effective and timely, businesses can assure that we can all eventually live on a healthy planet within a safe and equitable society.

The alternative is undoubtedly the end of civilization as we know it, especially when considering the impact of SDG #6 (Affordable and Clean Energy) and #13 (Climate Action). Plastic waste in the environment is an example of a very significant issue not included in the United Nations’ SDGs which should also be part of any corporate ESG initiatives.

Competition among companies is the key to a well-functioning, non-monopolistic capitalist  economy. Awareness about ESG and SDG is significantly increasing everywhere and at all levels. Companies are now providing information about their ESG strategies and policies as a way to distinguish themselves from other companies in their industries.  Ultimately it will be up to external stakeholders to insure their implementation and their compatibility with SDG and other similar frameworks such as CSR (Corporate Social Responsibility) and the 3 Ps (“people, planet and profit”).

The path towards a sustainable and just economy exists. Currently needed is the means to encourage corporations to proceed forward.

Advance ESG is the only non-profit organization that empowers public stakeholders to effectively influence companies to improve their ESG policies and strategies.  Call it “ESG checks and balances,” the “wisdom of the crowd,” or even “grassroots for sustainability.” It is an approach to ESG advocacy whose time has come.

What is Corporate Social Responsibility (CSR)?

Corporate social responsibility (CSR) is a business practice framework that prioritizes positive social  impacts of the company’s policies and practices in addition to generating profit. The basic goal is to improve communities, both local and throughout the world, by including social, environmental and business governance (ESG) considerations within all strategic decisions. By being “socially accountable” businesses generate considerable consumer good-will that ultimately be reflected in a better bottom line.

Katie Schmidt, the founder and lead designer of Passion Lilie, said that companies that implement CSR stand to benefit in multiple ways. “What the public thinks of your company is critical to its success,” Schmidt told Business News Daily. “By building a positive image that you believe in, you can make a name for your company as being socially conscious.”

Businesses ignore CSR at their peril. Recent research that 60% of Americans want companies to be at the forefront of social and environmental changes and nearly 90% would purchase products from companies that supports issues that were important to them as well. Perhaps more significant was that 75% said they wouldn’t buy from a company whose support of an issue differed from their own.

CSR also improves employee recruitment and retainment. Susan Cooney, head of global diversity, equity and inclusion at Symantec, said that a company’s sustainability strategy is a big factor in where today’s top talent chooses to work.  “The next generation of employees is seeking out employers that are focused on the triple bottom line: people, planet and revenue,” said Cooney. “Coming out of the recession, corporate revenue has been getting stronger. Companies are encouraged to put that increased profit into programs that give back.” 

Companies’ CSR efforts usually fall within a few general areas including environmental programs that reduce their carbon footprint, improve energy efficiency and promote recycling. Besides being easy to initiate, philanthropy such as donations of goods, services and money to non-profits generate considerable good-will. Encouraging and supporting employees’ involvement in charitable organizations is also a common theme for socially responsible companies.  Treating employees fairly and ethically is one of the most important characteristics of a socially responsible company, especially for those that operate internationally where the labor rules many be different than in the US.

How to change corporate ESG behavior

The growth of socially responsible investing (SRI) has skyrocketed over the past several years. There is now over $17 trillion, or nearly 1/3rd of all capital under management, within funds that include progressive environmental, social and business governance (ESG) and similar criteria within their investment decision making process. Many large investment firms, including BlackRock and Vanguard, are calling upon companies within their portfolios to prioritize long-term ESG considerations over short-term profit generation. With that kind of financial leverage, positive ESG changes in corporate behavior should be easy and straightforward to accomplish.

It’s not that simple.

