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Blockchain and Natural Capital Accounting: Opportunities and Challenges for Scaling

Momentum around blockchain technology and the solutions and vision it
presents is growing rapidly, including from being a high-level agenda
item for discussion by political and thought leaders at the 2017 World
Economic Forum in Davos, to concrete applications within and beyond the
financial sector. With increasing global discussions surrounding the
delineation of global standards, frameworks and protocols as well as
growing concrete use-cases across sectors, the potential for blockchain
to become universal is significant. Overall it is an optimistic vision
and perhaps one of the most significant areas of dialogue and practical
use cases is related to sustainable development.

The 20-year vision for Blockchain as outlined at the World Economic
Forum in Davos 2017, sees the adoption of Blockchain which was
originally driven by the financial services sector, across all “facets
of the real economy allowing businesses and governments to achieve
unprecedented efficiency and create new service models. Global business
operations and supply chains will have been fundamentally reorganized,
enabled by new business models and relationships. (Maguire 2017)

Examples of blockchain application in sustainable development are
growing rapidly from peer-to-peer trading of existing and emerging
commodities, to new decentralized models for solar energy distribution,
to increasing efficiencies and transparency in logistics chains and
supply chains. The potential to have a major role in sustainable
development lies not only in the fundamental and unique potential to
overcome current issues that lead to inefficiencies, waste and
inequality in supply chains, but also in the capacity to track and trade
assets in a transparent, incorruptible and universally accessible
manner – thus enabling suppliers, producers, retailers and consumers
alike, to better verify the provenance of goods.

Blockchain could potentially help revitalize if not overcome
cumbersome and disjointed indices, accounting, tracking and reporting
capacity which are also limited in terms of data accessibility and
transparency. Moreover, the ability to track and trade assets with both
tangible and intangible values increases greatly the possibility for
more inclusive and effective means to incorporate sustainable
development criteria and natural capital.

Where sustainability professionals are likely to see the most action:
among utilities or renewable energy developers seeking a more efficient
way of pricing and selling clean power; at consumer products companies
and retailers seeking a better way of validating supply-chain claims;
and among banks and insurance companies interested in verifying the
provenance of minerals, commodities or raw materials. (Clancy 2017).

In this article, we explore the application of blockchain technology
to natural capital valuation and accounting as a combined approach that
could potentially drive a new paradigm, with concrete implications for
problem solving and decision making within supply chains, but also for
broader business and policy applications.

Blockchain itself presents certain challenges including its high
carbon foot print and capacity issues such as storage, availability of
experts including data miners and developers, and other barriers.
However, despite their warning in the Harvard Business Review, Iansiti
and Lakhani (2017) suggest we “examine blockchain step by step” and
“outline key areas where we see real-life implementation”. This is our
intention. We are not suggesting blockchain as a panacea for sustainable
development and natural capital accounting, but rather intend on
exploring its potential in overcoming certain barriers and in addressing
efforts in broader implementation of natural capital initiatives and
solutions and particularly the Natural Capital Protocol.

Our experience studying technological innovation tells us that if
there’s to be a blockchain revolution, many barriers—technological,
governance, organizational, and even societal—will have to fall. It
would be a mistake to rush headlong into blockchain innovation without
understanding how it is likely to take hold. (Iansiti 2017)

Part of our rationale in writing this article is that not more than
four years ago, Natural Capital Accounting was making headlines as the
“next big thing in sustainability…” with governments and NGOs pushing
for it and business seeking the means to implement it (Alan McGill
2013). As we see growth in real-life implementation of blockchain in
sustainability areas that could support natural capital accounting, it
seems more than timely to examine these in a pragmatic manner.

Our intention is to outline and examine current constraints to wider
implementation and scaling of natural capital accounting and
specifically the Natural Capital Protocol, the capacity of blockchain to
address these, as well as the hurdles that must be cleared from both of
these emerging frameworks.

