Recently, The Economist published an article critiquing Environmental Social Governance (ESG), stating the measure is deeply flawed. They proposed the ‘S’ and the ‘G’ should be dropped and shift the ‘E’ from “environment” to “emissions”. The argument is that if the “measurement of firms’ carbon footprints were standardized, they would be easier to shrink”.
We agree with The Economist’s perspective that “emissions” and measurement of firms’ carbon footprints should be standardized to help reduce emissions (which we have been pushing for through our Carbon Suite of products and services). However, we believe we can and must be more ambitious. Companies and countries, by nature, need to undertake many important tasks at the same time; though there is a strong argument to focus only on emissions, we believe the other aspects of the ‘E’ portion are extremely important as well (even if they do not directly contribute to reducing emissions). For example, efforts to increase biodiversity, increase the area of protected carbon sequestering forests and eliminate air, water, and soil pollution are important and interrelated to emission reduction.
Although these actions do not necessarily aid in reducing emissions, these processes are still part of a larger cycle that provides ecological life support to everyone on Earth. Further, our ambition is high and we also disagree that the ‘S’ and ‘G’ elements should be removed as they contribute to a more sustainable economy. The ‘G’, governance, is most often manifested via corporate boards and political leaders, and their informed decision-making plays a vital role in ensuring that ‘E’ – whether it is ‘environmental’ or ‘emissions’ can be achieved.
The S, social, is the least connected to eliminating carbon from the atmosphere. However, I go back to our initial contention, we need to be ambitious and capable of multi-tasking. An employee who can work without fear of bullying, and harassment and do so in a safe and encouraging environment is not something that should be discarded. There is a need for a laser focus on the reduction of carbon in the air in a transparent and accurate way, however, do we need to drop ‘S’ as employers just to measure emission accurately? I do not think so.
In summary, accurately measuring carbon (and other GHGs) is essential to combat the existential threat of climate change. Even more importantly, it is for corporations and governments to act on the data obtained from measurement and transition to a sustainable business model. It is through business model changes in the real economy that the actual carbon reduction will be achieved. There is a good argument to focus just on the emission. New future-facing technology to measure carbon footprints has been introduced to speed up accurate measurement. However, it seems to me, that having good governance and treating employees well should not be so challenging that they must be dropped in the name of emission measurement and ESG.
The importance of the integrity of carbon credits
Standardization in the carbon market is extremely important as there are many agencies that offer variations of standards, which confuses customers. Transparency in the market is also needed to reduce greenwashing as well. As the market currently remains opaque to an outsider, harnessing trust is a struggle. Without widespread trust in the carbon credit market, labels of greenwashing threaten corporations. Hence, it is important to provide trustworthy and transparent solutions.
This is something we at MetaVerse Green Exchange take very seriously. We strongly believe in standardization and clear and honest disclosure of the calculation, reporting, and offsetting of carbon emissions. We ensure that our Carbon Neutrality Tokens (CNT™) are of the highest integrity by using blockchain technologies and operational procedures to provide safeguards. Hence, ensuring carbon integrity avoids double-counting and enhances transparency.
Thereafter, money must be spent in the form of green projects and R&D to modify carbon-emitting business models (i.e. substituting coal energy for wind, retrofitting buildings to be green, and retooling auto plants to make electric vehicles).
In the meantime, carbon credits can be used as an important tool to offset the hardest and last elements of business models to transition. As such, a combination of business model transformation coupled with carbon credits allows businesses to move towards net zero. Clearly, we can already see that emissions alone are not sufficient when a company looks at its ESG strategy or policy.
The role of different businesses in the path to net zero
Furthermore, the financial community must be willing to finance the transition towards a sustainable global economy. This means a transition towards using renewable energy or clean energy, electric cars, water-efficient homes, and buildings, etc. This transition requires a new business transformation that can be risky, require new technology, and may not always succeed. However, the only other option is to continue to finance the status quo and end up with a balance sheet of brown failed companies and stranded assets. Hence, to combat climate change, we need more coordinated efforts that link the real economy, policy (laws and regulations), and the financial service sector.
As a fintech company, we aim to use technology to combat climate change. We do so by leveraging on blockchain technology to create our Carbon Suite – which includes the Carbon Neutrality Token (CNT™), Carbon Registry System, and Carbon Management System (CMS). Using blockchain together with Digital Twin technology, we have developed the patent-pending Non-Fungible Digital Twin (NFDT™) which creates a digital representation of an asset that is traceable, immutable, and able to update information in real-time. Hence, this ensures the integrity of not only our CNT™ but also the integrity and efficiency of the updating of real-time information for our Carbon Registry and Carbon Management System. This ensures that investments have a direct impact on the environment, ensuring the integrity of the ‘E’ aspect of ESG.
The role of governance in the path to net zero
The ‘G’ in ESG stands for governance, and it is key to ensuring climate action as it is an overarching system of key decision-makers – from corporate boards to public officials, that act as informed and forward-thinking stewards to address areas of risk for their wider stakeholders. It can be argued that many of those in positions of governance define their roles in a narrow manner and in a very short time horizon (i.e. the tragedy of the horizons) and do not act on critical risks such as climate change.
For all the transformation that is required in the real economy to meet climate goals, informed, future-facing governance is required. Hence, the levers of power to change business models, develop action-inducing policies and finance the transformation must work in concert to catalyze the action required in the Environmental portion of ESG.
That is why our Carbon-as-a-Service covers aspects such as a Carbon Registry, Carbon Trading System, and Carbon Management System which allows governments, agencies, and organizations to access data regarding their carbon liabilities and assets. It is through this governance of emissions through a proper system that organizations are then better able to strategize how to lower their emissions or carbon footprint. As we can see, The Economist has a point about ‘E’ but without ‘G’, there wouldn’t be a system to follow through.
The ‘social’ element in addressing climate change
Finally, what is the role of ‘S’ in saving the world and addressing climate change? The Social element of ESG is most often equated with how people are treated in their workplaces and within the greater society. Important concepts of fairness, equality, and safety are addressed.
If one were to take a hard look at the ‘Social’ element, it does not seem to have a hard solid line for solving climate change. However, there are certainly some important dotted lines in the social construct that contribute to the mitigation of climate change. We see this manifesting itself in all voices being heard in a company or in small societies with indigenous people.
Many workers have views on how things should change, and they can often be bullied or shut down in the name of short-term profits or advancement. Whistle-blowers play a key role in calling out climate greenwashers.
In developing countries, farmers may need to clear forests for the rearing of cattle or agriculture in order to make a living, but this harms the environment. It would be too sweeping to ask them to stop their livelihoods in order to save the environment without any alternative solutions. Besides farmers, perhaps governments need to clear forests to build roads or expand villages and cities. This is problematic for both the environment as well as indigenous people who live in the forest.
Again, there is a social aspect to environmentalism and both governments and organizations have to consider many factors as they move into the future. Will the social element of ESG save the world? No, but it does have a contributing role as well as a critical role in making workplaces and society safe, fairer, and more equal for everyone.
While it is easier to focus only on ‘emissions’, we must work together to combat climate change; and we will need a coordinated effort between all stakeholders, including governments, organizations, and even individuals like you and me. An exceptional amount of resources (human, financial, intellectual, etc) along with incentives can catalyze a sustainable economic transition. Much of this work will be technical and empirical ranging from accurate and transparent carbon measurement to the development of new forms of storage and everything in between. Hence, whether you are an individual, organization, or government body, we all need to play our part in ensuring that all three aspects of ‘ESG’ work together.