Tokenization Taxonomy: ESG— Part 1: ESG Assets

11 min readNov 14, 2023

This article is the first in a series on ESG asset tokenization. Follow RWA World on Twitter and LinkedIn and sign up for our weekly newsletter to receive the full report.

Environmental, Social, and Governance (ESG) criteria have become increasingly important in assessing a company’s operations’ ethical impact and sustainability practices.

Environmental considers how a company performs as a steward of nature.
Social examines how it manages relationships with employees, suppliers, customers, and communities.
Governance involves a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

When applied to Environmental, Social, and Governance (ESG) initiatives, tokenization can transform how sustainable projects are financed and managed. Blockchain allows for fractionalizing ESG assets, enhanced liquidity and investment opportunities, and broader access for marginalized communities, all supporting greater investment and transparency in ESG initiatives.

Types of ESG Initiatives

ESG initiatives cover a broad range of activities across various sectors.

Environmentally, they include efforts to reduce carbon emissions, enhance renewable energy use, promote biodiversity, and implement sustainable resource management.

Socially, initiatives focus on improving labor practices, promoting diversity and inclusion, enhancing community engagement, and ensuring product responsibility.

Governance initiatives involve establishing ethical business practices, enhancing transparency and accountability, and ensuring fair executive compensation.

Market Size and Growth

A public survey of listed companies revealed that 88% have ESG initiatives in place, while 90% of companies listed in the S&P 500 actively report on sustainability. This supermajority reporting comes as little surprise given the projected market growth of 84% by 2026 for a $33.9 trillion market. Over $500 billion flowed into ESG in 2021, marking one of the strongest years on record for the sector, supporting this projection.

The intersection of cutting-edge technology and ESG bodes well for tokenization. With a projected market size of $1.5 billion by 2027, ESG reporting software is a strong industry subsector in its own right. With tokenized real-world assets having experienced an explosive growth of $300 million in a single year, tokenized ESG is a trend with strong financial undercurrents for support.

The Role of ESG in Combating Climate Change

ESG initiatives are crucial in addressing climate change. By prioritizing environmental concerns, ESG initiatives help reduce greenhouse gas (GHG) emissions and promote the adoption of clean energy. Investment in renewable energy projects directly reduces reliance on fossil fuels, while carbon credits provide a financing mechanism for sustainability projects.

ESG’s social aspect also plays a role in climate change, as it emphasizes the need for businesses to consider their impact on communities, particularly those most impacted. ESG initiatives offer a comprehensive approach towards sustainable business practices, vital in addressing global challenges such as climate change. As the market for ESG initiatives continues to grow, their impact on promoting a sustainable future becomes increasingly significant.

Tokenization of Assets

The Concept of Tokenization

Tokenization is the process of converting rights to an asset into a digital token, often on a blockchain. These tokens can represent partial ownership of tangible assets, access rights, or specific values. They can be traded like electronic securities, with blockchain ensuring immutability, transparency, ledger homogeneity, and facilitating transactions without intermediaries.

Benefits of Tokenizing Assets

Tokenization offers several benefits depending on the asset, including but not limited to the following:

Increased liquidity of traditionally illiquid assets
Immutability showing a censorship-resistant record of account
Enhanced transparency through blockchain’s immutable record-keeping
Broader access allowing more people to invest in qualified assets

Tokenization can simplify the process of buying, selling, and trading assets, reducing the need for intermediaries and lowering transaction costs.

The Process of Asset Tokenization

Asset tokenization involves a handful of essential steps, all of which must be undertaken in the context of regulatory compliance with relevant jurisdictions:

Asset Selection: Choose tangible or intangible assets suitable for tokenization, such as collectibles, real estate, bonds, or securities.
Market Research: Conduct comprehensive research to assess demand, competition, and pricing strategies.
Jurisdiction and Compliance Framework: Select the appropriate legal jurisdiction and establish a regulatory-compliant framework for tokenization.
Legal and Financial Structuring: Set up legal entities like funds and SPVs, define the ownership structure, and evaluate the assets.
Product Strategy and Roadmap Development: Create a detailed product strategy, including financial models, user and money flow designs, and a development roadmap.
Technical Infrastructure: Design the technical architecture, choose blockchain and token standards, and develop smart contracts and connectivity solutions.
Documentation and Regulatory Filings: Prepare prospectuses, terms and conditions, risk disclosures, and complete KYC/AML documentation.
Security and Quality Assurance: Perform security audits, establish monitoring systems, and ensure the platform’s integrity through quality assurance.
Launch Preparation and Marketing: Develop marketing strategies, community-building efforts, and prepare customer support and documentation for launch.
Secondary Market Integration and Scaling: Initiate secondary market trading platforms, implement growth strategies, and provide ongoing support and enhancements.

