Rosenblatt & Memery Crystal Breakfast Briefing – 6 July 2023

At the latest in our regular series of Blockchain briefings, The Realization Group and Rosenblatt & Memery Crystal invited industry experts and an audience of interested parties to talk about the myths and challenges around energy consumption (sustainability) with respect to digital tokens and blockchain, and the use cases for blockchain technology focussing on impact and ESG goals.

Opening the debate, Laura Clatworthy (Partner, Rosenblatt & Memery Crystal) referenced growing demand for sustainability products, increasing pressure to adopt Net Zero targets and evolving global and UK regulation- including the UK Government’s proposed regulation of ESG ratings providers to standardise how sustainability is measured.  She also referenced the potential for reputational damage from relying on ‘worthless’ accreditations and carbon credits/tokens.

There is huge risk to companies around ‘greenwashing’ and associated reputational damage, hence the UK Government’s focus on regulating ESG ratings providers, and seeking to standardise benchmarking to ensure that it is measuring real impacts. Some sizeable corporations like Nike have discovered to their cost the reputational risk of relying on worthless carbon offsets and credits; which also have a negative environmental impact.

Perception v. reality of excess energy consumption

There are many misnomers and misunderstandings around the sustainability of bitcoin and by extension, digital tokens, despite an enormous amount of industry endeavour to develop sound ESG methodologies alongside new, truly ESG, assets. This creates a narrative (perpetuated by the media) that crypto/digital investment is inherently NOT sustainable and should be avoided in a ‘green’ investment portfolio.

A recent paper by James McKay, an independent research consultant (who also writes for CoinTelegraph), concluded that despite public perception and the common narrative, in fact, Bitcoin mining uses less power than mining gold and other commodities:

The report’s findings are unequivocal; whilst the Bitcoin network consumes significant amounts of energy, analysis reveals that it is not disproportionately high relative to its role in the global financial system, and that it uses a high proportion of renewable energy sources. As the technology evolves, greater efforts to use renewable energy sources will help to alleviate concerns.

Commentary at the roundtable acknowledged that the technology uses a lot of energy, and that there is always a need to improve energy consumption, particularly when looking forward to Net Zero 50. It is also instructive to look at the underlying blockchain technology and its capacity to engender trust in the integrity of underlying data around the use of sustainable systems to achieve positive environmental impacts.  As an applied technology (as distinct from its application in cryptocurrency activity) blockchain can be used to drive social impact and other ESG goals.

Oxygen, Zumo’s product for decarbonising digital assets, represented on the panel by its Chief Financial Officer Devina Paul, was created specifically to measure, mitigate and report on the scope 3 emission linked with digital asset activities such as Bitcoin. Every business today has an ESG mandate and reducing or offsetting energy consumption is a massive part of that.  Oxygen is used by financial institutions specifically to compensate for the carbon impact of digital assets, and gives businesses a flexible and transparent solution for the efficient procurement and custody of ‘real’ carbon credits.

Green bitcoin mining

A great deal of work is going into ‘green’ bitcoin mining, around proof of stake and ‘proof of useful work’ (where technology is used to solve random algorithms). Technology lends itself perfectly to transparency and verifiability (provenance/dirty grid/clean grid) to toughen environmental processing impacts.

There is also a changing dynamic with respect to incentivising energy producers to be cheaper and greener. The first stock exchange in Tajikistan, for instance, is powered by hydro-electricity, with surpluses supplied to other places like Pakistan. This region is also of interest to bitcoin mining companies seeking to harness that power, rather than being net consumers.

Carbon markets fragmentation

Currently, carbon registries are standalone; nothing is interconnected so there’s no data sharing.  95% of the market is OTC.  There are front end trading platforms but no APIs that track the movement of inventory.

There are multiple carbon credits and legacy analogue infrastructures, and everyone is (naturally) protecting their own flow.  There is also a geopolitical element – it’s often developing countries that generate the credits while more developed regions ‘consume’ them.  Most of the registries are effectively US-based (DC) which leads to a capital outflow to the West that doesn’t help local regions upstream (as evidenced in various studies of upstream financing gaps).

It’s important to migrate to digital on-chain registries and to take a more integrated, multi-chain approach enabling cross checking and verification across carbon registries to prevent unscrupulous arbitrage between registries and projects being issued multiple times on different registries.

Interoperability to support effective auditing is crucial as is the connection of such digital registries to multiple carbon markets.  This functionality is achievable with blockchain technology.

There are aggregation initiatives including World Bank’s Partnership for Economic Inclusion (PEI), and another called Climate Action Data founded by the International Emissions Trading Association (IETA), the World Bank and the Government of Singapore, which is essentially a ‘data lake’ to which registries are encouraged to report (and which can be accessed by organisations and businesses to validate data). This enables a validation mechanism for end-to-end traceability of inventory in and across multiple markets.

