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Blockchain in Green Finance: Transforming the Future of Finance

24 Feb 2023 updated
8 min

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Since the moment the global community realized the scale of its disastrous impact on the environment, the concept of sustainability emerged to change how we do many things. The overarching document guiding all states’ commitment to the world’s better future is the 2030 Agenda for Sustainable Development, adopted in 2015. The document laid out the main problematic areas, including 17 sustainable development goals (SDGs) of global significance. These SDGs now form the central agenda for achieving environmental, social, and governance (ESG) improvements on the global level.  

Finance and money management are also covered by SDGs, as sustainability efforts require sufficient financing to make a realistic impact. The concept of sustainable finance – an approach to investment decisions with respect to ESG goals – emerged in response to the need for a new investment tactic. That’s why the sustainable finance market has grown to $4.2 trillion in 2022, enjoying a CAGR of 22%+ projected for the coming decade. This will give us a $30+ trillion market by 2032, confirming the commitment of individuals, businesses, and governments to sustainable goals. 

From what I have been observing in the global financial market over the past decade, the GreenFi trend is very strong. There are many drivers for the emergence of the sustainable financial system, and one of them is regulation. The European Green Deal, Kyoto and Paris protocols’ carbon caps, and other regulatory measures make sustainable finance a must rather than a whim. 

But the most exciting part of this transition is that it creates unprecedented business opportunities for forward-looking businesses wishing to tap into GreenFi and offer technically robust and superior solutions. Here is my in-depth analysis of the potential that blockchain, an emerging technology in the global financial sector, has in the GreenFi niche. Let’s go through the overview of the sustainable finance system, blockchain’s role in its growth, and the benefits of blockchain-unique tokenization technology for the GreenFi sector. I’ll review several real-world examples of blockchain-powered GreenFi solutions to show you how these startups work and pinpoint several vital business directions. 

Sustainable Financial System in 2023-2024

A sustainable financial system is the one that creates, values, and transacts financial assets in ways that shape real wealth to serve the long-term needs of an inclusive, environmentally sustainable economy. It is a system of investment decisions compliant with ESG goals and fostering the attainment of sustainability objectives. 

The related phenomenon is green finance. It is the branch of financial activity that encourages bilateral engagement between the environment and finance and investment. In other words, GreenFi actors, such as banks, insurance brokers, investment funds, and microcredit organizations, ensure financial flows from various market participants (individuals and businesses) to sustainable development initiatives.  After many years of spearheading 4IRE’s GreenFi development projects, I can confidently say that GreenFi ensures that investors get a fair ROI while at the same time financing environmentally beneficial activities. 

Green finance is composed of banking, investment, and insurance products. Examples of these include green bonds, green-tagged loans, green investment funds, and climate risk insurance. Since one of the key priorities in GreenFi is energy efficiency and pollution reduction, the carbon trading market has also emerged as one of the primary GreenFi subfields. Carbon trading refers to buying and selling of credits allowing companies and production facilities to emit a specified amount of CO2 to the atmosphere. 

Other products that are labeled as ‘green’ may not be universally accepted as such – for example:

  • Financial products (e.g. credit cards) that offer a donation to environmental protection work in reward for a certain level of spending.
  • Financial products, which respond to an environmental issue (such as flood insurance) but do not seek to address the causes of this issue (such as climate change).
  • Financial products that minimize the environmental impacts of the provider’s operations (such as using recycled paper) or which offset the customer’s normal activities (such as the carbon emissions generated by air travel).

The main goal of the green finance market is to increase the importance of financial markets in solving environmental problems to ensure a sustainable future.

Green finance is thus a multi-stakeholder partnership between actors in financial markets, all directed at the promotion of the SDG agenda and improvement of the environment and social well-being. Funds accumulated via GreenFi projects are allocated to sustainable projects and technologies. 

By clearly outlining environmentally sound projects that attract investment, “green” finance allows investors to evaluate and invest their capital exclusively in environmentally sustainable projects. That’s why projects with sustainable corporate practices and a focus on sound government structures can count on green finance support. 

Can Blockchain Be Used for Sustainable Finance?

In the realm of finance, blockchain technology has emerged as a powerful tool for driving sustainable practices and advancing environmental and social goals. That’s why I am deeply convinced that blockchain has a bright future in GreenFi. There are many reasons: for example, governments need to decrease the waste rates causing dump overload in their cities. Or another case — activists have a hard time sharing the culture & knowledge or they want to invest in the ecology or helping with recycling.

By leveraging the immutable and decentralized nature of blockchain, organizations can revolutionize areas such as impact investing, carbon credit trading, supply chain sustainability, and more. Blockchain offers much value to sustainable finance because it can track emissions and lay the foundation for better accountability and traceability of transactions in this industry.  Besides, numerous blockchain-based projects emerged today to reduce carbon emissions and introduce innovative financial technology for emissions tracking and credit trading. 

Carbon balance tracking has also become much more transparent with blockchain integration. It simplifies businesses’ accountability with NGOs and interest groups in terms of their carbon footprint and work on emission reduction and movement toward more sustainable operations.   

