ESG needs web3
ESG needs web3
If politics is the sublimation of war, alignment is the sublimation of politics
Russian invasion into Ukraine changed the world. Suddenly the winter came and we appeared in the desert of the Real. In a minute after the first bombs started falling on 24th of February 2022, we shifted from the metaphoric Kingโs Landing, with all the intrigues and culture wars, into Winterfell with the real war on our border.
The marcher lords of Ukraine became more Western than the West. Trudeau escaped from the annoying honking of the truckers. Zelenskyy chose to stay in Kyiv amid shelling.
Ukraineโs vice prime minister, Mykhailo Fedorov asked Elon Musk for a Starlink connection and got it within hours. And the devices came within two days. He also published various crypto addresses of organizations supporting their army for people to support Ukraine amid invasion. Now the Ukrainian government contemplates regulating crypto so it can fundraise directly.
From Woke Capital to technological transcendence
Balaji Srinivasan commented on an interesting discussion in the EU and Germany focused on ESG taxonomy. And if weapons could be included under investments meeting the environmental, social and governance criteria as non-financial factors for assessing the material risk and opportunities of doing business.ย
Basically, German weaponsโ manufacturers saw a window of opportunity to include weapons in the ESG taxonomy and thus increase their access to financing. Balaji comments that Germans should get bullish on nuclear energy. A remark on the recent skirmish over EUโs decision to include nuclear energy and natural gas in a guidebook for green energy.
At first, including weapons into ESG seems quite odd, even unholy to contemplate. How could someone come up with such an idea?
Well there is this meme of a woke Raytheon. And a woke CIA recruitment video with language people outside US wonโt comprehend much.
But Balaji Srinivasan explains why such Hegelian syntheses, like a priest/warrior combination, might be in fact effective. The Left provides a moral justification and the Right provides the effective action and execution. Take China โ CCP provides moral justification by mentioning the national rebirth after a century of colonialism with injustices such as The Opium Wars, as well as the effective action of providing both order and capitalistic prosperity.
Balaji Srinivasan simplifies the world into three major power attractors today โ The Woke Capital (NYT), the Communist Capital (CCP) and the Crypto Capital (BTC).ย They all oppose each other. And they are all detrimental when taken to extremes. The CCP wants you to submit because they are powerful. The NYT wants you to sympathize (and submit) because you are powerful (and privileged on some axis). And BTC wants you to be sovereign.
And the key is to find the decentralized center between them or some kind of technological transcendence (a z-axis that would transcend the inherent conflict of these three attractors). A way out of maximalism into something he calls optimalism. Because the dose makes the poison. Too little of tolerance is not good. But too much focus on tolerance flips into a new kind of intolerance. Too much sovereignty becomes impractical and solipsistic. The key to resolve this tension is a new kind of technologically enabled tribalism. We can call it building epistemic communities - cloud first, land last, as Balaji Srinivasan says.
All noble ideals are with us since the dawn of humanity. What changes is the technology that enables progress. One can find pragmatic and effective Hegelian syntheses between Liberal Arts and STEM. Call it STEAM, or socio-technology and psycho-technology. There might be too much focus on STEM in the East and not enough focus on STEM in the West. ย
From window dressing to technological progressivism
Messari in their Crypto Theses for 2022 mentions ESG as one of the attacks on web3 due to misconceptions about inherent energy scarcity and perceived energy intensity of bitcoin mining.
But I think ESG needs web3. The decentralized financial internet, together with the ledger of record concept by Balaji Srinivasan, can in fact disrupt ESG and 10x it.
I have worked both in development cooperation/finance and ESG, and I am familiar with the current state of what was once called Corporate Social Responsibility (CSR). A few years ago, CSR or corporate responsibility was rebranded into Sustainability, and more recently into Environmental, Social and Governance (ESG) areas of compliance and risk management.
But by and large, ESG still remains a window dressing exercise for potential investors and regulators. The culture and social wars donโt help either and eroded its credibility in the recent years. Hence the stakeholder capitalism and Woke Capital memes. But to give CSR community their deserved credit, they are often the true protopians โ enthusiastic people believing in, and patiently working towards, gradual progress of their companies in sustainability, equality and transparency, using technological innovations, long-term goals and measurable KPIs.
Maximalists are both dystopian when attacking their enemies, and utopian when presenting their solutions. Protopians are technological progressives and pragmatists.
Web3 in general and bitcoin in particular reduces violence. Why? Because โfiat money is backed by men with gunsโ and the digital gold is backed by math. No amount of violence will solve a math problem.
