Three ways blockchain technology can funnel capital to climate change-friendly products.

Fixing our planet is going to cost a lot of money. It’s not hard to find projections of those costs that run into the trillions of dollars. A quick literature survey turned up estimates of $4.5 trillion to decarbonize the U.S. electric grid, another $3 trillion for climate change mitigation, just in the U.S. over the next decade, and about $4 trillion needed to redress systematic inequalities in our education system. That is starting to sound like a lot of money, even for the $23 trillion U.S. economy, although the amount is still less than the cost of replacing our planet or moving to a new one.

Across the board, this same infrastructure is missing or underdeveloped for many critical social investments. Blockchain technology offers some hope for accelerating this path forward in three different ways.

Smart Contracts

The first is around new methods for tracking, managing and capturing returns. The logic in smart contracts allows companies to do things that were not easy to do at scale in the past – such as tracking carbon emissions from a single enterprise and matching those with offset activities and verifying that there’s no double-counting.

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Using blockchain technology and smart contracts, complete with oracles and external auditors, makes it possible to look at the total life cycle of a product, to attach carbon outputs to asset tokens along the process and bring products to market that have a verifiable net-zero carbon footprint. Hundreds of companies have pledged a path to net-zero carbon emissions and this will offer them a provable mechanism for getting there.

Asset Segmentation

Second, blockchains allow us to segment assets in ways that were not possible or simple in the past. Mortgage-backed securities allowed investors to buy slices of risk in a pool of securities, but in practice, the assessment of risk was subjective. With a blockchain-based smart contract, you can separately tokenize a renewable energy investment as a vanilla energy-producing asset and a carbon-offset investment, offering one to a low-risk utility investor and the other to a company that has pledged 100% carbon offsets, with data flows and smart contracts verifying outputs and distributing returns. Unlike past securitization efforts, this one can be underpinned with real-time systems data and transparent business logic on-chain.

Risk Tolerance

Third, blockchain investors have something else corporations need to fund the path to a better world: a high tolerance for risk. Bloomberg estimates that $500 billion was poured into renewables in 2020. Not only is that not enough, but it also didn’t get that big overnight. It took years to build the skills and investment opportunities to attract that much capital. The early days were much riskier. If we want to accelerate the path forward on education opportunities or climate change, we need more risk-tolerant investors putting capital into the hands of portfolio managers who will need to learn and get better at spotting investments.

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The early days will be rough as the ecosystem works through challenges from investment skills to external data validation, to the right way to construct smart contracts and how to package all the pieces to suit investors. The faster we get risk-tolerant capital into the mix, the faster we start flattening that learning curve.

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