Blockchain

By application of blockchain we refer both to the technical
infrastructure (the technical components including mining and
cryptography, a public ledger, distributed computing, historical
permanent records, peer-to-peer exchange, platforms and protocols) where
information can securely be stored, monitored and tracked (thereby
creating transparency and accountability), as well as the application
layer where digital assets are linked each to a digital token which
again, can be programmed for automatic tracking and transactions. 

“Stripped down to its core, blockchain is essentially a global
database, or public ledger, that securely stores transactions of any
value such as currency (money, stocks, bonds), tangible assets (goods,
property, energy) and intangible assets (votes, identity, ideas,
personal data). Coded and programmable blockchain applications are then
built on top of this public ledger that help to facilitate the
coordination, tracking and exchange of these assets.” Interview with
Deanna MacDonald, CEO of BLOC (Source: Could Blockchain be the Shipping
Industry’s Life Jacket? In Shipping 2030 Nov 15, 2016)

It is this combination and layering of technologies and applications – a public ledger that stores transactions of any value securely, anonymously and incorruptibly, a monetizing system applicable to different values, and the formalization or synchronization of workflow and transactions – that has concrete implications with real opportunities for natural capital accounting. A more in-depth and accessible perspective of blockchain technologies and applications particularly suitable for discussions around sustainable development is available at: BLOC

Natural Capital

Natural capital is the sum of the services offered by natural
ecosystems. Every business and all economic activity depends upon and
impacts natural capital, but its uptake into standardized frameworks and
processes for concrete decision making by businesses, governments and
financial institutions has been a challenge for different reasons.

“Our ability to account for these environmental assets and their rate
of depletion (commonly referred to as stocks and flows) is limited and
variable but evolving” (McGill 2013). Progress has been
particularly slow in attempts to account for environmental services that
are not asset specific, especially those which are less visible such as
“clean air provided by forests, flood protection provided by wetlands
or crop pollination provided by bees” (McGill 2013).
Understanding the impacts of commercial decisions is where companies
need to become better informed, in order that the consequences of
actions can be better managed, business models transformed and a new
type of growth can emerge.

However, natural capital has until recently, been difficult to
address in business and policy decisions alike. Access to trusted and
credible valuations and actionable information, as well as the
frameworks and methodologies to measure these in terms of the impacts
and dependencies on natural capital, have been fragmented and slow to
develop (source: naturalcapitalcoalition.org). However, information and toolsarenecessary
for policy makers and business managers alike to make informed
decisions. The tools that have emerged to answer these challenges have a
key focus on natural capital accounting which is the process of
calculating the total stocks and flows of natural resources and services
in a given ecosystem, region or supply chain.

Numerous methods and frameworks of natural capital accounting and
reporting have emerged but each has key limitations and barriers to
uptake and scaling. The Natural Capital Coalition sought to bring
together leading global initiatives and organizations and to harmonize
approaches to natural capital and natural capital accounting under an
umbrella framework, the Natural Capital Protocol (NCP). For our
purposes, we will focus on scaling the Natural Capital Protocol as it is
the result of global multi-stakeholder collaboration that brought
leading global initiatives and organizations and is applicable to any
business sector, operating in any geography, at any organizational
level. The NCP provides the framework for high level assessment at
multiple levels using three dimensions of scope: corporate (site,
product, business unit, company), value chain scope, and typology of
dependency or impact scope. We believe the NCP offers the best available
framework to aid in identify, measuring and valuing impacts and
dependencies on natural capital as it encompasses existing frameworks
and methodologies in a consistent framework.

Natural Capital Protocol Barriers and Potential Blockchain Solutions

Having the NCP in place does not in and of itself answer all the key
challenges in addressing natural capital, and in adopting, implementing
and scaling natural capital accounting. Hence it is here that we begin
to delineate these challenges and outline the areas blockchain could
potentially serve to facilitate and accelerate the uptake of NCP. 