A practical and a directionally right example from Kenya: an unbanked person could have been robbed of cash. But mobile banking in 2007 changed the equation quite a bit.ย ย ย
CSR community helped to scale M-Pesa, it can nurture peace with web3
Many things in life are Pareto-distributed. This means that black swans and big disruptions for better or worse are scarce. One of the biggest successes of CSR and development cooperation was the scaling of M-Pesa and the rise of mobile banking innovation in Kenya. And from Kenya and Africa even to places like Albania.
The original Kenyan innovation of peer-to-peer transfers of mobile phone credit in the micro-finance context was scaled, thanks to the CSR team at Vodafone and a challenge fund grant from the British DFID, into the M-Pesa mobile banking revolution across Africa.
Some 15 years ago Africans leapfrogged the West not just with mobile telephony, where they skipped the landlines and went straight to mobile phones, but also in mobile banking. Instead of bank accounts and plastic debit cards, they went straight to mobile payments.
Similar world-changing innovations in web3 might come from places like India or Nigeria in the near future. The ESG community might be a catalyst that will help to scale these innovations or might lose, fighting them and wake up on the wrong side of history and capitalism.
From the materiality matrix to the DeFi matrix
Every CSR exercise starts with stakeholder engagement and stakeholder analysis. Their interests are captured in the materiality matrix. What is material for internal stakeholders, such as employees and shareholders, is often different from what is material for external stakeholders, such as regulators, customers or the general public.
The most material issues, for both internal and external stakeholders, are then prioritized, detailed in management approaches and position papers, made into strategic objectives, with concrete actions to be taken, KPIs to be measured, data to be collected and (non)achievements to be reported in annual sustainability reports. ย
The arrival of Google News in 2002 had all of a sudden put all the news outlets against each other, in a stiff global competition. Newspapers have for long enjoyed a natural geographic monopoly power in the pre-internet era, and suddenly they were all comparable and readable online. Suddenly reprinting the AP stories wasnโt enough. And thus, many smaller outlets, that didnโt manage to improve, compete and add value on a global market perished.
Balaji Srinivasan argues that, what he calls the DeFi matrix, will be a similar disruption to governments, companies and financial institutions as the Google News was to the news outlets. Because all financial assets will be soon digitized, put on blockchain, and traded against each other. DeFi here stands for Decentralized Finance subsector of the web3 revolution. Imagine the DeFi matrix as a huge crypto wallet of the near future, where all financial assets are held and traded against each other, and are made suddenly liquid.
ย In the recent years the number of retail investors and crypto investors increased maybe 100x thanks to apps like Coinbase, Robinhood or Revolut. And all these people learnt what an orderbook is, and can sell a share or buy a coin, while commuting to work or watching Netflix.
The Gamestop saga of 2021 still resonates and was a harbinger of things to come. People can invest some small amount into companies like Beyond Foods on Revolut. Maybe they just want to support the company, becasue they believe in technological progress and see plant-based meat as a stepping stone to similar innovations in near future, like cultured meat. The stock price of Beyond Foods tanked but, they might HODL the stock anyway and might buy some more. But they can also sell out their whole stock portfolio any minute and buy crypto assets instead. Or they might move their crypto off exchanges to private custody wallets if iritated by something like recent behavior of Canadian politicians and banks.ย
From the triple bottom line to triple-entry accounting
Triple bottom line is People-Planet-Profit. The idea that businesses shouldnโt just make money, but also protect our planet and improve society, by taking care of their employees, supply chains, and communities where they operate.
Often these efforts are inadequate and optimized for publicity. Or what would be called cheap signalling. Politicians and companies optimize their performance for clicks and likes. Which leads to memetic contagion and herd behavior.
But even if companies really try to audit their supply chains for human rights violations, they often find that these are very opaque and complex. Even the biggest companies manage to barely get a glimpse into their Tier2 suppliers. And they have still at least two tiers to go. For example, a garment factory in Bangladesh supplying clothes for a major global brand might have a supplier that has other suppliers, often women producing parts of garments in their homes. ย
One solution to human rightsโ abuses across a complex supply chain is to automate away much of it and bring production closer to home and customers, increasing transparency and a skin in the game. Adidas cooperated with Carbon, a US 3D printing start-up, to create a Speedfactory in Germany. But they were too early into the digital fabrication automation trend.
Another solution is to use blockchains to increase transparency and produce immutable and globally compatible records. But enterprise blockchain solutions were a dead end for lack of incentives. Balaji Srinivasan uses enterprise blockchains as an example of an ineffective Hegelian synthesis โ of a decentralized blockchain (but without a token/alignment around a financial incentive) and a centralized company.
