Climate Change, Social Equity and the rise of ESG mandates
Environmental, Social and Governance (ESG) considerations have become a key factor in corporate governance and the flow of global capital.
In January 2020, the CEO of BlackRock, the world’s largest asset manager, said he believed considerations about climate change had put the world on the “edge of a fundamental reshaping of finance.” (1) By July of last year, the CEO of Singapore’s largest bank said a “tsunami of money” was flowing into sustainable investments. (2)
At the same time, regulators are moving to impose increasingly strict ESG requirements on businesses: In 2018, the EU began requiring large companies to report on how they manage social and environmental challenges. (3) The U.S. Securities and Exchange Commission (SEC) is currently set to vote on whether to require companies to include climate risk disclosures in their offerings to investors. (4)
And ESG considerations are of special importance to the cryptocurrency industry: ESG is on the short-list of issues that most concern SEC chair Gary Gensler about the crypto industry (5), and ESG concerns were at the center of the May 2021 cryptocurrency market crash.
Cardano’s ESG Advantages
Given the growing importance of ESG issues to financial and regulatory regimes worldwide, businesses based on Cardano need to embrace ESG-driven initiatives if Cardano is to achieve its full potential as a global financial operating system. Fortunately, Cardano’s no lock-up, no slashing dPoS consensus model allows enterprises to stake ADA while maintaining maximum liquidity and minimum risk. And this dPoS model has also positioned Cardano to become the clear, industry leader in ESG-driven investment, for several reasons:
- Cardano’s energy-efficient consensus mechanism makes it a comparatively green option for blockchain-based businesses;
- Cardano’s lite-weight stakepool requirements allow for a more globally distributed, socially inclusive network of validators than any other major blockchain;
- The Cardano Foundation and IOG’s commercial strategies will further global, financial access and equity more than any other blockchain; and
- Cardano ecosystem contributors and investors show clear interest in mission-driven stakepool operators, companies and projects – preferences which are not nearly so prevalent in any other cryptocurrency ecosystem.
A Consensus in favor of ESG Investment
As the foundation of Cardano’s financial operating system, its delegated proof-of-stake (dPoS) consensus process (and the rewards derived from it) are where Cardano’s ESG impacts begin. The advantages of Cardano’s dPoS consensus model have spurred the growth of a staking ecosystem that’s more engaged, dynamic, diverse and mission-driven than that of any other blockchain.
To attract delegators, a host of Cardano stakepool operators (SPOs) offer a variety of value propositions – including mission-driven, charitable stakepools. But few SPOs offer robust proof of their charitable contributions, much less verifiable, quantitative measures of positive ESG impacts resulting from stakepool delegations.
Cardano’s staking ecosystem already displays demand from delegators for ESG compliant stakepools, yet a lack of accountability among SPOs makes their business models inadequate to partner with Cardano-based enterprises and institutional investors.
By staking with mission-driven SPOs, Cardano-based enterprises can make large, positive ESG impacts to earn goodwill with the public and offset any negative impacts necessitated by their business models. However, to leverage Cardano’s dPoS consensus process in this way, some key innovations need to be introduced to address enterprise and institutional needs:
- There need to be robust systems of accountability to ensure ESG-driven, charitable contributions are actually being made by SPOs.
- Enterprises and investors must be provided with a wide range of giving options to vetted charities, through which they can fulfill their unique, ESG-related initiatives and mandates.
- Impact metrics must be made transparent and granular enough for enterprises and institutional investors to quantify the impacts of their giving, and record these impacts for the various entities they’re answerable to.
Our Solution: ESG-compliant STaaS
As outlined above, a higher standard of SPO service and accountability is needed to provide ESG-compliant Staking as a Service (STaaS) to businesses. Rather than completely reinvent a system that can provide this level of service and accountability, we’ve partnered with B1G1, a Singaporean social enterprise and U.S. 501(c)(3) non-profit organization. B1G1 operates a subscription based giving model designed for small and medium-sized enterprises (SMEs) around the world.
B1G1 member businesses pay a reasonable, monthly subscription fee that covers B1G1s administrative costs. 100% of additional funds contributed by a member business pass through to the B1G1 vetted charities chosen by that business. And member businesses receive detailed metrics on the positive impacts of their giving. Today, the B1G1 initiative brings together more than 2,600 businesses from around the world, and has facilitated and documented over 277 million discrete giving impacts since 2015.