Natural Capital Valuation

Until recently natural capital hasbeen viewed and
examined as flow and even to some extant as moral valuation rather than
as something tangible with assignable value. “Generally, natural capital
is not perceived as capital, but as a flow. Most investors do not see
natural capital as something that is finite” (Boyd 2011). The valuation
of natural capital has been “inconsistent, open to interpretation or
limited to moral arguments (even when it is included)”
(naturalcapitalcoalition.org). It was not possible to account for the
value of ecosystem services (such as pollination, flood protection, CO2
sequestration or oxygen production) as these could not be captured in
traditional measures. In addition, it was not feasible to account for a
non-tangible asset or place value on a “decision taken” such as the
conservation of wetlands versus conversion for agriculture production or
the choice of a supplier with proven labour compliance.

Accounting for natural capital for government, corporate and even
consumer decision making necessitates the assigning of valuation either
in physical or monetary terms that that cannot always be captured in
traditional measures. Even the valuation of actual tangible assets and
stocks that could be potentially captured with traditional methods has
fallen short due to the complexity and fragmentation of information
whether due to measurement capacities or complexity of supply chains.
Blockchain offers the capacity to assign value directly to all forms of
data whether tangible or intangible asset thereby allows for the
inclusion of all assets and natural capital. Even the intangible issues
previously argued as a “moral values” can feasibly be encompassed.

In Blockchain the transactions are digital and the values can be
tangible or intangible but more importantly mean that value is directly
attributed to all forms of data from currency to goods and property, to
ideas and personal data. Applications are developed and overlaid to
“facilitate the coordination, tracking and exchange of these assets.
(MacDonald 2016)

The capacity to assign and trade value directly to all forms of data
whether a tangible or intangible is a key opportunity for natural
capital which as noted above, is often viewed through the lens of flow
rather than finite value. This formalization of flow and workflow in a
transparent and secure manner, even across fragmented value and supply
chains is also an important capacity that blockchain offers to NCP.

Information and Data Availability

Directly related to the challenge of valuation is the data and
information required for the assignment of value in natural capital.
Even if value can feasibly be assigned, the availability of robust data
and the verification of attributed source can be of concern.The
sheer breadth of natural capital (both tangible and intangible), actors
and stakeholders within and across geographic borders adds to the data
challenge in terms of implementation and scaling NCP. From the
perspective of a single company or even a single end-product and the
supply chains related to these, the issue is cumbersome. Supply chains
are complex, fragmented and geographically dispersed crossing businesses
and borders and therefore regulatory frameworks and cultural norms
(Kumar 2015). “For most companies (aside from agriculture and a few
other primary industries like forestry and extractive type industries)
the natural capital under direct company control is typically a tiny
fraction of that under their indirect influence (e.g. via supply
chains)” (McGill 2013.)

The companies and initiatives where blockchain has been successfully
applied to supply chains are growing in number. In her recent article,
(Clancy 2017) outlines cases of successful application of blockchain in
specific corporate supply chains. The example of Warmart’s service
(developed with IBM) to monitor pork from China and produce from the
United States, offers a glimpse of the breadth of information available
including “about the farm where the vegetable or pig originated, with
data about their operating practices. Radio frequency identification
tags, sensors and barcodes, already widely used across many supply
chains, are among the methods used to store the relevant data” (Clancy
2017). The focus is on provenance in terms of food safety and consumer
confidence but in fact the full supply chain and additional information
is made visible and thereby increasing the scope of robust data
availability.

Being global, public, open, and decentralized blockchain allows for
various inputs of data from various sources and for various uses. This
opens the possibilities to include new types of data and new sources of
information for a more robust picture not only of supply chains but also
perhaps of natural capital flows and transactions that were previously
not measureable and traceable. 

