Trust: the building block of successful ESG reporting
ESG reporting is suffering from a lack of trust arising due to the non-transparent connection of the non-financial metrics to tangible assets in the entire value chain. The EY blog article, Six ways companies can enhance their ESG reporting, highlights the importance of data credibility.
Blockchains thrive in an environment where there are many stakeholders with varied, and sometimes, conflicting needs, and there is no trust, or at least, some friction in collaboration. The technology has been referred to as the “trust machine” and can play a considerable role in reliable ESG reporting in the near future.
Blockchain: a way forward for trusted and standardized sustainability and long-term value reporting
Broadening the scope of ecosystem ESG collaboration with a decentralized utility
One of the main topics of discussion in ESG reporting is what to report and its scope — whether companies focus on scope 1 reporting, i.e., reporting the company’s direct effect, scope 2 or scope 3 impacts, including indirect effects covering the whole supply chain. The difference between direct and indirect emissions varies heavily from industry to industry. For example, direct emissions from an electric power generator company can constitute 97.8% of the overall emissions. In contrast, direct emissions from wholesalers and retailers constitute only 1.3% of the overall emissions.
You can learn more through the EY blog, Why calculating your company’s carbon footprint matters.
As the importance of ESG metrics increases, so does the demand for reliable data from the entire distributed ecosystem where companies operate today. The need of the hour is a utility that allows sharing of reliable and trusted information between several parties.
Blockchain creates a decentralized technical platform based on trust in the distributed network instead of intermediaries or central authorities. This enables automation of shared business logic in transactions and coordination mechanisms of ecosystems, digitalizing them as a code delivered by the technical and operational layer. This improves speed and efficiency by eliminating intermediaries from the interactions.
Decentralization makes blockchains attractive as a governance technology that facilitates collaboration. Data submitted by one is verified by many before being made persistent. Previously, some of the blockchain implementations have suffered from excessive centralization. Because a central platform provider exercised too much control, eventually failing to attract network participants to join the collaboration.
EY has made significant progress in enabling scalable privacy-preserving transactions on the public Ethereum blockchain. With this approach, the public blockchain networks can be used as a utility to build on real solutions.
Cryptographic chaining and automation for better ESG reporting transparency and auditability
Blockchains can work as a trust layer, integrating data from varying sources and database technologies for enterprise, value chain and ecosystem levels. For that reason, blockchain can be leveraged for cross-industry reporting needs. In addition, with this technology, the data layer becomes timestamped and tamper-resistant.
All transactions in blockchains are chained to each other using cryptography. Consequently, a clean lineage of data can be established across the value chain for transparency and auditing.
One of the earliest use cases of blockchain has been in supply chain management. Blockchain can provide transparency to the provenance of raw materials and goods from source to end-use. To understand this better, consider authenticating the ethical sourcing of cobalt used in batteries for electric vehicles as an example. The mining of cobalt has been plagued using child labor already for decades.
As blockchain technology matures, more complex logic can be embedded into transactions and validated on-chain. Business logic between transacting parties can be automated to occur within the transaction logic and transactions settled at the spot providing near real-time record of transactions. As any logic can be embedded into transactions, thus can sustainability data. This can even be used as criteria for the automatic execution of transactions.
Peers in the network validate all the transactions in a blockchain, as they are recorded to the ledger, i.e., the data is validated close to the source. How trusted a data is, is decided by how close to the value exchange origin the said data recorded on the blockchain. The convergence of Internet of Things (IoT), intelligent automation and blockchain can create a truly trusted data source connecting the physical to the intangible.
NextGen finance function
In times of crisis, the demand for insight, to seize an element of control in a volatile and fast-changing environment, increases. The research shows how finance is bearing the brunt of increased demands for rich and varied information and insight.
Based on the EY Financial Accounting Advisory Service Report of February 2021, two-thirds of respondents (66%) say demand for “forward-looking financial analyses and forecasts” has increased over the last 12 months. Stakeholders are also looking for new insight “beyond the numbers” of financial reporting, such as ESG data.