ESG, Blockchain, and the Allegory of the Cave

Jim Oosterbaan
April 19, 2021

In the year 375 BC, the Greek philosopher Plato described one of the most well-known philosophical theories, the myth of the cave, to explain human perception. The allegory describes a set of individuals in a cave watching the shadows on the walls of the cave cast by moving objects but not seeing the objects themselves. Plato argues that this is how humans perceive reality, a reality that is an imperfect representation of how things are. For instance, when we see a cup we only see an imperfect representation of the perfect concept of a cup.

It is in this light that we need to consider ESG (Environmental, Social & Governance) and its evolution, in order to start measuring the impacts of effective ESG practices. But before we get there, how did we get here and why is ESG so important?

ESG is generating significant interest and activity. It is not a fad, nor an end state. It is a concept that has evolved since 1970’s — its evolution a reflection of the changes that have rippled through our societies. These changes continue, ESG and what it means will continue to evolve and its prominence will continue to ascend.

Socially responsible investing has a long history but became more noticeable in the 1970’s and 1980’s. As socially concerned investors began to react to the impacts of the Vietnam War, Apartheid, and poor environmental stewardship by business, e.g., Love Canal, Bhopal, Exxon Valdez. The first sustainable investing mutual fund (Pax World) was launched in 1971. A list of socially responsible stocks was published in 1972 by Milton Moskowitz. Concurrently, the first personal computers are introduced in the late ‘70’s.

During the latter part of the 1980’s in response to the concerns of the impacts of fossil fuels the Intergovernmental Panel on Climate Change is established. By 1994, 26 money funds with a sustainable investment theme are available to investors. Corporate social responsibility reporting continues to grow and evolve in importance, as you see the early adoption by some companies.

In an attempt to address a range of human rights, labour, environmental and anti-corruption issues the United Nations launches the Global Compact Initiative. Concurrently, the Global Reporting Initiative is launched and provides companies with standards on how to present their impacts on these issues. Of note, the Global Compact adopts a number of principles articulated in the Sullivan Principles that were formalized in 1977.

Concurrently, Western society continues to change and evolve as long-standing issues are acknowledged and begin to be addressed. The deployment of technology begins to change the nature of work and provide people another means to communicate.

The term ESG is coined in a study published by the Global Compact — “Who Cares Wins”. The study provides recommendations on how to reflect ESG financially. At this time more than 12,000 companies are signatories to the Global Compact.

Corporate Social Responsibility reporting is evolving to ESG reporting. The most widely used standard is the Financial Sustainability Board’s — TCFD — Task Force on Climate Related Financial Disclosure. Other organizations are working to develop complementary or competing standards. Industry 4.0, the Internet of Things, is beginning to dramatically ease measurement, monitoring, and analysis of the impacts of a company’s activities on their surrounding environment. The deployment of technology is beginning to improve supply chain efficiency, measurement, and communication. Concurrently, the explosion of social media further reduces friction in communication. All these trends support and sustain the influence of ESG as it will continue to evolve.

Increased ESG activity and reporting by corporations increases transparency to purchasers and consumers of a company’s products and services. Companies that invest in reducing their environmental footprint, work to include stakeholders in their business are able to differentiate their products from competitors who do not. Purchasers and consumers begin to factor into their purchase decision ESG impacts. Here is where we need to start thinking about measuring impact, not its “imperfect shadows”.

How do we do measure in a manner that is secure, that enforces accountability, and that minimizes the amount of effort to report? Work has occurred to make this happen but little has been done to facilitate the communication of this information at the technical level. Generating and consuming information that is verifiable, that cannot be altered or lost in translation, and is immutably linked to the organization that created it even if this information changes hands multiple times is important to effectively demonstrate ESG related activity and its results. Also, it provides the opportunity to credibly allocate environmental impact to individual assets or products in large supply chains. Thus providing the basis for differentiating products.

Thanks to the efforts of many, the energy industry is ripe to adopt these new technologies that will enable accurate tracking of attributes, such as verifiable trade credentials, blockchain ledgers, immutable timestamps, etc. — without them we are only chasing shadows on a wall.

Neoflow can do this. Neoflow is a platform that enables providing secure and verifiable information across energy value chains, thus enabling the concept of an environmental passport.

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