5 minutes

The SIF Investment Thesis Part V: Making ESG Reporting Credible

Published By
Wes Geisenberger
February 3, 2023

Co-authored by Wes Geisenberger (VP, Sustainability & ESG), Rob Allen (SVP, Ecosystem Acceleration), Jonathan Rackoff (VP, Head of Global Policy), Paul Madsen (Head of Identity), Hania Othman (Director Sustainable Impact Europe/Africa), and Mariquita de Boissiere.

In this final article, we close out The HBAR Foundation’s post-COP27 series on the Sustainable Impact Fund’s (SIF’s) five-part investment thesis and corresponding strategy to fight climate change by bringing the balance sheet of the planet to the public ledger. By improving the credibility of ESG reporting, we tie each of our preceding investment priorities together, stepping beyond carbon markets to address how open and transparent reporting can help to build a strong foundation of trust and transparency for an environmentally sustainable, equitably developed, and biodiverse future.

ESG on the Rise

Under increasing pressure from investors, customers, and policymakers around the world, particularly within the last two years, disclosure of Environment, Social, and Governance metrics (ESG), both on corporate websites, in financial reporting, and by executives in high-profile appearances has been going steadily mainstream. In 2021, 92 percent of the S&P 500 reported ESG performance data. There are exceptions and notable resistance, but a growing social consensus holds that “Business As Usual” is no longer an acceptable endpoint.

The legacy of almost one hundred years of an economic system not designed to consider environmental or social welfare beyond GDP has contributed to an escalating climate crisis, ecological degradation on a global scale, and north-south inequality. Research released this year by the University of California at Davis reveals that over a fifth of the world’s economies are already suffering a “reduction directly attributable to climate change in their gross domestic product.” Projecting out over the next fifty years, researchers at Deloitte warn that the cost of inaction on climate could cost the US economy alone fourteen trillion.

Emitting greenhouse gasses (GHGs) has historically been treated as an externality by major industries with little incentive to voluntarily assume responsibility for the costs inflicted upon the global commons. However, in the face of widespread environmental degradation, the consequences of continuing to kick the can down the road on climate are beginning to hit home for the financial and business sectors. The business, legal, financial, and reputational risks involved in maintaining BAU span both the physical or the direct impacts of the climate crisis, as well as the transitional product of climate regulations or policies. Not only are these risks, including soaring costs of capital, growing exponentially, but forward-thinking companies stand to gain a significant competitive advantage by positioning themselves as an effective part of the solution; Millennials and Gen-Z want to see businesses incorporate a triple bottom line of profit, people, and planet on their balance sheets.

But while ESG continues to top the agenda at the World Economic Forum and within major industries, younger generations, climate scientists and sustainability experts alike remain skeptical that the framework is truly moving the needle on environmental and social concerns. 

Current State of Play

Many of the issues facing ESG processes echo those, such as lack of transparency and bottlenecks in relation to the Voluntary Carbon Market (VCM). Although this year saw a flurry of countries, including the EU, UK and the US, adopt or propose mandatory ESG reporting within their borders, attempts to standardize reporting and make it more transparent remain patchy and are dependent upon a small handful of (mainly Global North-based) authorities. As such, there is a well-documented tendency for corporations to deliver narrative-driven, creative reporting that lacks substance. Such reporting promises the earth while disguising cherry-picked results that are based upon proxy-level data, that fail to take context into account and gloss over operational sustainability risks. 

Putting Credibility Front and Center: dApps 

By bringing auditability, automation and granular data together in real-time on the public ledger, Hedera - together with the dApps built on top of the network - is addressing these concerns. TYMLEZ and Civic Ledger, both Australian-based climate first companies building with web3 tooling, provide examples of the kinds of leading-edge projects that are emerging from within the Hedera ecosystem to take ESG reporting to the next level in terms of both credibility and impact. Across emissions reporting, resource usage and supply chains, TYMLEZ is combining the immutability of data stored on Distributed Ledger Technology (DLT) with digital Monitoring, Reporting and Verification (dMRV) input from a suite of IoT devices, and digital identifiers (DIDs) to provide businesses with a cost-effective, tamper-proof and fully auditable ESG reporting solution.

By leveraging Hedera’s Guardian Policy Workflow Engine, and the standards-based foundation for token taxonomy frameworks that it provides, TYMLEZ can scale quickly and at low-cost. However, scaling here is not achieved at the expense of data resolution; quite the opposite. The Guardian plugs granularity of data directly into policy workflows, meaning that diverse sustainability assets can be tracked and traced down to the individual unit. In this way, instead of the ‘one-size fits all’ approach that has characterized much of corporate financial reporting, TYMLEZ is able to produce bespoke solutions that reflect the complexities of each project and of “even the most diverse organizations.” Beyond helping companies connect into the VCM and Guarantee of Origins (GO) ecosystems, the ESG reporting facilitated via the TYMLEZ platform also feeds into supporting UN Sustainable Development Goals (SDGs). 

