The ESG space has seen a major shift over the past 12 months with challenges over greenwashing dominating the headlines. With this comes the need to tie real-world examples of the benefits of ESG funding to investment inputs through transparent, accessible, and authentic data.
In recent months, some valuable reframing has also taken place in the digital space, breaking down a number of barriers around blockchain concerning energy usage. Ethereum’s Merge in September, for example, had a significant positive impact on blockchain viability in the climate-related project context.
Tokenisation is now accepted as a flexible, adaptable investment tool, which is strongly aligned with monitoring, reporting and verification requirements within the broad ESG-investing space. Its usefulness in all these respects as a solution for achieving climate-related goals is increasingly recognised.
This matters the most for investors and fund managers, who face growing pressures to show net-zero investment alignment amid the rapidly evolving voluntary and mandatory climate risk management and ESG reporting landscape. This includes the requirement to obtain and report on specific, reliable and verifiable emissions data arising from their investment choices.
Cue, tokenisation of assets — the act of turning physical and non-physical assets into digital tokens which are created and held on the blockchain, a distributed, decentralised ledger that exists across a network. Tokens live on the blockchain, making it easier to trade and invest.
There are numerous potential benefits of tokenisation and some of the most cited are liquidity and fractionalisation. Blockchain-based tokens may enable trading of interests in otherwise illiquid assets and also provide a way for investors to divide ownership of assets into smaller units.
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Newer applications include tokenising relevant assets to help advance climate goals. In July 2022, EDF Energy, the gas and electricity supplier, issued a tokenised green bond on a public blockchain, where the investment was focused on solar and renewables — the issuer of the tokens was EDF ENR, a supplier of rooftop and shade house solar installations for plants or livestock. BNP Paribas, which supported the issuance through its digital assets platform AssetFoundry noted that using blockchain in this way provided better transparency of ESG data along the value chain.
In other climate-related investment scenarios, tokens can efficiently bundle smaller renewables projects into dynamic opportunities for investors, with the tokenised instruments providing better granularity for smaller investment amounts, as well as the ESG data verifiability benefits already noted. Typical inadequacies that you might see in data accessibility in traditional markets are removed and everyone who owns a token can have data rights linked with that token, as well as the economic rights such as capital, interest and income.
The world of carbon offsets and other similar emissions-related certifications has had a long and sometimes difficult history. However, the current focus on net zero — and on ensuring that appropriate value from both a liability and asset perspective is placed on carbon emissions and their mitigation — intersecting with digital assets is producing enhanced interest in tokenised carbon.
Carbon trading is a key mechanism for addressing climate change by pricing carbon and incentivising polluters to reduce their emissions. Carbon markets use verified, tradable certifications, or “offsets”, which show carbon emissions that have been removed or avoided by a particular project that are unitised and traded as part of a commercial deal.
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Blockchain use cases are being explored here, both as the basis for the issue of tokenised carbon units, and as the platform underpinning carbon exchange operations. In 2022, a group of institutions issued two prototypes for the integration of emissions mitigation units into green bonds using blockchain. The Genesis 2:0 project is notable because the way in which the right to emissions mitigation units is derived is via blockchain-transmitted data.
This is a way of integrating the value of the emissions mitigation purpose of a project with its outcome; rather than having separate processes involved in creating the up-front green investment and another issuing later carbon certificates, it combines them. The investors can obtain certainty that their up-front investment will, assuming the project is successful, give rise to their receipt of the relevant carbon-related assets in due course.
And opportunities abound for tokenisation in land, forestry, agriculture and potentially also blue-assets projects including waterways. Climate-related projects in these areas may look to apply investment proceeds to achieve associated natural capital benefits, particularly environmental protection and biodiversity focus outcomes, alongside more traditional economic returns. For example, tokenisation projects which look to promote regenerative land use practices to enhance biodiversity, measure the gains made and convert the outcomes into tokenised biodiversity units, are evolving, like the Single.Earth EQT-backed MERIT token project.
Even NFTs – non-fungible tokens — have become valuable for climate goals. The Amazon rainforest has seen the use of NFT offerings which represent hectares of rainforest, proceeds of which are to be used to, among other things, provide satellite imagery, patrols, and other security for environmental protection in respect of the site represented.
As an increasing number of market participants accept the strong alignment between ESG capital raising models and the blockchain-based offering, it is likely tokenised projects will become more mainstream, including in biodiversity, given the startling global biodiversity decline issues we are seeing, the focus on these issues at the Biodiversity COP 2022, and the search for relevant financing options.
Innovation is also expected to tick up, along the lines of developments such as the ESG Impact Hub launched in October to accelerate the growth of Singapore’s ESG ecosystem. The hub already has 15 ESG fintechs which aim to foster greater collaboration, sharing of high-quality climate and sustainability data, and an efficient deployment of capital between financial institutions and real economy stakeholders.
The key challenge is solving the efficient deployment of genuinely effective climate change mitigation capital at scale, which digital assets and blockchain offerings are converting into one of their biggest application opportunities yet.
Looking ahead, 2023 is likely to mean macro-economic investment headwinds in a number of key economies, and there are uncertainties in digital assets given the ongoing crypto winter. However, none of this is hampering expansion in the crossover space between ESG, in particular climate investing, and tokenisation.
There are good reasons for this. On the one hand, net-zero targets are here to stay and progression towards those goals must weather economic cycles. On the other, systems which enable efficient deployment of capital to deliver verifiable, purpose-orientated outcomes cannot fail to make sense to investors.
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