Verification, Disclosure and Transparency

Related to data and information availability for natural capital
accounting are the issues of verification, disclosure and transparency
of data and information related to a company’s impacts and dependencies
as well as disclosures or decisions based on their findings. While the
NCP itself does not offer an umbrella reporting mechanism and is
generally focused on helping with internal corporate decision-making,
natural capital accounting results can be used or converged with other
reporting platforms and for external communications and external
decisions by consumers or other actors. Therefore, it is essential that
the information gathered for natural capital accounting is traceable,
verifiable and transparent and the NCP is founded on these principles. 

In terms of gathering data and reporting on supply chains, existing
accounting and reporting processes is fraught with weakness including
issues of bias, incentivization, and distribution even where third party
governance is feasible. Replicating and scaling verification processes
is also slow due to lack of resources and capacity. Blockchain provides
an open platform that can deliver neutrality, reliability and security
through its global peer-to-peer network and system architecture which
are well suited for fragmented supply chains and with stakeholders who
may not know nor trust each other (Steiner 2015). Anyone can add a
transaction to a block but these are validated through state-of-the-art
cryptography. As such blockchains “can facilitate the exposure,
valuation and reporting “on the full chain of provenance including
issues such as human rights, deforestation, etc. (Clancy 2017).

The blockchain database is then made more secure through then being
automatically copied, distributed and stored in real-time on thousands
of computers across the world that maintain it. Participants in the
network can have different permissions to view the blocks based on
public and private cryptographic keys and one can remain anonymous when
transacting as each individual or corporate identity is securely
attached to a unique and permanent blockchain identity. This creates a
common database of assets and a transparent and globally distributed
historical record of tamper-proof transactions. Interview with Deanna
MacDonald, CEO of BLOC (Source: Could Blockchain be the Shipping
Industry’s Life Jacket? In Shipping 2030 Nov 15, 2016)

A blockchain functions like most data systems but inputs or
transactions are specifically delineated according to its program and
are explicitly and directly authorized by relevant controllers “without
having to trust the behavior or competence of an incumbent processor.
Interested parties may also audit the production and manufacturing
avatars and verify that their “on-chain” persona accurately reflects
reality” (Steiner 2015). The blockchain not only “gives us an
unprecedented level of certainty over the fidelity of the information,”
it bypasses the need for centralized coordination and auditing (Steiner
2015). Blockchain also could make it easier to automate supply-chain
certification processes, combined with existing labeling methods, such
as shipment barcodes (Clancy 2017).

Opportunities and Risk Assessments

Because anyone can add a transaction to a block, which can then be
added to a chain of other blocks, and since blockchain transactions
happen and are validated in real-time, the entire value or supply chain
can be validated and made immediately accessible and/or transparent
(selectively to selected actors or broadly to the public). In addition,
agreements between two or more parties are defined and executed
automatically (once pre-defined conditions are met) through smart
contracts which are small software programs using algorithms that ensure
that once it is deployed on the blockchain it cannot be changed (van
Rijmenam 2017).

This capacity relates directly to a final key challenge in natural
capital accounting and in scaling the NCP that we address in this
article, that is, the capacity to delineate risks and opportunities.
Blockchain technology with its unprecedented capacity for transparency
and security in global supply chains but offers key capacities for
identifying and managing risks. While the scope for decision making
through the NCP is largely focused on internal corporate decision
making, combining or supporting it through Blockchain technologies and
applications, the NCP could scale implementation and uptake including
the possibility for better internal and external decision making beyond
the corporate actors and stakeholders to include consumers and even
policy makers.

Combined with the valuation capacity described above, the blockchain
can help with prioritization and decision making including on
non-tangible issues that could not previously be valued as an “asset”
such as human rights, mitigation, minimising impacts, restoration,
offsetting, and net positive approaches. Blockchain could open the
scalability of investment and other tools including informing payments
for ecosystem services, sustainable financing and investment, pricing,
marketing, shared value, enhancing developments and for setting
thresholds. The combination of NCP and blockchain technologies and
applications opens the possibility for scalable, timely risk and
opportunity assessment and decision making which incorporates the fuller
scope of natural capital and the implementation of the NCP.

