With Environmental, Social, and Governance (ESG) metrics increasingly influencing executive compensation and company valuation, questions have arisen about the authenticity and objectivity of these metrics.
A Financial Times article titled “Investors warn ‘fluffy’ ESG metrics are being gamed to boost bonuses” highlights investor concerns that the criteria for ESG are often too subjective and can be manipulated for financial gain. While three-quarters of S&P 500 companies use ESG metrics as part of their compensation schemes, the lack of standardization and transparency poses a real challenge.
Here, we explore how blockchain technology could offer a solution to these problems, thereby promoting a truly sustainable supply chain.
The Problem: ‘Fluffy’ ESG Metrics
The Financial Times article raises concerns that ESG metrics tied to executive pay can often be “fluffy” and “easily gamed.” For example, Southwest Airlines saw its CEO’s pay increase by 76% last year, even as the airline faced criticism for canceling thousands of flights. Investors and asset managers argue that companies can manipulate ESG initiatives to meet “target-level expectations,” which isn’t necessarily indicative of actual performance in sustainability or corporate governance.
Using Blockchain to Ensure Transparency in ESG Metrics
Blockchain technology could be the antidote to these challenges by providing a decentralized, transparent, and immutable ledger for tracking ESG metrics. Here’s how it could work:
The first step is to create standardized ESG metrics that all companies must adhere to. These metrics could be formulated by a consortium of industry experts, auditors, and regulatory bodies. Once standardized, they could be encoded into smart contracts on a blockchain.
Companies could use IoT devices and sensors to collect real-time data related to their ESG activities, such as carbon emissions, waste management, and labor practices. This data would be recorded directly onto the blockchain, making it tamper-proof.
Auditing and Verification
Auditors would have real-time access to a company’s ESG metrics. Smart contracts could automatically trigger audits if there are discrepancies in reported data or if the company fails to meet pre-defined standards, making the audit process more efficient and less subject to manipulation.
All stakeholders, including investors and regulators, could have permissioned access to the blockchain to view real-time ESG data. This ensures full transparency and makes it almost impossible for companies to manipulate their performance metrics.
The Case for Blockchain in Sustainable Supply Chains
Incorporating blockchain to track ESG metrics can have far-reaching implications beyond executive compensation, especially for establishing a sustainable supply chain. Companies could extend the same technology to scrutinize the sustainability practices of their suppliers. This could create a ripple effect, encouraging even small suppliers to adopt better ESG practices.
While ESG metrics are becoming an integral part of corporate strategies, their lack of objectivity and transparency is a growing concern for investors. Blockchain technology offers a viable solution to these challenges. By enabling real-time tracking and verification of standardized ESG metrics, blockchain can not only make executive compensation more equitable but also help in establishing truly sustainable supply chains.
Let’s move away from ‘fluffy’ metrics and embrace technology that brings tangible sustainability improvements. Blockchain can provide the accountability and transparency we need to ensure that corporate ESG efforts are genuine and impactful.
Interested in using blockchain technology to implement a transparent and truly sustainable supply chain? Reach out to #dltledgers for a demo, or check out our ready-to-deploy blockchain powered solutions on The App Hub.