Beyond Carbon: The Power of Tokenization to Make Social Impact a Part of ESG Conversations
How can we best reduce carbon emissions, a negative externality brought about by our post-modern way of life and doing business? This question was first collectively posed in Kyoto in 1997, where conference participants determined its answer: by paying every time an actor perpetuates that negative externality. And this is exactly how the carbon trade was born.
Today, it’s safe to say that carbon is taking up all the oxygen — both literally and when it comes to our impact focus. The voluntary offset market is growing at a rapid pace, having expanded from $300 million in 2020 to more than $1 billion in 2021, showing no signs of slowing.
But not even billions of dollars and commendable environmental motivations could save carbon markets from their many issues. Perhaps the gravest one, though, is how dramatically they’ve managed to shift our focus away from social impact — making the carbon tunnel vision one of the worst things to happen to comprehensive ESG efforts. So, is there a way to fix this?
Building a new impact economy
If emitting carbon dioxide is a bad look for your business, isn’t slave labor in your supply chains or operating in a community where girls can’t go to school just as bad?
We’ve often overlooked these factors and rushed to accept carbon offsets’ dominance. Social impact has been perceived as harder to quantify, riskier, and as “having too many chefs in the proverbial kitchen.” After all, the international development system, with NGOs, INGOs, and civil society actors, has been running the show for the past seven decades.
While often criticized for capital inefficiency, moral relativism, and even, in some cases, outright corruption, one potentially positive byproduct of the development aid sector is the fact that these organizations have had to operate in complex settings while often resource-constrained. That fact, combined with pressures from donors and governments to justify and measure impact outcomes, has forced these actors to develop helpful frameworks for measuring both needs and impact. Carbon markets have had to build these methodologies from scratch — social impact has a solid base for us to leverage.
Just think about the Sustainable Development Goals (SDGs) and the externalities we can explore to generate impact in areas such as Zero Hunger, Life Below Water, or Gender Equality. With the market-making capacity of web3 ecosystems, we now have the opportunity to turn this and other impact assessment frameworks into token standards, creating a whole new marketplace for social impact and its externalities. Not only does tokenization present better quantification models, but it can also facilitate innumerable opportunities for incentivizing, maximizing, and monetizing positive action.
Putting the SG in ESG again
Companies can bolster their ESG efforts in relation to social impact in various ways. They should first thoroughly evaluate any holdings in “impact” funds. Next, and perhaps most importantly, they need to look at their own operations: wage distribution, environmental degradation in communities, and more. In the future, these efforts could be complemented by impact tokens.
And what better way to make an impact than buying a token that’s representative of a project that met a genuine need and passed impact assessment requirements? Tokenization, with the use of blockchain technology to track data and create trustless systems, could broaden the scope from outputs to outcomes, thereby shifting the focus to longer-term benefits of impact initiatives. Peer-led reviews or on-chain experts could verify the impact in place of today’s costly and time-inefficient monitoring practices.
Tokens could drive the formation of a more inclusive crowdfunding structure, allowing stakeholders, from companies to NGOs to individuals, to participate in both assembling and financing an impact project, resulting in more democratic decision-making and assessment. Project developers, beneficiaries, community members, and various other stakeholders could snap pictures, submit immediate on-site data, or provide other evidence inputs, which are all factors that can demonstrate and even appreciate the value of the token over time.
For example, an impact token representing a school built in a remote village might appreciate more than one representing an educational institution in a town with more schools, as the ripple effects here are likely more outsized. Token creators, and possibly involved certifiers, will, however, need to be vigilant in the evaluation and verification of specific impact metrics to address biases that tend to dominate traditional economic development models. In other words, we need to avoid models that might result in a project to resettle refugees from Sudan generating significantly lower token values than a similar project for refugees from Ukraine. We need to look at web3 as an opportunity to rectify — versus inherit — legacy problem spaces.
Using the SDGs, we can also better communicate impact and its different layers. Let’s say that after speaking to its value chain’s farmers, a company decides to invest in the education of those farmers’ families. This investment will clearly boost Quality Education (SDG #4), but if holistically conceived with longer-term outcome measurement in place, this project could also improve Gender Equality (SDG #5) and Life on Land (SDG #15). Different tokens representing these ancillary impact outcomes (often called “co-benefits” in the carbon space) could paint a more accurate picture of the true, multifaceted impact on people, their environments, and their community wellbeing.
From mainstream discussions about operationalizing Michael Porter’s shared value creation to Blackrock’s Larry Fink’s ESG letters to Patagonia’s unapologetically mission-forward revenue growth strategies, “impact” and “ESG” continue to find their way into corporate boardrooms. But while we may have robust valuation and trading structures for carbon offsets today, we have yet to build the equivalent for social impact. We now have an opportunity in this new era of the internet to leverage tools, such as impact assessment frameworks, to help us forge a path to greater accountability, transparency, and inclusivity for these social impact initiatives. And, importantly, we have the tools to make them investable, tradable assets.
