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Why Blockchain Can Both Promote

ESG And Accelerate Climate
Transition
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Blockchain technology can help organizations drive more favorable
enterprise environmental, social and governance (ESG) outcomes.
However, the technology has drawn scrutiny over energy consumption.
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In recent months, stakeholders such as institutional investors and

environmental organizations have made public statements about how
blockchain technology can exacerbate climate risk due to high energy
consumption. But such claims are an oversimpliDcation of highly complex
and quickly evolving technological developments.

Blockchain’s energy consumption, speciDcally, bitcoin mining, gained

media attention following Tesla’s decision to suspend accepting bitcoin as
a form of payment due to climate concerns. The electric vehicle company
further stated that it will resume allowing bitcoin transactions once there
is conDrmation of signiDcant clean energy usage in mining. This begs a few
questions:

• Is Bitcoin (and other cryptocurrencies and blockchain technology in

general) bad for the environment?

• And for companies that are proactively developing their climate

transition plans, could investment in blockchain hinder their progress?

The energy consumption debate

Proof-of-work: The high-energy consumption blockchain

Bitcoin is a type of blockchain called proof of work, which means that

participants compete to verify transactions made by other participants by FEATURED CONTENT

consuming computing power to solve a cryptographic puzzle. In the

context of Bitcoin, this process of using computing power to validate
transactions is referred to as “bitcoin mining.” By design, proof-of-work
blockchains require high levels of energy consumption. In fact, high
energy consumption is a cost that inherently prevents addition of
malicious blocks.

Proof-of-stake: The alternative that

consumes exponentially less energy
9$*63(%(:!/(1+%$-5

Proof-of-stake blockchains, on the

other hand, work very differently. New Poll: CEOs Find Challenges
In Using Customer Data To
Instead of using computing power to
Drive Innovation
verify transactions, proof-of-stake Chief Executive and Amazon Web Services
blockchains verify transactions by Ability to harness and sort through data for
locking away some coins as “stake.” In meaningful insights remains a hurdle, many
turn, the stake gets an additional say. “The key is...Dnding what is actually
relevant.”
reward for successfully verifying the
transaction or destroyed if there is a mistake or fraud. Proof-of-stake Nearly Half Of CEOs
Struggling With Digitalization
blockchains are already in mainstream, such as Cardano. The founder of
Efforts, Poll Finds
Ethereum and its community have long discussed plans to shift to proof-
of-stake from proof-of-work blockchain. Ethereum is the second largest
cryptocurrency by market capitalization and the foundation of a wide
SUBSCRIBE TO CHIEF EXECUTIVE
range of real-world use cases. If successful, such a shift would have
signiDcant implications for cryptocurrency and energy usage.
Sign Up to Receive
Renewable energy usage is on the rise Chief Executive
Energy consumption is not equivalent to carbon emission. Based on Magazine
estimates provided by the Cambridge Center for Alternative Finance Chief Executive’s publications are
designed to help CEOs do their
(CCAF), Bitcoin mining consumes more than 100 terawatt-hours (TWh) of jobs better and run their
electricity annually, enough to power an entire country such as the businesses more effectively.
Subscribe here.
Philippines and Pakistan. However, the CCAF also found that 76% of proof-
of-work miners use some source of renewable energy, and that 39% of Learn more

total proof-of-work mining is powered by renewable energy. Median usage

of renewable energy is high in Europe and North America (70% and 66%,
CEO CONFIDENCE INDEX
respectively), while much lower in Asia PaciDc (25%). Overall renewable
energy usage in Bitcoin mining is expected to improve given China’s recent
crackdown, where the world’s largest Bitcoin mining operations once took CEO Confidence
place. Index: Proportion Of
CEOs Planning To
Using blockchain to combat climate change
Increase Hiring
Blockchain can play an important role in driving greater use of renewable Highest We’ve Seen
energy. For example, Energy Web was launched as a global energy Chief Executive’s February CEO
blockchain community that seeks to accelerate energy transition, such as ConDdence Index poll shows a
record number of CEOs plan to
helping Austrian Power Grid more efDciently integrate renewables into the
increase their hiring over the
electricity market. Energy Web also announced an open-source coming year, but, their

application that will enable bitcoin miners to claim and verify renewable conDdence in future conditions
dropped on worries over interest
Learn more
energy usage. rates, iniation and instability.

In addition to reducing carbon emission through greater use of renewable

energy, blockchain can also be used to enable carbon offset. Blockchain-
enabled platforms allow companies to offset their carbon footprint
through investment in environmental projects. Demand for carbon offset
opportunities continues to surge, coinciding with the desire to
decarbonize cryptocurrency. For instance, the Carbon Offsets to Alleviate
Poverty began accepting cryptocurrency donations to make carbon offset
more accessible, allowing donors to counteract their carbon footprint
from cryptocurrency mining and usage.