Who can use this technology? The answer is easy — everybody. Everyone who can be stakeholders — they are government, recycling facilities, environmental and social activists, citizens, and waste management software vendors.

That’s why, as I said earlier, blockchain integration in green finance is a promising milestone of modern global digitalization. It can help solve such recycling problems as costly transportation or the cumbersome supply chain of recycling facilities. Using crypto for the most efficient subsidizing is another use case for blockchain many actors are exploring right now.

Benefits of Blockchain Use in Green Finance 

What everyone should keep in mind is that blockchain is a unique technology with multiple unexplored yet promising use cases. Its one-of-a-kind architecture makes it applicable in GreenFi, counter to the common skepticism of putting an equation mark between blockchain and cryptocurrencies. Here are the main benefits blockchain comes with. 

Supply Chain Transparency

One of the greatest benefits of blockchain to sustainable finance is the total supply chain transparency. According to EUBlockchain experts, blockchain is a tool for ensuring supply chain activities’ transparency with publicly accessible ledgers containing data about every transaction. This leaves no space for unlawful, manipulative business practices and greater automation of supply chain control without centralized authority’s oversight. 

Deloitte analysts also added that a blockchain-powered supply chain can guarantee price, date, location, quality, and location data recording in real-time, thus enhancing the traceability of any merchandise throughout its transfer from the factory to the end user. These practices will address counterfeiting and limit the activities of gray markets, improving compliance checks and control of manufacturing standards.  

Carbon Footprint Tracking and Trading 

As a representative of 4IRE, a certified and experienced developer of carbon credit trading platforms, I am convinced that blockchain’s strategic benefit is the efficient and accurate carbon footprint tracking.  In this vein, blockchain can serve the UN Sustainable Development Goals (SDGs), one of which relates to cutting energy costs and reducing the global carbon footprint. One of the tools for carbon footprint reduction is traceability – an effort that allows quantifying and controlling the emissions of every country and every business, forcing them to comply with the established caps. Blockchain makes traceability possible, as it collects accurate and complete records about carbon dioxide emissions and makes this information publicly accessible, thus improving the accountability of every entity. 

One of the latest developments in this sphere is EY’s OpsChain ESG. It is a brainchild of a global professional services agency EY, which launched this blockchain-based solution to enable companies to measure and track their carbon footprints. Companies can tokenize their emissions using this app to assume fuller control of the current emission rates and emissions targets. 

Renewable Energy Trading

As the global and regional players unite to make SDGs possible, the key task they need to address is the decentralization of renewable energy technology. This has been addressed via an energy trading platform’s setup and development of a trading mechanism that would respond to this market’s specifics. 

The modern solutions to this issue take the form of distributed energy resources (DERs) and p2p energy trading, which support an exchange of surplus electricity among parties connected to the grid. Blockchain is an optimal medium for renewable energy trading, as it can store data about multiple transactions, monitoring the asset exchange in real-time to optimize the grid’s capacity and minimize waste.

Circular Economy Solutions

The circular economy is another option for achieving sustainability with blockchain. This technology enables cleaner and more efficient economic transactions and helps the participants and project creators achieve balance and harmony between society, environment, and economy via optimal resource use and distribution. One of the examples of such projects is CircularChain, a circular economy ecosystem created by SUEZ Group. The solution specifically targets material reuse and recycling, so it deals with data collection, consolidation, and visualization for the secondary raw materials market.

Challenges Faced by Green Investors 

Green finance is appealing to many financial actors in many markets. Yet, some drawbacks and structural weaknesses keep large-scale investors at bay because of the market’s immaturity and flaws. The most pronounced challenges with which investors have to deal in GreenFi are as follows: 

  • Skewed demand and supply. The degree of liquidity in the GreenFi niche is much lower than in other industries, so highly demanded projects may be overvalued, while lesser-known financial instruments may enjoy lower demand. 
  • High entry barriers. Green bonds usually cost much, and they are not sold in fractions. Thus, retail investors with small capital are usually absent in this market and face significant entry challenges. 
  • Loose certification and monitoring. GreenFi assets are versatile and lack a single validation standard, so they are prone to misuse or greenwashing. The latter means that funds are collected for sustainable projects but are, in fact, allocated to activities that have nothing to do with greenness or sustainability. 
  • High certification costs. While certification is a viable option for improving investor trust in green bonds and other instruments, getting a certificate is usually very costly. That price ultimately lies on the investors’ shoulders, making GreenFi investments less appealing in terms of ROI. 

Tokenization as a Solution to GreenFi Market Risks 

Since GreenFi is a new field, it needs new, technologically robust solutions. The answer to many problems plaguing green finance is found in the tokenization technology central to blockchain. 

  • Tokenization helps investors diversify their portfolios by buying small fractional shares of green bonds and other financial instruments without huge commissions. 
  • It drives the cost of green finance down by making green bond issuance and management cheaper, faster, and much more manageable. 
  • Blockchain provides lower transactional complexity to users. 
  • It is much easier to balance the supply and demand of tokenized assets in the GreenFi trading market. 
  • Tokenized assets are much easier to trade on the innovative, automated exchange platforms. 
  • Tokenized assets are transparent and traceable, thus preventing duplicate usage, fraud, or greenwashing. 
  • Tokenized assets and data are much easier and safer in terms of cross-border transfer. 

