How Companies can report ESG data effectively using Blockchain?

This article talks about the ESG (Environmental, Social and Governance) score and SDGs (Sustainable Development Goals) which are used by investors to decide if a company is worth putting their money or not and, I also talk about how the integration of Blockchain would be revolutionary in the reporting of ESG data considering the added transparency, immutability and Digitization Blockchain adds to the system.

Environmental, Social and Governance factors (ESG)

ESG refers to the Environmental, Social and Governance factors used to evaluate a country or a company on how far advanced they are in sustainability.

  • Environmental factors include the contribution a company makes to climate change with cutting of green gas emissions, waste management and energy efficiency.
  • Social factors include labor rights in the supply chain of a company, human rights and general factors such as workplace safety and health. 
  • Governance refers to a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of corporations. [1]

This score is used by investors to avoid companies that might pose a potential financial risk due to their environmental or other practices.
The world’s largest investor, BlackRock CEO Larry Fink raised the bar by calling on corporate CEOs for their companies to have a social purpose and to be mindful of the impact of their business on society. Moving forward, he said, BlackRock will be keeping a closer eye on how companies behave. [2]

Investors are looking more closely into the ESG funds which are portfolios of equities and/or bonds for which environmental, social and governance factors have been integrated into the investment process.

Sustainable Development Goals (SDG)

SDGs are 17 interconnected Sustainable Development Goals which, according to the UN are the blueprint to achieving a better and more sustainable future for all. 

Most of the rating agencies are now including these scores along with the usual metrics for the performance of the company which adds another major factor for the investors to consider while investing. This puts more pressure on the companies to report their sustainability practices and adopt more transparency in their system.

Klaus Schwab, Founder and Executive Chairman of the World Economic Forum, said in 2019: “We should embrace independent tracking tools for assessing progress under the Paris agreement and the SDGs and implement “stakeholder capitalism” by introducing an environmental, social, and governance (ESG) scorecard for businesses”.

Current Problems with ESG reporting

  • Data Reporting
    Investors are becoming more and more serious about the reporting of data about the ESG score. They wrote a letter to the SEC requesting them to develop a framework about the reporting of data concerning the ESG data.
    Companies are either reporting fragmented data or the data is of very limited use for the investors.
  • Data Accounting
    There is a serious problem with data accounting in companies regarding sustainability and governance which makes it difficult for the investors.
    This problem of data accounting is quite prominent in the supply chain of companies in which the data related to waste management is ignored or is fragmented.
    If the data related to ESG is not reported correctly by the company, then it’s ESG status is Unknown or Pending which means that the investors will be reluctant when investing in the company. 
  • Data Standards
    Most of the time the data reported by companies in regards to sustainability and governance does not meet the standards set by the authorities and this makes it difficult for them to calculate the ESG scores. Although the companies are reporting the data, it cannot be used by the investors as it does not comply with the standards and is basically useless. 

The London Stock Exchange Group’s characteristics of ESG investment-grade data

  • Accuracy: deploy rigorous data collection systems
  • Boundaries: align with the fiscal year and business ownership model
  • Comparability and Consistency: use consistent global standards to facilitate comparability
  • Data Provision: provide raw as well as normalized data
  • Timeliness: provide data to coincide with the annual reporting cycle
  • External Assurance: consider strengthening the credibility of data by having it assured
  • Balance: provide an objective view, including both favorable and unfavorable information [3]

How Blockchain aids in providing better ESG data?

  • Transparency
    With more transparency in the system of a company including the Supply Chain transparency, companies will be able to report the data concerning sustainability practices. This transparency can be achieved very easily with the integration of Blockchain in the supply chain of a company.
    Adding the Blockchain to the supply chain will aid in the integration of data which, as of now, is stored in data silos. With a common platform for all the entities on the supply chain, companies can provide complete transparent data.
    Also, the added transparency in the supply chain makes it easily auditable which adds to the credibility of the data because of the immutable nature of Blockchain technology.
  • Compliance
    Compliance with the government regulations regarding sustainability will aid in a better ESG score which in turn results in more investments. The use of technology is essential in the modern-day complex supply chain of companies.
    With the integration of Blockchain, AI, and IoT to monitor the operations of the supply chain, companies can assure better compliance. All the producer’s data can be uploaded on the Blockchain platform which eases the compliance process. 
  • Digitization of data
    Will all the data uploaded on the platform, the availability of data for the calculation of ESG score is fast and accurate. The data once uploaded on a Blockchain platform cannot be changed or deleted by anyone and with the upload of real-time data, the extraction becomes convenient and fast. [4] [5] [6]

QuillTrace, the right solution

QuillTrace is a Blockchain-based procurement platform by Quillhash which makes the supply chain of any business transparent, sustainable and secure with integrating with the existing Supply Chain systems. Using QuillTrace, companies can report their ESG data more transparently and with data formats complying with the Industry or International standards. With better data related to sustainability and governance about the company, their score increases which opens more avenues for the investors to look into.

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