The over 500 projects/charities in the B1G1 network are vetted to ensure they cost-effectively further at least one of the United Nations’ 17 sustainable development goals (SGEs) - goals focused on "ending poverty, fighting inequality and injustice, and tackling climate change." () B1G1 charities offer businesses a wide range of charitable causes to contribute to, including many charities focused on mitigating climate change. And B1G1 even offers members gift options including an "Employee Carbon Offset Bundle" and "Office Energy Usage Carbon Offset Bundle" to directly address companies’ most pressing ESG goals and mandates.
Our FLUID stakepool became a B1G1 member in July 2021. Currently, each time FLUID pool receives a new delegator, we donate 5 days of ITT and internet access to a student in Ethiopia. And continuous reporting we receive from B1G1 documents our giving and giving impacts with respect to the UN's SDGs - an extremely useful framework for enterprises attempting to optimize their ESG impacts in an accountable way. Nevertheless, there are several ways we plan to make this framework more accessible and valuable for SPOs and their enterprise delegators:
- We'll enable SPOs participating in our network to automatically capture a variety of granular, delegation-related data - including new delegations, delegation sizes, delegators new to a stakepool, number of new delegators, total funds delegated to a stakepool exceeding a threshold, delegations or delegated funds in a given timeframe, or other metrics SPOs and their delegators want to capture.
- We'll integrate participating stakepools with Zapier's automation solution, which will allow them to set up a custom giving configuration where specific delegation events trigger specific giving actions. Zapier's automation solution is very flexible, so SPOs will be able to automate any number of kinds of giving events, triggered by any number of kinds of delegation events. And SPOs will be able to configure the solution specifically to suit the ESG needs and wants of larger delegators like Cardano-based enterprises.
- We'll capture giving and giving impacts on social media to draw attention to giving generated out of Cardano's consensus. For this initial proposal, we commit to enabling automated social media notifications for participating stakepools in order to highlight benchmarks of the stakepools' giving impacts being reached. But these notifications can eventually be made more granular: For example, they could post thanks to specific Cardano-based businesses when their delegations convert to a specific giving impacts.
- We'll assist participating SPOs in integrating B1G1 widgets and giving badges onto their websites. B1G1 widgets feed the current count of SDG impacts an SPO has contributed to the B1G1 network.
The above innovations and integrations will provide a solid foundation to build upon. If our framework is favored by Cardano delegators (as we believe it will be) it will incentivize mission-driven SPOs to move towards a culture of accountability, and give them tools to take this step. But if this framework - in both its initial and future iterations - is going to maximally benefit Cardano-based businesses, we'll also need to work in collaboration with these businesses to ensure we're designing a system to fit their ESG compliance needs. For this reason, we'll be implementing a three-legged approach to getting our ESG-focused STaaS consultancy and Stakepool network off the ground:
- Led by our Project Director and the Fluid7 team, we'll develop the above innovations and create systems to support multiple SPOs in the above integrations.
- Simultaneously, Led by our Business Development Lead, we'll create business development materials and attempt to connect with a large number of the largest projects and companies on Cardano. To satisfy this proposal, we commit to trying to connect with 50 of the largest companies and projects on Cardano. Wherever possible, we'll present them with our value proposition with respect to ESG issues. We'll welcome their feedback on how best to address their current and future needs, and do our best to incorporate the sum of our findings into a viable plan to build upon.
- We'll work with a small number of mission driven SPOs (probably 2 or 3 to fulfill the goals of this proposal, but possibly more) in a closed trial - integrating our solutions into their Stakepools. The primary reason for this closed trial will be to work out any kinks in our integration plans, and receive feedback from SPOs on the process, the benefits, and any unforeseen drawbacks of the integration. We have not yet selected SPOs to participate in this trial, but can promise they'll be mission-driven SPOs who are well respected in the Cardano community.