Similarly, multi-award-winning next-generation marketplace, Civic Ledger has built a Hedera-native disclosure reporting tool of its own. Dubbed Datasker, the platform is lowering barriers to access for businesses looking to embed trust within their ESG compliance. Running on operating rules that are encoded in smart contracts, measuring and verification are automated in a fully transparent way. The if/then protocol that defines smart contracts enshrines policies, protecting them from external input that may undermine credibility by centering business interests. Put another way, the tendency towards automation in how projects are executed, recorded and verified leads to a phenomenon labeled ‘hard coding ethics’, thereby leaving little margin for the greenwashing of reporting.

With the ability to track and trace assets across their lifecycle, TYMLEZ and Civic Ledger are driving attention towards the quality of outcomes, rather than the reporting process itself. If the first step in overcoming a problem is in realizing you have one, outcomes-focused ESG reporting can shine a light on the places along the value chain where “climate risk is investment risk”, helping businesses gain credible insight into their scope one, two and three emissions. In this sense, companies can avoid mounting liabilities and reroute financing towards projects that are both profitable and sustainably aligned

Credible Reporting to Make Finance Regenerative

Although rapid and steep carbon reductions are a matter of urgency, ESG is about more than ‘just’ the climate. Of Rockström’s 2009 nine planetary boundaries framework, climate change is but one. Also included are: the rate of biodiversity loss, ocean acidification, global freshwater use, land-use change, and chemical pollution, amongst others.

Underpinning the planetary boundaries concept is the recognition of the interconnected nature of “coupled human-environmental systems” and the drastic, irreversible and non-linear change that crossing planetary boundaries can provoke. In the abstract, researchers write that the study is offered in the hope of “shifting our approach to governance and management, away from the essentially sectoral analyses of limits to growth aimed at minimizing negative externalities, toward the estimation of the safe space for human development.” Embracing and incorporating a more holistic, systems-thinking approach to the intersecting, yet unevenly distributed, ecological and social crises facing our global community is a necessary starting point to achieve this.  

Credible reporting lays the foundation for the informational leap required to rewire our economies for regeneration. Fundamentally, this will only be possible when ESG ratings, such as those produced by MSCI, center real-world outcomes in addition to corporate bottom lines. This shift will be driven and sustained by systems that foster rapid, cross-border collaboration; open, auditable, enhanced by machine learning and automation, integrated with DLT-enabled dMRV, and living on-chain. The work of dApps such as Civic Ledger, which has also created a water ledger to “redesign water accounting and the governance of water markets”, shows us what this leap looks like in practice.

By contrast, initiatives such as the global stocktake of the Paris Agreement (GST) remain heavily focused on climate as an isolated issue and risk missed opportunities. Rather than waiting for GSTs to roll round every five years, progress on Nationally Determined Contributions (NDCs) - like reporting on ESG - needs to be updated in real-time and made fully transparent.

The technology that can deliver these shifts already exists and is upgrading the way carbon markets operate. Through interoperable connectivity, Hedera’s sustainability-first, carbon-negative public ledger also promises to mainstream ESG. Essentially, DLT-based solutions provide the necessary tooling to help “close the information feedback loop” that can separate business decisions from their environmental and social consequences by years, decades or even generations.

Climate change is one (particularly deadly) such feedback system. Social protest and government regulation are others. Harnessing and processing data in disintermediated ways and at new orders of magnitude is key to unlocking “inherently more agile yet more long-term and holistic” systems of governance.

With all this in mind, Net-Zero - the international framework for bringing GHG emissions as close to zero as possible by 2050 through a combination of emissions reductions from source and carbon removal through sinks - should be seen not as an endpoint but as a landmark along a deeper and more inclusive road towards a future that values social and environmental wellbeing. Getting there means not just focusing on goals seven and ten of the SDGs; it means embracing all of them.

By lowering the cost of trust, DLT can make ESG credible in previously unforeseen ways. At the Sustainable Impact Fund, we recognize that ESG credibility is constructed on top of and interwoven throughout the four previous goals that have made up this series. The dApps being built on the Hedera Hashgraph speak to one or multiple of these goals and offer a glimpse into a future that is here but not yet evenly distributed. In that future, the balance sheet of the planet, without a doubt, lives on a public ledger.

Are you an entrepreneur with cutting-edge project ideas that could help move the needle on mainstreaming ESG through DLT? The HBAR Foundation wants to hear from you. Apply to the Sustainable Impact Fund today and get set up with the financing, the operational support, and the access to networks you need to unlock your potential to innovate and bring the balance sheet of the planet to the public ledger.