The growing role of blockchain in ESG risk management

Blockchain – or distributed ledger technology (DLT) – is beginning to be employed by businesses to improve their environmental, social and governance (ESG) obligations.

Its potential applications in the ESG space include tracking provenance in supply chains, and improving transparency and data security.

Most commonly associated with the cryptocurrency Bitcoin, blockchain describes the ledger that sits behind the currency’s transactions. It differs from traditional ledgers by eliminating the role of a central party in tracking and recording transactions.

Instead, the decentralised nature of blockchain means that everyone in the transaction ecosystem has access to a real-time copy of all the records on the chain. This means if there is a dispute, everyone can see all the transactions on the ledger and results in a more collaborative, transparent, secure, accurate, consistent and timely transaction environment.

Speaking at the AMP Amplify conference, Shuonan Chen, Founding Partner and CEO of venture capital firms IOVC and Agile VC outlined some of the ways blockchain is already being used to bolster ESG commitments and credentials.

For example, The World Wildlife Foundation (WWF) is helping the Pacific Island tuna industry to implement blockchain technology to verify the sources of tuna sold to fish markets to ensure they haven’t been sourced illegally. When used to track supply chains blockchain’s visibility can help companies detect problems or risks faster and more readily trace the origin of any problems.

Ms Chen also outlined plans within the Australian Securities Exchange (ASX) to implement a DLT solution to replace its current CHESS securities settlements and clearing functionality, leading to greater efficiency and market confidence.

Other potential future uses for blockchain in the ESG space include in tracking carbon credits, combatting counterfeit drugs and medical devices in the pharmaceuticals industry, and improving corporate governance by offering greater transparency and better data protection, as the lack of a centralised source of information makes blockchain harder for hackers to attack.

As with any burgeoning technology there have been some teething issues with some blockchain-based solutions. But while blockchain is not without its limitations, it has many benefits and its application are only likely to broaden in the future.