Blockchain is not a technological innovation in a normative sense
because it is not the technology itself that is the breakthrough.
Instead, the innovation is the ingenious combination of technologies and
concepts that are being developed and applied by society, for
society. If we all take part in creatively and collectively applying it
where it is needed, blockchain has the potential to be the technological
foundation required to achieve an inclusive, socially responsible and
equitable society. (MacDonald, 2016)

Conclusions and Next Steps

Most of the discussion and examples of uptake of blockchain
technologies related to natural capital are focused on implementation in
specific supply chains, we believe a broader examination is needed.
Both the Natural Capital Protocol and blockchain are about transforming
business models and operations that take account of full costs of assets
both tangible and intangible as well as strategic decisions in a
transparent, robust, accessible and secure manner. We do not presume to
have a transformative application in mind but instead wish to
investigate the specific opportunities and challenges for scaling
Natural Capital Protocol with blockchain.

Transformative applications are still far away. But it makes sense to
evaluate their possibilities now and invest in developing technology
that can enable them. They will be most powerful when tied to a new
business model in which the logic of value creation and capture departs
from existing approaches. (Iansiti 2017)

We have simply scratched the surface in this introductory article,
which we hope will be the first in a series and perhaps a platform to
continue the examination and discussion. 

REFERENCES

Boyd, E. H.  (2011). The Cambridge Natural Capital Programme:
Increasing mainstream investor understanding of natural capital. Part A:
Main Report
http://www.cisl.cam.ac.uk/publications/publication-pdfs/cambridge-natural-capital-programme-natural-capita.pdf

Clancy, H. (February 6, 2017). The blockchain’s emerging role in sustainability https://www.greenbiz.com/article/blockchains-emerging-role-sustainability

Hawken, P., Lovins, A. and Lovins, H. (1999). Natural Capitalism: The Next Industrial Revolution. Little, Brown & Company

Iansiti, M, and Lakhani, K. R. (January-February, 2017) The Truth About Blockchain In Harvard Business Review https://hbr.org/2017/01/the-truth-about-blockchain

Interview with Deanna MacDonald (CEO of BLOC) : Could Blockchain be the Shipping Industry’s Life Jacket? In Shipping 2030 Nov 15, 2016 https://shipping-2030.com/2016/11/15/could-blockchain-be-the-shipping-industrys-life-jacket/

Kumar, K. Liu, J. and Demirag, O.C.  (2015). National Culture’s
Impact on Effectiveness of Supply Chain Disruption Management In Journal
of Applied Business and Economics Vol. 17(4) (
http://www.na-businesspress.com/JABE/KumarS_Web17_4_.pdf

MacDonald, D. (February 19, 2017). Blockchain: The Future of Digital Infrastructure https://medium.com/@blockchainlabs/blockchain-the-future-of-digital-infrastructure-d7267390b260#.qwbvu4e25).

MacDonald, D. (December 15, 2016) Blockchain Breakdown
https://medium.com/@blockchainlabs/blockchain-breakdown-22beaf87bc7d#.i8d2umjga

Maguire, E. (19 January 2017). Global Financial Services Lead,
Digital Ledger Services, The quiet hero: Blockchain at the WEF
https://www.weflive.com/#!/story/e9cfa9e0de8b11e6a1c6a7ee941bc7e8

McGill, A. (2013) Natural Capital Accounting: What’s all the fuss about? In 2Degrees. https://www.2degreesnetwork.com/groups/2degrees-community/resources/natural-capital-accounting-whats-all-fuss-about/

Steiner, J. Baker & Wood, G. (21 November 2015) Blockchain: the solution for transparency in product supply chains https://www.provenance.org/whitepaper

van Rijmenam, M: (Nov 17, 2017) What is the Blockchain – part 4 –
Transactions and Smart Contracts
https://datafloq.com/read/what-is-blockchain-transactions-smart-contracts/2449