Last year we explored certain challenges facing green and sustainability-linked finance and investments, noting the growing issues with greenwashing and the difficulties in connecting real-world evidence of the benefits of funding to investment inputs via transparent, accessible, and authentic data. We noted the untapped potential of tokenisation to assist in bridging this gap – certainly, the past year has given us reason to be optimistic. This article is written to serve as both a recap and to detail some key developments in climate-related tokenisation projects. In the intervening 12 months, some of the barriers concerning energy usage issues and blockchain have been broken down, with greater understanding of the energy consumption credentials of different blockchains and Ethereum’s Merge having a significant impact on viability. Tokenisation remains flexible, adaptable, strongly aligned with ‘monitoring, reporting and verification’ (MRV) requirements in the broad ESG-investing space (including climate), automated and efficient. Its usefulness in all these respects as a solution for achieving climate-related goals is increasingly recognised.
What do we mean by tokenisation?
Asset tokenisation is a process whereby an asset is converted into digital tokenised form. Tokens can constitute rights in respect of physical assets, they can also constitute non-physical assets like shares and other securities and/or can be assets in and of themselves (like digital artworks in the form of non-fungible tokens). There are a number of potential benefits of tokenisation and some of the most commonly cited are liquidity and fractionalisation – blockchain-based tokens may enable trading of interests in otherwise illiquid assets and also provide for ownership of fractional interests in assets which are otherwise difficult to divide.
Examples of relevant assets where tokenisation could help advance climate goals as cited in the article published 12 months ago1 included commercial property, expensive machinery and vehicles. It was noted that compared to traditional ownership methods, asset tokenisation provides a much more stringent, direct way to integrate environmental performance targets and reporting into investments in such assets, supporting the MRV aspects of climate-related projects. We can now provide relevant examples of this in practice. In July 2022, EDF issued a tokenised green bond on a public blockchain, where the investment was focused on solar and renewables purposes (the issuer of the tokens was EDF ENR, a supplier of rooftop and shadehouse solar installations). BNP Paribas, which supported the issuance through its digital assets platform AssetFoundry, noted that using blockchain in this context provided better transparency of ESG data along the value chain. It was also noted that blockchain technology offers the opportunity to efficiently bundle smaller renewables projects into dynamic opportunities for investors, with the tokenised instruments providing better granularity for smaller investment amounts, as well as the verifiability benefits already noted. These aspects were referenced in our previous article - the right to (relevant, granular) data can be associated with a very small holding. Data accessibility inefficiencies that we might see in traditional markets are eliminated and everyone who owns a token can have data rights associated with that token, as well as the economic rights such as capital, interest and income.
All of this is becoming particularly relevant for investors who, through the rapidly evolving voluntary and mandatory climate risk management and ESG reporting landscape, are facing increasing pressures to evidence net zero investment alignment, including the requirement to obtain and report on specific, reliable and verifiable emissions data (including in respect of scope 3 emissions) arising from their investment choices.
What other developments have we seen in this space?
In our case studies section in the previous article, we considered potential applications for sustainability-linked debt and asset improvement investing for climate-related purposes. We have seen projects like this coming to the fore including, for example, tokenised agri-tech investment offerings which provide for agricultural improvement and food security outcomes as well as carbon emissions mitigation.
However, there have also been other exciting developments in this area which go beyond our previous suggested applications, including projects exploring advanced integration of carbon offsets with tokenised debt securities, tokenised green real estate investment platforms, the emerging asset class of natural capital investment offerings and projects that are focused on renewable energy democratisation - bringing unitised renewable energy ownership direct to consumers. We explore a couple of these further below.
Integrating Carbon Offsets with Tokenised Debt
Carbon offsets are a verified, tradable certification that evidences reduction or removal of carbon emissions from the atmosphere, and this mitigation can be unitised and traded as part of a commercial market. The world of carbon offsets and other similar emissions-related certifications has had a long and sometimes difficult history, however, with the current focus on net zero, with relevant percentages of emissions offset, and on ensuring that appropriate value, from both a liability and asset perspective is placed on carbon emissions and their mitigation, we are seeing considerable leaps forward in the space. The opportunities at the intersection of digital assets and tokenised carbon are very promising. In 2022, a group of institutions issued two prototypes for integration of emissions mitigation units into green bonds using blockchain. The Genesis 2:0 project is notable because the way in which the right to emissions mitigation units is derived, is via blockchain transmitted data. This is a way of integrating the value of the emissions mitigation purpose of a project with its outcome, not by having one process regarding issuing the up front green finance and another issuing later carbon certificates, but combining them. The investors can obtain certainty that their up front investment will, assuming the project is successful, give rise to their receipt of the relevant carbon-related assets in due course.
Natural Capital Investments
In this space, the opportunities focus on land, forestry, agriculture and potentially also blue assets including waterways. The projects look to apply investment proceeds to achieve natural capital, particularly environmental protection and biodiversity focus benefits, alongside more traditional economic returns. The Amazon rainforest has seen projects evolve in this area, including non-fungible token ("NFT") offerings which represent hectares of rainforest, proceeds of which are to be used to, amongst other things, provide satellite imagery, patrols and other security for environmental protection in respect of the site represented. Other projects, which look to promote regenerative land use practices to enhance biodiversity, measure the gains then made and convert the outcomes into tokenised biodiversity units, are also evolving, for example the Single.Earth EQT-backed MERIT token project, amongst others.
What do we see in the future for this space?
In the short term, we expect to see scaling of tokenised green bond offerings, as many market participants recognise the natural alignment of the purpose orientated green bond model with the blockchain-based offering. We also expect tokenised natural capital and biodiversity-orientated projects to become more mainstream given the startling global biodiversity decline issues we are seeing, the focus on these issues at the Biodiversity COP and the search for relevant financing options. In addition, we can expect more innovation – for example Singapore’s MAS, in October 2022, launched the ESG Impact Hub to expedite the growth of Singapore’s ESG ecosystem2 and it has 15 ESG FinTechs already set up at the Hub, which aims to foster greater collaboration, sharing of high quality climate and sustainability data and an efficient deployment of capital between financial institutions and real economy stakeholders. This in fact is the key challenge – solving efficient deployment of genuinely (verifiably) effective climate change mitigation capital at scale, which digital assets and blockchain offerings are converting into one of their biggest application opportunities yet.