A look at the crypto approach to responsible investment, which may one day challenge the failing ESG standards
In the world of finance, good intentions are often overshadowed by reality. This is the case of ESG (Environmental, Societal, and Governance) standards, once heralded as a beacon of hope for responsible investing.
However, the ESG is failing.
While investors, especially Millennials, are ready to pay premium for ESG-labeled investments, there is virtually no guarantee they will have any positive externality.
Greenwashing has entered our everyday vocabulary for a reason: it is frighteningly common.
Take Deutsche Bank, for example. After firing the Head of Sustainability in 2021 for “unproved” greenwashing whistleblowing, its asset management subsidiary DWS saw the German Police raiding its premises a year later for this same reason. The firm’s CEO was pushed to resign, and a new one was quick to pledge the need to “re-establish trust in DWS as a platform.”
What happened next? In March 2023, NGO Finanzwende found that DWS invested about 850 million dollars from its “green” funds into fossil fuel companies in 2022. This made DWS a “top tier” fossil fuel investor, which at the same time advertised its funds as a gateway to environmental protection 🤦
Deutsche Bank is not the only one, of course, but it serves as an illustration of what happens when ESG is used as a mere PR tool rather than a genuine commitment. It also shows that no matter how compliant traditional finance firms are, they will always be opaque organizations, where a handful of people are making decisions behind closed doors.
In this system, only a whistleblower or an investigative journalist can unearth the truth.
In the crypto world, however, both decision-making and opacity issues are solved by using the blockchain. The added benefits include crypto’s accessibility, which makes the investment available to anyone, anywhere. This combination led to the emergence of a concept dubbed ReFi, or Regenerative Finance.
ESG has, in some cases, devolved into little more than an image-polishing instrument, resembling PR campaigns more than genuine sustainability efforts.
As companies’ focus shifts to virtue signalling, the ESG activities do not really have to be profitable or sustainable in the long term. This means wasting resources on exuberant punctual actions, which can be based on very dubious (if any) scientific evidence. In the absence of open debate, that’s what we get 🤷
Enter ReFi. This concept integrates financial practices with social responsibility, sustainability, and regeneration, using blockchain to ensure transparency and collaborative decision-making.
In the past couple of years, several ReFi initiatives have emerged. While still in their infancy, these projects can be classified into two groups – the crypto versions of impact investing and carbon offset trading.
Impact investing seeks to generate both financial returns and positive social or environmental outcomes. It differs from philanthropy because it involves an expectation of financial returns that are at least comparable to market returns.
While this may echo elements of ESG investing, lessons from cases like Deutsche Bank highlight the need for significant adjustments. Web3 technologies, with their reliance on DAOs (Decentralized Autonomous Organizations) for decision-making and blockchain for transparent value streams, provide the means to address these shortcomings.
Examples of ReFi impact investing include Traditional Dream Factory – an eco-village in Portugal managed by a DAO. Together with community membership, the DAO’s tokens give the right to use the village’s premises and facilities (housing, water etc), along with the right to co-decide on its direction and development.
Bio.xyz helps fund independent scientific research in biotech 🧬 via different DAOs and a digital marketplace Molecule.xyz.
Or the Human DAO, which manages the platform outsourcing simple web-based tasks to people in developing countries. It protects a fair exchange of value, allowing remote personal assistants to earn up to $400 a month (which is a non-negligible sum in some regions).
Gitcoin incentivizes developers to participate in open-source “public good” projects and helps fund many of them.
Kolektivo is developing a community currency toolkit and mobile app focused on earning and spending community currencies, with the pilot project successfully accomplished in Curaçao.
Impact Market provides basic income and microcredits to some of the poorest communities in the world, financed by donations and a system of DeFi farming using the Celo stablecoin cUSD. The blockchain’s borderless nature also helps with distribution, as people only need their phones to access funds.
Another area of ReFi focuses on improving the transparency and accessibility of carbon offset trading.
This practice allows companies to compensate for their carbon footprint by buying carbon credits – proof of their contribution to the environmental protection incentives.
ReFi democratizes the carbon offset market, so far mostly available to major businesses, by tokenizing the credits. Platforms like regen.network, toucan.earth, or klimadao.finance give access to a number of initiatives, vetted by internationally recognized organizations like Veera, or by their own efforts.
Regen.network also builds a network of DAOs that would manage a multitude of ReFi projects.
The ReFi sector is still in its early stages, and while we understand how the blockchain can alleviate the ESG problems, a lot of work and trial-and-error is still needed.
Fortunately, the crypto space is known for its enthusiasm and fast pace, facilitated in large part by the open-source approach.
With the likes of Gitcoin, Kolektivo, Commons Stack (building open-source web3 toolkit for the regenerative approach towards public goods), or Metropolis (DAO management tools), more communities will be able to apply the web3 methods to regenerate their economies.
In case they succeed, more investors will be able to place their money in projects that make the world a better place.