These tokens can then be issued to investors, representing their ownership stake in the asset.

Blockchain Technology and Its Role in Tokenization

Blockchain is often integral to contemporary tokenization initiatives. As a decentralized ledger, it records every transaction and token that moves through the system, ensuring definitive asset ownership and secure and efficient asset transfers. It also facilitates asset interoperability, reducing database redundancies and improving the cost of capital.

Smart contracts, programmable sets of rules within a blockchain, can automate many aspects of the issuance and trading processes. They can also enforce rules and compliance automatically without the need for intermediaries. Smart contracts work seamlessly with blockchain to enhance asset management practices and user experiences.

ESG Tokenization: Case Studies in Investment and Tokenization

Investment Platforms

Facilitating the ability to buy and sell ESG-related assets, ESG investment platforms have evolved as crucial tools for accessing the outsized yields offered by sustainable investment opportunities. Tokenization further decreases the cost of capital and increases the potential yields within this asset class.

Dexstar

Overview: Dexstar is a DeFi protocol offering a permissioned debt marketplace to drive positive environmental impact. It bridges DeFi’s capital and the substantial funding needs of sustainable businesses.

Tokenization Approach: Dexstar employs ERC-721 tokens to tokenize debt positions in sustainable projects, offering transparency and detailed insights into each stake. This approach facilitates under-collateralized lending, diverging from traditional over-collateralized methods, and broadens the scope of DeFi into traditional finance sectors.

Key Achievements: The platform focuses on early-stage financing for various sustainable projects, such as renewable energy and green tech initiatives. Dexstar’s alignment with Sustainably-Linked Loan Principles and compliance with ESG standards further strengthens its position.

Unique Selling Points: Dexstar’s debt vaults, collateralized by sustainable projects, stand out for their legal structuring and enforceability. Its platform facilitates a diversified lending strategy overseen by experienced Liquidity Allocators, blending institutional-grade due diligence with DeFi’s efficiency.

Challenges Faced: Dexstar faces the challenge of blending the decentralized ethos of DeFi with the required regulatory compliance of traditional finance. Additionally, the platform must educate potential users about this new market intersection and its relative benefits.

Penomo

Overview: Penomo seeks to leverage decentralized finance to provide battery makers and operators with a financing platform. They aim to streamline the build-out and operation of batteries by providing hassle-free, global capital access, circumventing traditional capital expenditure challenges, and eliminating the need for intermediaries.

Tokenization Approach: The platform’s tokenization method transforms battery storage assets into fractional entities that are tradable, transparent, and easy to track. This process facilitates the sale of fractions of assets, enabling faster, more affordable financing and providing stakeholders with superior terms and greater autonomy.

Key Achievements: Penomo is the only blockchain entity we have identified actively working in battery capacity financing. By enabling these groups to invest and own stakes in battery networks, Penomo enjoys a first-mover advantage.

Unique Selling Points: Penomo eliminates the complexity of accessing a global pool of capital for battery construction and operation. It is the only entity in the market offering a tokenized fractionalization solution for battery capacity financing.

Challenges Faced: Penomo’s service offering is comparatively specific, focusing firmly on battery capacity financing. This niche focus could potentially limit the total capital available or eligible for investment.

Plural Energy

Overview: Plural Energy facilitates renewable energy investments in solar fields, wind farms, and battery storage. Their platform democratizes the investment process, allowing contributions as small as $10 and offering up to 10% annual returns. They aim to break barriers in renewable energy financing, offering an easy, transparent, and compliant way to invest and accelerate the transition to a renewable grid.

Tokenization Approach: Plural Energy uses blockchain technology to tokenize renewable energy assets. They offer security tokens, representing digital equity shares in renewable energy projects, accessible to accredited and unaccredited investors. These tokens can be used as collateral in DeFi, enabling further financial flexibility.

Key Achievements: Plural Energy has established a transparent system that provides end-to-end financial and energy data visibility. Their instant settlement feature and compliance with existing regulations offer a user-friendly and regulatory-compliant investment platform.

Unique Selling Points: Plural Energy’s most notable point is its accessibility, offering highly accessible investment sizes and terms. The platform also stands out for its transparent and efficient approach to analyzing energy industry investments and DeFi integrations.

Challenges Faced: Plural Energy faces potential regulatory uncertainty regarding the intersection of decentralized finance and energy markets. Additionally, the long investment cycles for renewable energy projects and the often sophisticated finance terms present challenges to the platform’s unaccredited investor base.