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Real-World Examples of Blockchain Use in Green Finance 

Now, let’s get to the practical part of blockchain use in sustainability-focused projects. Here are a couple of GreenFi projects with immense local and regional value that have taken advantage of blockchain. 

Recycle Chain 

The Recycle Chain project in Hyperledger’s portfolio was built to create an open market for sustainable waste management. The core of this project is a blockchain database that is stored decentralized and synced between users in real time, encouraging optimal waste disposal and task dissemination among service providers.

The Plastic Bank

The Plastic Bank is a special social platform, whose main goal is to gather together all the people from the whole world. This “team” must alleviate global poverty and Ocean Plastic side by side. In this concept, plastic waste is accepted as a currency and it encourages the idea of using Social Plastic as recycling material.

Working with Cognition Foundry, the Plastic Bank leverages the best technology, allowing it to grow exponentially while maintaining transaction security. Blockchain provides trust in an industry that has been fraught with corruption and danger; it provides trust to “recyclers” that their data is safe, they are safe, and their finances are safe.

The Dnepr Regional Council

In the Ukrainian city of Dnepr, a new strategy of using solid domestic waste was created. So, all the waste is used as a payment method for covering losses for the removal and disposal of waste. There are special recycling centers where citizens can take their garbage. Also, they can receive cashback on a special card they can further use to pay for utility bills.

Genesis 2.0 

The project was launched by the Hong Kong division of the Bank for International Settlements Innovation Hub, the Hong Kong Monetary Authority (HKMA), and the UN Climate Change Innovation Hub. It also involves a variety of public and private partners; the project’s aim is to explore blockchain integration opportunities in the GreenFi area and stimulate the development of the green bond market. 

Hong Kong’s Tokenized Green Bonds 

The government of Hong Kong was the first to use blockchain in the green bonds sector at the national level. Its authorities chose smart contracts as a remedy for greenwashing in the GreenFi industry and enhanced the transparency of environmental data. The government partnered with the HKMA and issued the green bond at the amount of HKD800 million in February 2023. The bond operates under the national Green Bond Program and yields 4.05% APY to its holders. 

The Bottom Line

To sum up, blockchain technology is the new word in the world of green finance. It is applicable at all stages of environmental improvement initiatives and can aid in the achievement of many ESG goals of the UN, thus making the world a better place. Its traceability and immutability, universal access for all categories of populations, and advanced privacy measures add a new dimension to GreenFi efforts. 

The good news is that you can also join this emerging niche with GreenFi products, such as a carbon trading marketplace, a green fund, or a carbon credit trader. By coming to the 4IRE team, you will always get an exhaustive expert consultation on all aspects of GreenFi business idea realization. We can become your trusted development partner to pave your path to this market with cutting-edge software solutions and services.

FAQ

What are the benefits of using blockchain for green investments?

Blockchain opens a realm of new opportunities in the green investment market. First, it increases trust and traceability in the field of green bond and fund management, thus taking ambiguity, abuse, and fraud out of the process. Blockchain-powered GreenFi resources allow seamless cross-border transactions and data exchange without high fees or central oversight. Besides, tokenization simplifies green bond issuance and validation. 

Are sustainable blockchains compatible with mainstream blockchain networks?

Yes, most sustainable blockchains are built using popular blockchain development technology and tools. The earliest blockchains, like Bitcoin and Ethereum, are not eco-friendly (Ethereum improved its sustainability parameters after transitioning from PoW to PoS), while carbon-neutral blockchains like Cardano, Algorand, or Celo work with mainstream blockchains without friction. 

What role does regulation play in promoting sustainable blockchains?

Regulation is getting ever more stringent in the EU and worldwide, pushing all businesses toward greater compliance with sustainability targets and objectives. Therefore, sustainable blockchains emerge as a ready-made business solution to regulatory compliance demands. Such blockchain projects are compliant with the dominant sustainability regulation by default, thus promising business gains and zero risks of penalties for compliance breaches.

How does blockchain promote transparency and traceability in sustainable finance?

Blockchain uses a public ledger to record all transactions, so the movement of funds is always traceable and publicly accessible, with all anonymization measures taken to avoid fraud or exploit. That’s why blockchain-based transactions are transparent and auditable, which is important for GreenFi fundraising and fund management.

What role does blockchain play in carbon credit trading and offsetting? 

The carbon credit market suffers from procedural delays, fragmentation, and a lack of a unified regulatory framework for cross-border carbon credit purchases, validation, and utilization. Blockchain-based carbon credit marketplaces can make the industry truly global by introducing a single standard for carbon credit validation, utilization, and tracking throughout its entire life cycle. Offsetting providers can also benefit from blockchain marketplaces by offering their credits for sale and contributing to the reduction of carbon-intensive businesses’ footprint.

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