Zero13, a GMEX initiative led by Hirander Misra, is an automated, AI and blockchain-driven ecosystem for carbon credits and ESG real-world assets that digitally interconnects ESG markets to achieve Net Zero and combat climate change. By connecting multiple international carbon exchanges, registries, custodians and ESG project owners globally for supply verification, transparent pricing and real-time settlement using APIs and across blockchains. ZERO13 aims to restore trust in carbon credit markets, addressing greenwashing, double counting, price transparency, vertical silos and market fragmentation issues.

Reporting, authenticity (provenance) and transparency

At its most prosaic level, there are huge efficiencies (and environmental impacts) from digitising manual processes and eliminating multitudes of faxes, emails and spreadsheets from the system. It is also acknowledged that blockchain creates a timestamped and immutable record of every activity that happens on chain, enabling reporting, authentication and transparency.

This is particularly important with respect to issues around greenwashing and assuaging doubts around trust in the data.  Importantly blockchain technology and digital assets opens up end to end trusted data retention, accessibility monitoring and reporting.

Sustainability/ESG Use Cases

Seaweed farms have been established around the premise that seaweed absorbs carbon (blue carbon) which on the face of it is a very good thing.  However, if the farmers of the seaweed (typically uneducated women living in poverty) are exploited by the producers – either through low or no pay, or because they drown in the process – that is not positive sustainability. Blockchain can actually track the end-to-end supply chain and assure the provenance of goods for much better overall outcomes.

The decentralized nature of blockchain lends itself to supporting local markets and projects, harnessing financing (current and for upstream development), resolving the chicken and egg conundrum of building something first, then trying to backfill carbon credits. A Mexican community-based mango farming project is leveraging smart contracts and methodologies around the creation of carbon credits, ecosystem preservation and local community development (“social carbon”).   

Many initiatives leveraging blockchain technology are looking to ensure, for example, that local farms and labourers receive payment directly, more quickly, and receive a more equitable share of the profit.  In turn, data inputs on to the chain can be used to track ethical standards to drive positive social impacts.

There are many applications globally around diversity (a major aspect of ESG), for example, supporting female entrepreneurs in certain parts of the world that don’t have access to traditional trade finance and find it difficult to connect into sources of capital beyond their immediate environment.

Convergence of traditional carbon markets and digital technologies

In terms of bringing these two worlds together there is perhaps some scepticism.  However, just a few years ago the “ESG guy” in a firm had little influence or budget and was required only to occasionally rubber stamp a ‘green bond’.  In today’s world, ESG teams are huge and growing, and often report directly into Boards; at the same time, digital asset teams, payments teams and markets teams are increasingly subject to specific sustainability and carbon credit mandates.

What does the future hold? Key takeaways from our discussion:

• There are no insurmountable challenges but there is a need for a more coordinated, joined-up approach across the board.
• Discussion must be matched with live action. Many countries have announced initiatives that haven’t amounted to much in real terms.  It’s much easier to set high-level goals than to achieve them.
• The transition process requires a more coordinated, global approach. The US is mindful that they need to include other countries and developing nations in the Big Plan e.g. the Caribbean and its carbon sinks.  Similarly, the UAE is granting wind farm licences to the Seychelles.
• Climate change has to be considered ‘in the round’.  It’s about water, energy, and food which impacts everybody. For example, during the pandemic the UAE had to fly planes all around the world to alleviate major food shortages and empty supermarket shelves.  Food security is a massive challenge the world is starting to face.
• Establishing standards will encourage greater adoption by corporates and banks which have learned to embrace rigorous onboarding tools like KYC and understand the importance of efficient data measurement.
• Connecting carbon registries through an interoperable network of networks to multiple markets and participants which can assure high-quality inventory will encourage confidence and adoption.
• Digital assets will become more standardised as regulation is introduced and legislators clarify (for example in England & Wales the Law Commission consultation confirming common laws exist and can flex to adapt to these new technologies).
• Sustainability lends itself well to futures markets (upstream financing) and some indices are already emerging. The securities markets, more than anything, are a prime use case for tokenisation.
• ESG regulation and associated compliance rigour is coming down the line which should alleviate current blockers to adoption.  The Financial Services Regulatory Authority as the regulator at Abu Dhabi Global Market has already introduced a whole set of regulations around sustainability and specific licensing obligations around exchange operations and carbon credits to the extent that it is being called “the Wall Street for climate investing”.
• COP28 initiatives need to look beyond ‘direct impact’ actions to reduce carbon footprints like reducing international travel, to looking at the sustainability of the mechanics associated with mining tokens, for example, and other investment ‘end product’ manufacturing processes and supply chains. These must be reflected more transparently in carbon consumption/reduction calculations.
• Climatetech/Climate Fintech is an established phenomenon (leveraging the growing adoption of blockchain and digital assets)-and a growing trend that is rising up political and business agendas alike.