Tokenization Platforms

Tokenization platforms offer powerful new opportunities for fractionalization and liquidity for ESG assets. These entities specialize in taking existing assets and creating regulatory-compliant tokenized layers associated with them, increasing market efficiency.

Frigg

Overview: Frigg is making sustainable finance accessible, efficient, and composable by using the Frigg Standard to pave the way for real-world asset integration into DeFi. This standard comprises compliance, financial, and technical workflows, allowing easy access to sustainable investments. Frigg’s vision centers on the Frigg Standard becoming the golden standard for securitizing sustainable projects, leveraging blockchain and IoT technology.

Tokenization Approach: Frigg employs a Software-as-a-Service (SaaS) model to enable sustainable infrastructure developers to issue digital securities, such as bonds. The innovative use of blockchain and IoT technology complements this approach by facilitating the tokenization of sustainable infrastructure, providing real-time data on project performance.

Key Achievements: Frigg is at the forefront of publishing real-time project data in the public domain, enhancing transparency in sustainable finance. It has set high Environmental and Social Requirements standards for renewable projects listed on its Microsites. Notably, Frigg is collaborating on groundbreaking research on asset tokenization with notable institutions and experts, furthering its impact on sustainable finance.

Unique Selling Points: Frigg stands out for its rigorous real-time project performance monitoring, utilizing IoT devices to ensure transparency and accuracy. Its Microsite offers a regulatory-compliant space for investors to interact, buy, and sell tokens.

Challenges Faced: Frigg navigates the complex terrain of integrating traditional finance compliance with decentralized finance and blockchain technology innovation. The company’s commitment to radical transparency and combating greenwashing also presents an ongoing endeavor in the evolving landscape of sustainable finance.

Allfunds Blockchain

Overview: Allfunds is a global WealthTech leader based in Germany. It offers a multifaceted service range tailored for Fund Houses and Distributors, and its ecosystem encompasses dealing and execution services, data analytics, reporting, portfolio tools, ESG advisory, and custom software solutions, all unified in a single, efficient platform.

Tokenization Approach: Allfunds has pioneered blockchain technology within the fund industry. Its innovative Allfunds Business Smart Contracts solution employs blockchain for enhanced fund distribution operations, setting a strategic roadmap for optimal blockchain utilization across the value chain. This approach ensures improved performance and scalability and significantly cuts costs while bolstering operational security.

Key Achievements: Allfunds stands out for its role in launching Spain’s first tokenized fund in 2022. The company boasts a specialized team of over 20 experts across three countries, focusing on blockchain-based solutions for all stakeholders in the fund value chain.

Unique Selling Points: Allfunds Blockchain is a trailblazer in offering a live blockchain environment, providing partners with crucial savings, enhanced data governance through dedicated privacy features, and minimal integration disruptions. Its comprehensive platform aims to be a one-stop solution, offering an array of functionalities, technology solutions, and digital tools to streamline the entire fund distribution process.

Challenges Faced: Balancing innovation with the levels of security expected of a bank, Allfunds navigates the complexities of integrating cutting-edge technology with traditional fund distribution practices. Regulatory uncertainty is a particular challenge for the space in which Allfunds operates.

Cashlink

Overview: Cashlink offers a comprehensive infrastructure for crypto securities, with their technology facilitating a seamless integration of the entire value chain, including distribution, custody, and asset servicing, tailored to the demands of modern investment platforms and financial institutions.

Tokenization Approach: Their approach provides a robust infrastructure for tokenizing a wide array of assets, including ESG assets. Cashlink’s system encompasses a crypto securities register compliant with eWpG regulations, ensuring its services are both technologically advanced and fully regulatory compliant. This infrastructure enables efficient and secure management of tokenized assets.

Key Achievements: Cashlink has made significant strides in the tokenization market, particularly in the sustainable investment sector. Notably, their collaboration with WIWIN, a leading German online platform for sustainable investments, has led to substantial capital placement in various sectors.

Unique Selling Points: Cashlink stands out for its all-in-one, flexible, fast solution, offering everything from crypto securities registry to custody and investment brokerage. Their neutral stance ensures they never compete with clients for investors, and their customized product packages are aligned with client branding.

Challenges Faced: One of the main challenges for Cashlink is navigating the complex and evolving landscape of blockchain technology and regulatory compliance. Balancing innovation with the stringent requirements of financial regulations and catering to a diverse range of clients, from innovative FinTechs to traditional financial institutions, presents a continuous challenge in maintaining their leading edge in the market.