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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 Reporthttp://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