<u>Citations:</u>
- https://www.huntonnickelreportblog.com/2020/01/blackrock-supports-esg-as-a-new-standard-for-investing-in-its-annual-ceo-letters/
- https://www.cnbc.com/2021/06/17/dbs-piyush-gupta-a-tsunami-of-money-is-going-to-sustainable-assets.html?&qsearchterm=esg
- https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en
- https://reason.com/volokh/2022/03/11/sec-to-vote-on-climate-disclosure-rules/
https://www.youtube.com/embed/WxxyDMBRu9E?start=&t=1s
Regarding the KPIs of this Business Solutions category, we're confident that ultimately, the vast majority of dApps and businesses operating on Cardano will delegate at least some of their ADA to stakepools that help them attain and maintain ESG compliance. Especially as "cryptocurrency companies," these businesses and dApps will be compelled by prevailing financial and regulatory regimes to reduce their carbon footprint wherever possible.
And even if this move towards ESG-focused staking doesn't turn out to be mandatory, its hard to see why many enterprises would avoid it entirely: Many mission-driven pools offer returns to delegators that are on par with pools without a mission-driven component, so the downside to ESG-focused delegation doesn't have to be burdensome. And ESG-focused staking builds good will with the customers of Cardano enterprises.
Our team sees the move towards mission-driven, accountable staking for businesses as analogous to the corporate giving sector: It may not come to dominate the enterprise delegation space (which is driven primarily by ROI) but a significant percentage of enterprise delegations will be allocated to it.
Even more importantly, we've outlined clear advantages that the Cardano staking ecosystem has over other blockchains when it comes to ESG-compliant staking. And if ESG is becoming as big of an issue as it appears to be, these advantages and the work of our project and others like it will drive more projects to Cardano, and more growth in activity on Cardano's mainnet and testnet.
Last, because pioneers in this STaaS niche will likely secure significant delegations for their stakepools within the next 6 - 18 months, stakepools in the network we're proposing should eventually have healthy revenues and be able to self-fund the bulk of this projects future development.
<u>Risk #1 - Lack of corporate "agility" in re-delegation:</u>
While our team is very confident a sizable number of Cardano-based enterprises will find our ESG STaaS attractive, it's possible that many corporations also face significant obstacles to redelegating some or all of their ADA holdings. These obstacles could involve such factors as utilizing a 3rd party custodial service for their ADA, multi-sig wallets requiring acts of corporate governance to redelegate ADA holdings, obstacles arising from DAO governance, or other unforeseen obstacles.
<u>Mitigation #1 - Lack of corporate "agility" in re-delegation:</u>
As we've outlined above, we believe many enterprises, especially larger enterprises, will feel increasing pressure to avail themselves of any positive ESG impacts that don't cut deeply into their bottom line. And at some point, some enterprises will likely be compelled to aggressively pursue ESG compliance related to their cryptocurrency holdings, so we feel these obstacles will prove temporary, even if they're initially significant.
<u>Risk #2 - Our ESG approach isn't aggressive enough for some companies:</u>
It's possible our "offset" model isn't aggressive enough for some Cardano enterprises - that they'll in fact prefer more radical approaches to countering any negative environmental or social impacts resulting from their businesses.
<u>Mitigation #2 - Our ESG approach isn't aggressive enough for some companies:</u>
While we believe our initial "offset" solutions will be attractive to many businesses at this point in time, we have in mind STaaS consultancy options that could yield more dramatic, positive impacts for the environment and/or social justice. These more radical solutions will require more time and funds to design, coordinate and implement, but they are doable, and we'd actually like to move in the direction of more dramatic solutions in the mid to long term.
<u>Risk #3 - Our solution is too early to achieve good product/market fit: </u>
It's possible that the vast majority of Cardano-based enterprises don't yet have a strong need or desire to opt for ESG-focused solutions like the ones we're offering.
<u>Mitigation #3 - Our solution is too early to achieve good product/market fit: </u>
While this fact (assuming it proves to be true) could delay the widespread adoption of our services by Cardano-based businesses, we believe it is a matter of time before the need for ESG-focused, B2B STaaS becomes common for cryptocurrency based businesses. So if we're somewhat early on this issue, we consider that an advantage, not a liability. When (probably not if) ESG concerns become prominent in our industry, we want Cardano to be the blockchain with the best solutions, attracting projects in part because we were early on this issue.