Blockchain technology can help organizations drive more favorable enterprise environmental, social and governance (ESG) outcomes. However, the technology has drawn scrutiny over energy consumption.
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 oversimplification of highly complex and quickly evolving technological developments.
Blockchain’s energy consumption, specifically, 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 confirmation of significant 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 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
Proof-of-stake blockchains, on the other hand, work very differently. Instead of using computing power to verify transactions, proof-of-stake blockchains verify transactions by locking away some coins as “stake.” In turn, the stake gets an additional reward for successfully verifying the transaction or destroyed if there is a mistake or fraud. Proof-of-stake blockchains are already in mainstream, such as Cardano. The founder of 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 range of real-world use cases. If successful, such a shift would have significant implications for cryptocurrency and energy usage.
Renewable energy usage is on the rise
Energy consumption is not equivalent to carbon emission. Based on estimates provided by the Cambridge Center for Alternative Finance (CCAF), Bitcoin mining consumes more than 100 terawatt-hours (TWh) of electricity annually, enough to power an entire country such as the 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 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%, respectively), while much lower in Asia Pacific (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 place.
Using blockchain to combat climate change
Blockchain can play an important role in driving greater use of renewable energy. For example, Energy Web was launched as a global energy blockchain community that seeks to accelerate energy transition, such as helping Austrian Power Grid more efficiently integrate renewables into the electricity market. Energy Web also announced an open-source application that will enable bitcoin miners to claim and verify renewable energy usage.
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 fintech 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 finance 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 financial inclusion through microfinance, where blockchain technology can significantly 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 financial inclusion and health. By making supply chains more efficient, 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 efficient recruiting processes, safer transmission of confidential 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 verification on ESG data can significantly enhance governance practices and outcomes. In speaking with board members around the world, we came to understand that the lack of verified and standardized ESG data can be a significant obstacle to driving organizational ESG priorities and measuring companies’ improvements in their ESG profiles. At Davos 2020, major accounting firms 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 verification of ESG data are well documented, such as this report published by the World Economic Forum. Specifically, 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 profile 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.