Can blockchain tech in green finance attract more investors and deter bad actors?

The world could be getting its first government-issued blockchain-based green bond later this year, the Hong Kong Monetary Authority announced on Monday at the city’s Fintech Week. 

The government said it has laid the groundwork for green finance on the blockchain through private and public partnerships such as the UN Global Innovation Hub and Bank for International Settlements (BIS).   

Advocates say the digital ledger can help governments combat greenwashing and increase trust and participation in climate-friendly markets.

Greenwashing, the misappropriation of an environmentally friendly label, has been so pervasive that some governments such as the UK and Australia have passed laws to fine entities for exaggerating their sustainable actions when raising money.

“There have been certain issues with green finance, from greenwashing to traceability to the effectiveness of the projects,” said Musheer Ahmed, an external consultant for the Bank of International Settlements and advisor to the Dubai-based Virtual Assets Regulatory Authority.

“Through the initiative, you’re going to be able to get better transparency because you’ll be able to track how and when these carbon credits are being generated,” said Ahmed. 

Green bonds are debt instruments, the sale of which are theoretically put towards green projects in areas such as energy production or waste management and recycling. However, a report from Bloomberg last month found that the majority of funds raised by green bonds in Europe are tied to weak or irrelevant climate goals.

Hong Kong authorities said that its planned digital green bond will address greenwashing through stronger accountability on the digital ledger. 

Data transparency 

Data collection is one way that blockchain can improve green bond accountability, according to Hong Kong-based Allinfra, a sustainability data management software company. Allinfra’s blockchain-based platform collects climate-relevant information directly from assets and allows it to be stored, monetized and verified. 

By collecting data on green-funded projects and linking that information to digital financial instruments on the blockchain, it creates a “permanent immutable record” and more trust, said Allinfra cofounder Dave Sandor. 

“It’s these two elements together that really help improve the provenance of climate-related products, reduce fraud, reduce greenwashing and make it easier to monitor where funds are deployed,” he added in an interview with Forkast.

Democratization

Another aspect of green finance where blockchain technologies are being implemented is within the carbon market. Carbon markets work by putting a price on the use or storage of carbon, which can be bought and sold by countries or companies to offset emissions.

According to forecasts, the size of the carbon market could reach US$2.4 trillion in 2027, from US$211.5 billion in 2019. But the market remains too closed off and distant from even the most sophisticated investors, said Michael Chin, CEO of InterOpera that builds Web 3.0 infrastructure. 

“Every country will soon have a national carbon credit exchange, but so far, only big companies and professional investors are participating,” Chin said at Hong Kong Fintech Week on Tuesday. Carbon markets need to become more like traditional capital markets and welcome more everyday investors, he added.   

Tokenized carbon assets extend carbon markets’ reach and impact, according to Josh Knauer, cofounder of ReSeed Carbon Assets and co-chair of a World Economic Forum working group on carbon credits. 

ReSeed is a blockchain platform that plans to sell digital blockchain tokens which identify farmlands that have an estimated metric ton of carbon stored in vegetation and soil. 

The digital “carbon protection credit” can be linked with live satellite imagery of the farmland, which uses artificial intelligence to confirm the amount of carbon protected. That way, buyers can ensure the quality of the credit and easily prove and report their ownership of the protected carbon, according to ReSeed. 

The efficiency of tokenized carbon credits in measurements, reporting and verification makes it easier for ReSeed to create smaller and less expensive bundles of carbon to be sold to individual investors and family offices rather than just large institutional investors, said Knauer.

The company will begin selling credits linked to about two million metric tons of carbon from over 8,700 small farmers by the end of this month, he added. 

Knauer added that public-private partnerships such as Hong Kong’s green bond initiative could help boost innovation in the market.

“We need everybody involved, from the nonprofit sector to the private sector to governments,” said Knauer. 

“Fundamental questions we all should be asking is, where is this carbon credit from? How was it generated? What is its quality? And the transparency of data that blockchain can provide is the best way to start that dialogue between all sectors.”