Blockchain technology promotes transparency, security and efficiency, all of which are qualities that can improve the Environmental, Social and Governance (ESG) impact of companies.
Blockchain and its Benefits
A blockchain is a chain of blocks of data connected sequentially starting from a genesis block, forming an immutable (meaning unchangeable) ledger.
- Transparency
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- When a blockchain is used to record transactions, the blockchain would provide an immutable record of all transactions that ever took place.
- The blockchain can be accessed by all of its network participants. For permissionless blockchains, anyone can access the stored information while any invited party can access the information of permissioned blockchains.
- Without blockchain, each participating company or organisation would have to keep separate databases, which is more prone to discrepancy and errors or allows alteration by a single party.
- Blockchain allows for a centralised and secure database that is accessible by all participants and is safe from malicious actors.
- The data stored in a blockchain cannot be altered even if a recorded transaction is erroneous and would instead need a new block to be added to the blockchain.
- Thus blockchain allows for a shared and clear record of all transactions that were added to the blockchain that is available to all its participants.
- Security
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- In order for a candidate block to link to the blockchain, it requires the insertion of a number sequence that is difficult to compute and is also referred to as a Proof of Work (POW).
- Each block records the time and sequence of its connection with other blocks and altering or removing a block would require redoing the POW of all subsequent blocks.
- For a block to be added to the chain, it also requires a consensus from a majority of the nodes in the blockchain's network. The consensus may require the candidate block to fulfil a set of rules depending on the blockchain's application in addition to the verification of the POW.
- Thus as more blocks are added, removing or altering a block becomes increasingly infeasible to the point of impossibility. Every node is equal, so no party would be able to alter the blockchain without alerting the other party(s) attention.
- One of blockchain's greatest benefits is its security for the above reasons.
- Efficiency
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- Blockchain is time and cost efficient;
- Blockchain allows for smart contracts which can automate transactions by checking if specified conditions are met and immediately triggers the transaction.
- Smart contracts greatly reduce the time needed to carry out a transaction and prevent interference from third parties.
- The increased speed of transactions through automation and reduced paperwork and errors can also greatly reduce business costs.
- Blockchain technology such as cryptocurrencies can also reduce costs for cross-border transactions.
Blockchain and the Environment
Blockchain can be used to track and log materials or goods from the time and place of manufacture or acquisition. This allows companies to track the carbon emissions and environmental impact of their sourced materials, greatly reducing errors in accounting carbon emissions. The traceability of blockchain also allows companies to reduce the waste produced and minimise carbon emissions. As blockchain would provide a full, transparent history of transactions, the relevant authorities will also be able to trace the company's materials and account for the company's total carbon footprint. The ease of tracing for a company's supply chain would allow for higher accuracy and accountability for a company to meet its ESG goals.
Blockchain technology can also be applied as tokenisation of real-world assets such as carbon credits. Tokenisation of carbon credits would allow for efficient trade of carbon credits while allowing the transaction history to be traced.
Blockchain and Social
Blockchain can have social benefits, mainly through cryptocurrency. Cryptocurrency is an alternative currency which can benefit those in countries with volatile or depreciating currencies. Instead of holding on to depreciating currencies, converting money into cryptocurrency can allow for the preservation of value in global transactions. On the topic of cross-border transactions, blockchain can often allow for faster and cheaper cross-border transactions by reducing transaction costs.
Blockchain and Governance
Government entities require security and efficiency, much like private sector companies. Blockchain can be used to store and manage government-owned records such as employment records or even track ESG milestones of companies. Blockchain's transparency and security allows the government to collect and access immutable data of companies or individuals that remain accurate and safe from manipulation. Blockchain can also be used in voting, where the security of blockchain ensures that votes are secured and cannot be manipulated.
Conclusion
Blockchain's benefits of transparency, security and efficiency bring much needed improvements to ESG. Blockchain technology is able to fill the gaps in areas where traditional forms of keeping records or cash payments are inconvenient or nonoptimal in ESG. Widespread adoption of blockchain technology promises continuous improvement in many aspects of ESG.
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