ESG, carbon credits, the "net zero" supply chain, and blockchain - a risk manager's/trader's view of some potential issues
While it is not the centerpiece of the skill set the DCM leadership is known for, one member of our leadership team has been involved in environmental issues since he served an internship for over a year with the Connecticut Department of Environmental Protection in 1972. Since that time, he has stayed involved in areas from air quality, renewable fuels, renewable energy sources, distributed energy, and carbon credits - including leading analytical engagements, publishing articles, and supplying strategic advice to clients. The recent rapid changes in carbon sequestration, carbon credit trading, and supply chain carbon reduction targets led to these observations.
1. Not all carbon credits or carbon sequestration methodologies may be considered equal for your corporate objectives. Is the credit a voluntary credit or will it be valid under Article 6 or the Paris Accords? The quality and persistence of the carbon sequestration as well as the ongoing validation of the credits may have impact on both your corporate requirements for carbon reduction under national laws as well as the public reputation impacts of any disallowed or under-performing sequestration or reduction actions;
2. Blockchain will be a major tool in validating "net zero" carbon in your supply chain, especially when looking at "Scope 3" carbon emissions. ("Scope 3 emissions are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain. Scope 3 emissions include all sources not within an organization's scope 1 and 2 boundary. - https://www.epa.gov/climateleadership/scope-3-inventory-guidance). Tracking the Scope 3 emissions (and emissions reductions) across your supply chain to validate achievement of "net zero carbon" supply chain goals is likely going to require blockchain technology. However, when discussing blockchain technologies with participants and vendors at Madrid COP 25 in December, 2019 it became evident that the blockchain models were being developed from the information provider's perspective. If I am the transportation company, I will develop blockchain to provide the information backwards to the shipper and forward to the purchaser. However, if the supplier who utilizes that shipper also has a blockchain model where they track the carbon impacts (and reductions) from their suppliers to their end consumer, the two blockchains may overlap in a manner that the ultimate consumer may not be able to untangle. In addition, if the taxonomy of the blockchain information is subject to change by the blockchain owner, a user of the information may not be able to rely on the definitions initially utilized to develop their "net zero" supply chain assessment methodology. In the end, I feel it may be likely that carbon data definitions that are utilized in Scope 3 carbon assessments may need to fall under a carbon market equivalent of a SWIFT style organization that defines the messaging components, structure, and definitions - allowing changes only when the governing body approves them.
3. This leads to the last item - blockchain providers make their money from the use of their blockchain and their "smart" contracts. If there is a global set of definitions and structures, blockchains become less monetizable as users can transfer their data from one blockchain provider to another and so decrease individual blockchain provider's revenue. Absent the interchangeability of blockchain data, each blockchain and "smart" contract becomes an individual pool of liquidity. In this manner, the overall market liquidity could be fractured - making structuring and execution of transactions more expensive for market participants. But if a company is committed to a single blockchain information source, that source may not align with the goal of tracking Scope 3 emissions and reductions.
I do feel that blockchain has great potential but it also can be a significant market burden if implemented and adopted without consideration of potential pitfalls.
DCM takes a risk based approach to all our clients needs - risk management, compliance or supply chain - as they are impacted by tradeable commodity markets. As carbon credits become a greater component of a company's assets, they will need to incorporate those assets into their existing risk management network in alignment with their ESG goals and ojectives.