Blockchain Puts ESG Adoption Benefits Within Corporate Reach

Policymakers, sultans and kings may be the headliners at this month's COP28 in Dubai, but corporations are vying for a turn in the spotlight as well: at the accompanying climate business expo, where companies from the world are trumpeting their green achievements to 400,000 registered attendees.

Since their inception more than a decade ago, Environmental, Social and Governance (ESG) criteria have proven to be far more than corporate window-dressing. Not only is ESG compliance becoming a legal requirement in many jurisdictions, but adherence to its principles has also been shown to deliver a host of competitive benefits along with real improvements to financial performance.

Until now, though, the intricacy of today's vast globalized supply chains has made it challenging for companies to convincingly prove their production, sourcing and distribution are managed in an environmentally and socially responsible way, particularly when they have operations and suppliers in multiple countries.

But there is at last a technological solution that will allow even the most complex enterprise to understand, untangle and manage these relationships sustainably: self-contained, customizable decentralized architecture with transparency and accountability at its core.

In other words, blockchain for enterprise.

Before we dive into how and why embedding decentralization is the best way to centralize supply chain knowledge, let's talk about all the reasons why ESG makes as much sense for businesses as it does for people and the planet.

In a report released in August, McKinsey & Company compared the total shareholder return, financial performance and ESG ratings of 2,269 public companies and found that companies that uphold high ESG standards outperform industry peers that do not — all else being equal.

In other words, if a company has both sound business practices and a good growth trajectory, it will benefit far more than its industry rivals from the adoption of more inclusive and planet-friendly practices. ESG cannot save a broken business model, but it can have a strong positive impact on a sound one — by reducing costs, stimulating innovation and increasing greater energy and operational efficiency.

And despite the increasing politicization of ESG in many major economies, customers and shareholders are increasingly demanding that companies disclose their impact on the world.

ESG is also an important tool in building an engaged workforce. Research from professional services company Marsh McLennan shows that companies with strong and trustworthy ESG policies attract more talent and have more satisfied employees. This, too, can deliver bottom-line benefits since happy employees are demonstrably more productive.

Companies that cannot demonstrate a real commitment to the environment, human rights and good governance also run the risk of losing the global competition for young hires since Gen Z places values above earnings when job hunting.

Given the long list of upsides to telling a good environmental story, it is perhaps understandable that many companies promise more than they are able or willing to deliver on the ESG front.

According to a November report from Accenture, although more and more major corporations are coming out with sustainability pledges, only about 18% are currently cutting emissions fast enough to qualify as net zero by 2050.

With promises coming thick and fast at COP28, global enterprises will be under renewed pressure in the months to come to prove to the world that they are taking credible steps toward sustainable practices or face accusations of "greenwashing."

Obtaining that proof and reporting it in a clear and consistent way to stakeholders can be a challenge with today's globe-spanning supply chains. These can be difficult to police and untangle, particularly since supplier-provided data about their environmental and social impact can vary in both quality and depth.

But today's enterprise-grade blockchain networks have the power to unsnarl this Gordian knot.

This isn't the first time blockchain has been put forward as a possible ESG solution. With its inbuilt transparency and immutability, coupled with programmable smart contracts, decentralized technology at first seemed ideally suited to the task of rationalizing supply chains and instilling strong governance standards.

Until now, though, high costs and limits to scalability were high barriers to company-wide implementation of such networks. Instead, ESG governance architectures have been relegated to peripheral roles, opening them to potential manipulation and raising questions about the trustworthiness of ESG inputs, particularly when data is held off-chain.

With the evolution of more sophisticated smart contracts and new consensus mechanisms, it is now possible for corporations to integrate enterprise-grade blockchain networks that can manage supply chains and ensure consistent and clear reporting.

To make this possible, companies need networks that are self-contained, robust and capable of being embedded throughout a company's disparate systems — from HR to finance. Such a network must also include secure and advanced smart contracts that can be configured to track compliance with ESG requirements. Finally, they must store all relevant data on-chain to ensure availability and integrity.

A system that includes all these elements — along with a high degree of security — will reduce the risk of data falsification and allow companies to create a set of standards for suppliers to uphold. Not only will this allow clear and consistent ESG reporting, but it will also build more resilient supply chains that are less at risk of interruptions.

The net result for the enterprise? A self-reinforcing circle of trust and understanding across the entire supply chain and the depth of knowledge required to prove a genuine commitment to ESG values to regulators, employees, shareholders, customers, rivals and the media.

With the right architecture and a strong and consistent set of yardsticks, it is possible for any company to adopt a sustainable, socially responsible and governance-transparent corporate ethos — to the benefit of both the corporate bottom line and the world at large.

Ting Yang is the CEO of Gorki Network, a next-generation blockchain technology tailored to be the backbone of both enterprise and public systems with its ability to handle complex operations internally, making it an all-in-one solution for businesses.

(Opinions expressed in this article are the author's own.)