ESG Buzz and Blockchain Traceability

Published on 3rd January 2022

India has introduced new environment, social, and governance (ESG) reporting requirements for the top 1,000 listed companies by market capitalization. The Securities and Exchange Board of India (SEBI) stipulates that the disclosure must be made through a new format, namely the Business Responsibility and Sustainability Report (BRSR). BRSR reporting has been voluntary for FY 2021-22 but will be mandatory from FY 2022-23.

Latest announcements from Reliance, which aims to become a net carbon zero company by 2035 and has allocated Rs 75,000 crore for capital expenditure on new energy, have fuelled ESG positivity in the country.

In 2020, SEBI mandated Business and Responsibility Reporting as voluntary till 2022 and compulsory from 2023 for the top 1,000 listed companies in the market. 

Why is the Buzz around ESG?

The inspiration comes from paradigm-shifting by Investors to look at the non-financial indicators same as financial parameters. This is the Key inspiration for CEOs looking towards ESG, as it can attract capital when infused with business strategy. BRSR (Business Reporting and Sustainable Reporting) is mandatory for the top 1000 companies in market capitalization by 2022-23. BRSR aims to gauge Companies performance by measuring ESG parameters by asking companies 150 questions across nine fundamental principles.

In India, Grasim has built technology to recycle cotton. What has also happened is that green products also give a lot of opportunities for good business. Sustainability and business value have merged, as Grasim is further venturing into greener technology.

Circularity, where the waste of one industry can be used as raw material for another industry, is a huge opportunity that can be further fueled by the principles of ESG. Another major ESG issue in the fashion industry is transparency. Grasim has applied Blockchain technology for end-to-end traceability since transparency has become an essential part of ESG today. Like Grasim, Welspun has become one of the first home textile manufacturers to use a Blockchain and AI-based traceability platform at such a large scale, which is set to capture all its product lines as major Sustainability-related data points. These include ESG metrics such as water usage, fair pay, power consumption, gender equality, among others.

Sustainability reporting presents an excellent opportunity to accelerate a business’s ESG evolution, becoming more resilient to climate change and less reliant on fossil fuels and other finite resources. By measuring and reporting ESG risks, companies show shareholders and other stakeholders that they can manage these risks better and deliver more excellent long-term value, thus enhancing their license to operate.

Net-zero touches every part of a business. Decarbonization plans must, therefore, acknowledge the enormous impact upon the entire value chain, including R&D, product design, manufacturing and operations, as well as key relationships with suppliers, distributors, logistics providers, retailers, and other business partners.
India has pledged to cut its emissions to net-zero by 2070 at the COP26 Summit at Glasgow. However, achieving this target could be a tough grind for India as its energy demand is expected to rise sharply over the next decade as the economy continues on its growth trajectory.

OECD*, finding on use cases on Blockchain Technologies as a Digital Enabler for Sustainable Infrastructure highlights four major blockchain use cases. 

*OECD(The Organisation for Economic Co-operation and Development is an intergovernmental economic organization with 38 member countries, founded in 1961 to stimulate economic progress and world trade)
  1. A decentralized financing infrastructure could enable the full spectrum of investors to invest directly in sustainable infrastructure through a blockchain-based platform, transforming illiquid assets into tradeable digital assets and increasing financing flows for sustainable development. Two financing methods proposed  
    1. Projects that issue security tokens where investors receive a return on investment according to project performance; 
    2. And a utility token through which purchasers receive access to future services provided by the infrastructure project. Tokenisation of infrastructure also enables automation of processes and reduced reliance on intermediaries, with reduced cost of administrative functions.
  2. Emissions certificate trading systems could be made more efficient by providing transparency and reliable data through a global blockchain layer. This helps to control quota rules effectively, certificate circulation, promote market integrity and robust carbon accounting while also automating transactions and increasing overall efficiency. Regulatory, compliance and administrative functions can be codified in the system, creating a transparent book of accounts on emissions. A blockchain-enabled platform could also link treaty-level registries supporting the Paris Agreement, particularly relating to Articles 2.1c and 6.
  3. A blockchain-based infrastructure contract management system, which verifies and tracks the valid and legally binding versions of contracts in infrastructure projects, could immensely improve transparency in current multi-party contract agreements. Involved parties adopting such IT systems can benefit from the certainty of knowing which contract version is valid and reviewing the conditions at any given time, leading to more streamlined and automated processes. This solution would work in tandem with existing IT environments, like document management systems, enabling high security for sensitive documents while providing a trusted single view on multi-party contracts.
  4. An underlying blockchain base protocol layer could allow decentralized applications to be built by any organization to support the governance, alignment and monitoring of various infrastructure standards. Decision-makers, including investors, require access to truthful, standardized, and up-to-date infrastructure assets. This could include data on financial performance and ESG criteria or climate-related disclosures. 

Given that existing data is fragmented and maybe unaligned with climate objectives, a blockchain-enabled platform would provide the digital backbone needed to support data transparency for sustainable infrastructure development. The process also enables automated compliance checks, data standardization, and integration with other digital technologies like AI, IoT and Satellite Imagery. 

References/Sources 

ESG Reporting in India to be Mandatory for Big Firms from

 https://www.india-briefing.com/

Ey.com, cnbc.com, etc-group.com

Perspectives from KPMG in India – KPMG India. 

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