14.2 Blockchain and sustainability tracking

Blockchain technology is revolutionizing sustainability tracking, offering unprecedented transparency and accountability. By creating immutable records of environmental and social data, blockchain enables companies to prove their sustainability claims and stakeholders to verify them easily.

This emerging trend is reshaping the future of sustainability reporting. Blockchain's ability to enhance supply chain traceability, automate data collection, and foster collaboration among stakeholders is driving more comprehensive and reliable sustainability management practices across industries.

Blockchain Fundamentals

Key Concepts and Principles

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• Blockchain is a decentralized, distributed ledger technology that records transactions across a network of computers, ensuring transparency, immutability, and security
• The basic unit of a blockchain is a block, which contains a set of transactions, a timestamp, and a unique cryptographic hash linking it to the previous block, forming a chain of blocks
• Consensus mechanisms, such as Proof-of-Work (PoW) or Proof-of-Stake (PoS), are used to validate transactions and add new blocks to the chain, ensuring the integrity of the blockchain
  • PoW requires miners to solve complex mathematical problems to validate transactions and create new blocks, rewarding them with cryptocurrency for their efforts (Bitcoin, Ethereum)
  • PoS selects validators based on their stake in the network, requiring them to lock up a portion of their cryptocurrency as collateral to participate in the validation process (Cardano, Polkadot)
• Smart contracts are self-executing contracts with the terms of the agreement directly written into code, automatically enforcing the contract terms when predefined conditions are met
  • They enable the automation of complex processes, such as supply chain management, insurance claims, and financial transactions, without the need for intermediaries (Ethereum, Hyperledger Fabric)

Network Types and Characteristics

• Blockchain networks can be public (permissionless), private (permissioned), or hybrid, each with different levels of access, control, and scalability
  • Public blockchains are open to anyone, allowing participants to join the network, view transactions, and contribute to the consensus process (Bitcoin, Ethereum)
  • Private blockchains are restricted to a specific group of participants, with access controls managed by a central authority, providing greater privacy and scalability (Hyperledger Fabric, Corda)
  • Hybrid blockchains combine elements of both public and private networks, enabling controlled access to certain parts of the blockchain while maintaining public transparency (Dragonchain, XinFin)
• Key characteristics of blockchain technology include decentralization, immutability, transparency, and security, which enable trust and verification without the need for intermediaries
  • Decentralization eliminates single points of failure and reduces the risk of manipulation or censorship by distributing control across the network
  • Immutability ensures that once data is recorded on the blockchain, it cannot be altered or deleted, providing a tamper-proof audit trail
  • Transparency allows all participants to view and verify transactions, fostering trust and accountability among network members
  • Security is enhanced through cryptographic techniques, such as hashing and digital signatures, which protect the integrity and authenticity of data on the blockchain

Blockchain for Transparency in Sustainability

Enhancing Data Integrity and Accountability

• Blockchain can create a tamper-proof, auditable record of sustainability-related data, such as carbon emissions, resource consumption, and supply chain information, increasing transparency and accountability
  • By recording sustainability metrics on a blockchain, companies can provide a verifiable and immutable history of their environmental and social impact, reducing the risk of greenwashing or misreporting
  • Stakeholders, such as investors, regulators, and consumers, can access and verify sustainability data on the blockchain, enabling more informed decision-making and holding companies accountable for their actions
• Smart contracts can automate the verification and reporting of sustainability metrics, reducing the risk of errors, fraud, or manipulation
  • They can be programmed to automatically calculate and report sustainability indicators based on predefined criteria, ensuring consistency and accuracy in reporting
  • Smart contracts can also trigger alerts or penalties when sustainability thresholds are breached, incentivizing companies to adhere to their commitments and take corrective actions

Supply Chain Traceability and Compliance

• Blockchain-based systems can enable real-time tracking and tracing of products and materials throughout the supply chain, ensuring compliance with sustainability standards and certifications
  • By recording the origin, journey, and impact of products on a blockchain, companies can demonstrate responsible sourcing practices and verify the authenticity of sustainability claims (fair trade, organic, conflict-free)
  • Consumers can access detailed information about the provenance and sustainability of products, empowering them to make more informed and ethical purchasing decisions
• Tokenization of sustainability assets, such as carbon credits or renewable energy certificates, can facilitate the creation of new markets and incentive mechanisms for sustainable practices
  • By representing sustainability assets as digital tokens on a blockchain, companies can trade and transfer these assets more efficiently and transparently, creating new opportunities for financing and investing in sustainable projects
  • Tokenization can also enable the fractional ownership of sustainability assets, lowering barriers to entry and increasing participation in sustainable markets

Collaborative Sustainability Management

• Blockchain can foster collaboration and data sharing among stakeholders, such as companies, regulators, and NGOs, enabling a more comprehensive and integrated approach to sustainability reporting and management
  • By creating a shared and trusted database of sustainability information, blockchain can facilitate the exchange of best practices, benchmarking, and collective action towards common sustainability goals
  • Blockchain-based platforms can enable the creation of multi-stakeholder ecosystems, where different actors can contribute and benefit from sustainability data and initiatives, fostering a more inclusive and participatory approach to sustainability governance

Challenges of Blockchain Implementation

Scalability and Energy Consumption

• Scalability issues can arise as blockchain networks grow, leading to slower transaction processing times and higher energy consumption, which may conflict with sustainability goals
  • As more participants join the network and the volume of transactions increases, the blockchain can become congested, resulting in longer confirmation times and higher transaction fees (Ethereum, Bitcoin)
  • The environmental impact of certain blockchain consensus mechanisms, such as Proof-of-Work, can be significant due to high energy consumption, potentially undermining the sustainability benefits of blockchain applications
    • The Bitcoin network consumes an estimated 150 terawatt-hours of electricity annually, more than the entire country of Argentina, raising concerns about its carbon footprint