Awareness regarding climate risk has continued to rise in the

cryptocurrency community. In April 2021, the Crypto Climate Accord was
formed with the goal for the crypto industry to reach carbon neutrality (or
net-zero) by 2040, 10 years earlier than the 2050 goal set out by the United
Nations (U.N.) and the world’s major economies. As a private-sector-led
initiative, large numbers of Dntech and cryptocurrency companies have
either become signatories to or indicated support for the Accord.

The U.N. expects that blockchain technology and cryptocurrency will play
an important role in sustainable development through enhancing climate
data transparency, supporting climate Dnance and enabling clean energy
markets. Leveraging blockchain networks with lower power consumption
can be the key to further unlocking these opportunities to propel climate
transition.

Driving ESG outcomes with blockchain beyond the climate debate

Blockchain technology also can drive better superior overall ESG

outcomes. For example, Principles for Responsible Investment, an investor
initiative in partnership with the U.N. Environmental Program (UNEP)
Finance Initiative and the U.N. Global Compact, was created to set out how
blockchain can contribute to responsible investment and become a force
for social good. One use case is Dnancial inclusion through microDnance,
where blockchain technology can signiDcantly reduce the transaction cost
for people in developing countries to access capital.

In the context of enhancing social outcomes, a study published by

Stanford Business School’s Center for Social Innovation highlights the role
blockchain technology can play in driving social outcomes such as
Dnancial inclusion and health. By making supply chains more efDcient,
blockchain can provide ore preferable operating environments for multiple
stakeholder groups such as suppliers, distributors, transporters and
retailers. IBM’s Responsible Sourcing Blockchain Network, joined by some
of the world’s largest industrial companies, is a relevant example of how
blockchain has played a role in driving responsible sourcing.

We previously have argued the many use cases of how blockchain

technology can provide more effective human capital management and
more compelling employee experience through more efDcient recruiting
processes, safer transmission of conDdential data, more comprehensive
learning and upskilling ecosystems, and their related processes and
programs. Such blockchain applications also can contribute to enhancing
employee wellbeing, an increasingly important indicator of organizational
health and productivity.

Enabled by blockchain technology, greater transparency and veriDcation

on ESG data can signiDcantly enhance governance practices and
outcomes. In speaking with board members around the world, we came to
understand that the lack of veriDed and standardized ESG data can be a
signiDcant obstacle to driving organizational ESG priorities and measuring
companies’ improvements in their ESG proDles. At Davos 2020, major
accounting Drms and the World Economic Forum collaborated to set out
common metrics and consistent reporting of sustainable value creation.

Sustainability metrics can only be set if they are measurable, especially for
organizations looking to connect ESG achievements to their executive
compensation programs. The use cases of blockchain applications in
supporting the collection and veriDcation of ESG data are well
documented, such as this report published by the World Economic Forum.
SpeciDcally, blockchain can automate data collection across different
points of an organization’s supply chain. Instead of relying on obscure data
provided by various vendors and suppliers, organizations can have greater
control over their true environmental impact.

Is investing in blockchain a hindrance to a company’s climate transition pathway?

Proof-of-work blockchains such as Bitcoin consume a substantial amount

of energy. However, the proof-of-stake alternative and the increasing use
of renewable energy in powering proof-of-work blockchains represent
examples of how blockchain and cryptocurrency communities have
committed to reduce climate risk and provide pathways for climate
transition.

Furthermore, there are many ways organizations can leverage blockchain

technology to strengthen their ESG proDle and drive sustainable value
creation, including more effective management of human capital and
increased productivity. With deeper and more complete ESG data,
organizations will not only have a better understanding of their progress
against the goals they set out, but also be more equipped to tell the story
of how their ESG achievements will lead to desired levels and forms of
sustainable value creation.

Blockchain can open new opportunities for organizations to more easily

access renewable energy and offset their carbon footprint, which are both
critical strategies in an organization’s climate transition journey, as well as
their ESG standards and sustainable value creation more broadly. We
expect to see blockchain technology playing an integral role in supporting
organizations’ ESG priorities as more creative applications emerge. It likely
will prove to be shortsighted to neglect the positive ESG impact of
blockchain in light of the narrow energy consumption debate about
Bitcoin.

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Kenneth Kuk is a senior director, talent & rewards, at Willis Towers Watson. Dominic Okus is a
senior executive compensation analyst, at Willis Towers Watson. John Bremen is a managing
director, human capital and beneDts and global head of thought leadership and innovation, at
Willis Towers Watson. Shai Ganu is a managing director, executive compensation and global
practice leader, at Willis Towers Watson.

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