Corporations and investment managers have a long history of verbal support for progressive ESG policies followed by either inactivity or actual efforts to oppose those principles. Although asset managers put, “significant effort into meeting institutional pressures to demonstrate transparency and responsible behavior,” their actual investment behaviors were inconsistent with responsible ownership. In 2019, a New York Times commissioned review of the proxy votes cast by BlackRock and Vanguard found that these two biggest fund managers, “tended to side with management and vote against shareholder-sponsored resolutions more frequently than other big fund companies,” including ESG focused efforts. SEC regulators reported this April that several investment firms that market themselves as investors in companies that that pursue ESG strategies were making potentially misleading statements about their ESG investment processes as well as their adherence to global ESG frameworks. More recently, five of the nation’s largest banks recommended to their shareholders that they reject racial equity resolution audits after previously expressing solidarity with the Black Lives Matter movement.

Despite these roadblocks, creating positive changes in corporate ESG policies is still possible. Boycotts, like the ones that targeted companies doing business with the former apartheid South African government, can succeed, but they are difficult to coordinate and maintain. A better technique is through investor advocacy whereby shareholders, because of their ownership position, can influence corporate policies. Just one recent example is the success of the environmentally focused investment firm, Engine No. 1, in their efforts to place independent Board Directors at Exxon.

Although often effective, this type of advocacy it is only available to mutual funds and other entities that own sufficient shares in the corporation. It is essentially impossible for an individual to afford enough shares to be able to positively influence the hundreds of corporations whose ESG policies need to be addressed. While there are several ESG focused advocacy organizations that coordinate such activities for both individual and institutional investors, they do not provide a mechanism for non-investors to influence corporate ESG strategies.

Another approach is required for the general public and other stakeholders to have an impact on corporate ESG policies. Most corporations are extremely sensitive to public opinion and expend extraordinary amounts of effort and expense to protect their reputation. This makes public pressure a very effective means to compel changes in corporate behaviors. Witness Delta Airline’s CEO’s rapid reversal of his support of the new restrictive Georgia voting laws in response to public outcry. And since shareholder resolutions submitted to a vote at corporate annual meetings are often non-binding, they can be ignored by corporate management unless supported by a significant amount of popular demand.

Integrating public pressure with shareholder engagement is the most effective way to compel positive changes in corporate ESG policies. By coordinating shareholder advocacy with social pressure, Advance ESG provides the public a voice in corporate decision-making. This allows individual investors and non-investors alike to help make corporations more environmentally and socially responsible.

What is stakeholder capitalism?

Capitalism is defined by the International Monetary Fund as, “an economic system in which private actors own and control property in accord with their interests, and demand and supply freely set prices in markets in a way that can serve the best interests of society.”[1]

The types of capitalism differ in whom is most important entity (stakeholder) that can affect or be affected by a business.

In State Capitalism the government is the key stakeholder acting as a steering force in the marketplace and can intervene when it deems necessary. As such, business interests are subservient to the interests of the state.

In Shareholder Capitalism the owners of the business are the primary stakeholders whose principal goal is to increase business profits. Short-term profit maximization is the key driving force and all other considerations are of lesser importance.

Stakeholder Capitalism envisions that all stakeholders, the owners, customers, employees, suppliers, essentially anyone who is impacted by business decisions, matter equally. The key characteristic is the emphasis on improving society and increasing the well-being of everyone rather than to generate a financial return. This form of capitalism focuses on long-term value creation and ESG parameters. In this system, individuals,  private businesses and public corporations can still innovate and compete freely while also being protected and guided to ensure that the general direction of economic development is for the greater good.

“Stakeholder capitalism is a vow to do business in service of all stakeholders, rather than just profits and returns. Shareholders are of course important, but it’s vital that companies also consider workers, communities, the environment, and more when defining success – especially because doing so has demonstrated benefits not just to society, but also the bottom line. This approach is neither status quo nor abandoning capitalism altogether. It’s simply recalibrating the system to take a deeper view of business, and ensure an economy that works for all.” – Paul Tudor Jones, founder of Tudor Investment Corporation and The Robin Hood Foundation, Co-Founder and Chairman of JUST Capital

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[1] https://www.imf.org/external/pubs/ft/fandd/2015/06/basics.htm