Interoperability and Standardization

• Interoperability challenges exist due to the lack of standardization across different blockchain platforms and sustainability reporting frameworks, hindering data integration and comparability
  • Different blockchain platforms (Ethereum, Hyperledger Fabric, Corda) have their own technical specifications and programming languages, making it difficult to exchange data and assets across networks
  • The absence of common sustainability reporting standards and metrics can lead to inconsistencies and fragmentation in blockchain-based sustainability solutions, limiting their effectiveness and adoption
• Regulatory uncertainty and the lack of clear legal frameworks for blockchain applications in sustainability reporting can create barriers to adoption and compliance
  • The legal status and enforceability of smart contracts and blockchain-based transactions may vary across jurisdictions, creating risks and uncertainties for companies and investors
  • The absence of clear guidance and regulations on the use of blockchain for sustainability reporting can hinder the development and implementation of blockchain solutions, as companies may be reluctant to invest in unproven or unregulated technologies

Cost and Accessibility

• The cost of implementing and maintaining blockchain solutions can be high, particularly for small and medium-sized enterprises, limiting their ability to participate in blockchain-based sustainability initiatives
  • Developing and deploying blockchain applications requires significant upfront investments in infrastructure, talent, and expertise, which may be prohibitive for smaller organizations with limited resources
  • The ongoing costs of maintaining and updating blockchain networks, such as transaction fees, storage costs, and security measures, can also be a burden for companies, especially those with tight profit margins
• Privacy concerns may arise when sensitive sustainability data is shared on a blockchain, requiring careful design of access controls and data governance mechanisms
  • While blockchain provides transparency and immutability, it may also expose confidential business information or personal data to unauthorized parties, necessitating robust encryption and privacy-preserving techniques (zero-knowledge proofs, homomorphic encryption)
  • Companies need to strike a balance between transparency and confidentiality when sharing sustainability data on a blockchain, ensuring that only relevant and authorized stakeholders have access to sensitive information

Blockchain Case Studies in Sustainability

Carbon Emissions Tracking and Reporting

• The Carbon Disclosure Project (CDP) has partnered with Xpansiv to develop a blockchain-based platform for tracking and reporting corporate carbon emissions data, improving data quality and transparency
  • The platform enables companies to securely and accurately record their carbon emissions on a blockchain, providing a verifiable and auditable trail of their environmental impact
  • By automating the collection and reporting of emissions data, the platform reduces the administrative burden and costs associated with traditional carbon accounting methods, while increasing the reliability and comparability of emissions disclosures

Sustainable Supply Chain Management

• Provenance, a supply chain transparency platform, uses blockchain to track the origin, journey, and impact of products, enabling consumers to make more sustainable choices and companies to demonstrate responsible sourcing practices
  • By recording the movement of products and materials on a blockchain, Provenance creates a tamper-proof record of their provenance, from raw materials to finished goods, allowing stakeholders to verify sustainability claims (organic, fair trade, recycled)
  • The platform has been used to trace the sustainability of products ranging from fish and palm oil to fashion and beauty items, empowering consumers to make informed purchasing decisions and incentivizing companies to adopt more sustainable practices
• The World Wildlife Fund (WWF) has launched the OpenSC platform, which leverages blockchain to track and verify the sustainability of seafood products, combating illegal fishing and promoting responsible consumption
  • OpenSC uses IoT devices and blockchain technology to track the journey of seafood products from the point of catch to the point of sale, providing a transparent and auditable record of their origin, quality, and sustainability
  • By enabling consumers to access detailed information about the provenance and sustainability of seafood products, OpenSC aims to drive demand for responsibly sourced seafood and incentivize the adoption of sustainable fishing practices

Renewable Energy and Circular Economy

• The Energy Web Foundation has developed a blockchain-based platform for tracking and trading renewable energy certificates (RECs), enabling a more efficient and transparent market for renewable energy
  • The platform allows renewable energy producers to issue and trade RECs on a blockchain, providing a secure and verifiable record of the origin and ownership of renewable energy credits
  • By enabling the fractionalization and tokenization of RECs, the platform lowers barriers to entry and increases liquidity in the renewable energy market, making it easier for companies and individuals to invest in and support clean energy projects
• The Plastic Bank uses blockchain to incentivize the collection and recycling of plastic waste in developing countries, creating a transparent and secure system for tracking the flow of recycled materials and rewarding participants
  • The platform enables individuals to collect and exchange plastic waste for digital tokens, which can be used to purchase goods and services or exchanged for local currency, providing a source of income and incentivizing the cleanup of plastic pollution
  • By recording the collection and recycling of plastic waste on a blockchain, the Plastic Bank creates a transparent and auditable trail of the impact of its initiatives, enabling companies to verify the sustainability of their recycled plastic inputs and support circular economy efforts

Smallholder Farmer Empowerment

• BanQu is a blockchain-based platform that enables transparency and traceability in global supply chains, particularly in the agricultural sector, empowering smallholder farmers and promoting sustainable farming practices
  • The platform creates a digital identity for smallholder farmers on the blockchain, enabling them to record their transactions, access financial services, and connect directly with buyers, bypassing intermediaries and increasing their bargaining power
  • By providing a transparent and immutable record of the origin and journey of agricultural products, BanQu enables companies to verify the sustainability and ethical sourcing of their inputs, while also empowering farmers to demonstrate their sustainable practices and access premium markets