On the other hand, for example, Coinbase is an example of an effective Hegelian synthesis between a decentralized cryptocurrency and a centralized retail banking solution. One can pay with a Coinbase Visa card. And the money is deducted from bitcoin balance.
Triple-entry accounting is a peek into future โ when the Big Four companies audit crypto companies, they are able to match and compare transactions between companies using, for example, the Ethereum blockchain. ย ย ย ย ย
From mostly talking to true alignment in collective impact initiativesย
In the sustainability or ESG community there is a lot of talk of achieving impact through venture philanthropy, so called patient venture capital and corporations nurturing a startup ecosystem.
Collective impact is an idea of corporations and philanthropists combining forces, dividing work and finding synergies to achieve a certain social or environmental goal in one area, like integrating Ukrainian refugees in Slovakia.
One company can provide discounted or free telecommunication services, other lobby the government to speed-up the employment paperwork and onboarding process, some NGOs can provide vocational training and a psychological counselling. And a city or county government can match residents with refugees and provide incentives to accommodate them.ย ย
Web3 technologies with concepts like Decentralized Autonomous Organizations (DAOs), city coins and crypto-REITs for startup cities can ease the NIMBYism and provide true alignment that can increase synergies and decrease complexity and competition between various stakeholders in the collective impact initiatives.
From skills-based volunteering to DAOfying vocational training
Volunteering is an integral part of sustainability reporting. Companies report what percentage of labor force actively participates in various volunteering campaigns. They also report how many hours they contributed and how many organizations and people they helped.
Some companies go a step further into skill-based or pro bono volunteering, and focus on quality of volunteering activities and try to connect them with their core business and competences. For example, lawyers doing pro bono work not just to help clients but to advocate for changing laws to increase protection of clients from loan sharking or changing the personal bankruptcy laws.
In German speaking countries there is a long tradition of vocational training, including so called practice enterprises โ virtual companies created besides or within real companies for training of apprentices and future employees. These can be โDAOfiedโ and turned into a vehicle for a fully remote and global workforce of the near future.
Since these practice enterprises are for โeducational purposes onlyโ, they are a type of scaffolding and low-stakes environment suitable for experimentation where web3 can really thrive. And provide not just a global view, but also a tech backbone to such efforts.
Balaji Srinivasan has a concept of a mirrortable โ a truly global mirror to a cap table in a certain jurisdiction. This can be abstracted to also include POAPs, or so-called Proof of Attendance Protocol certificates.
Thus, creating a mirror leader board, (or a mirror board?) for the most active (teams of) volunteers and apprentices.ย Some people might call them intrapreneurs. Giving credit to active people who are starting new initiatives within existing organizations. ย ย
From sustainability reporting to crypto oracles and the ledger of record
Sustainability reporting starts with stakeholder engagement and materiality analysis. What problems are the most important for various internal/external stakeholders, solvable by us and neglected by others and our competition?
If we know what problems we are willing and able to solve, we need to know how to solve them. This is detailed in management approaches and strategy. Then we need to draft short/mid/long-term objectives and related actions. Then come up with KPIs and ways to measure them. And then ways to report our (non) achievements.
There are myriads of standards (GRI), taxonomies (IRIS+), frameworks (SASB) and principles (Ruggieโs: protect, respect, remedy) to use in sustainability reporting. There is also a focus on science-based metrics in ESG, especially related to climate change actions.
Enter the concept of truly-reproducible research and the related Ledger of Record concept by Balaji Srinivasan. It is a combination of the Paper of Record (NYT) and the immutable ledger (blockchain) combined also with crypto-oracles (notaries + web3) and crypto-instruments.
Chainlink and Associated Press are experimenting towards a Ledger of Record vision:
The ledger of record is a progress from immutable money (bitcoin) to immutable information and a glimpse of what a fully auditable and traceable information supply chain (another โbalajismโ) could look like.ย
From SDGs to tech trees and vector-based theory of change ย ย ย ย
Sustainable Development Goals and Agenda 2030 is a set of universal and global goals and targets drafted by the UN to unite all countries around a theme of human progress and development. Unlike the Millennium Development Goals, SDGs are designed to be universal โ for โdevelopingโ and โdevelopedโ countries alike.
Balaji Srinivasan criticizes this developed/developing dichotomy and prefers to call countries either ascending or declining. Peter Thiel has a similar view โ if you think you are developed, it implies a kind of stasis, that all progress was already achieved. Alexander Bard has a related idea โ that internet as a global digital empire changed this developed/developing country dynamics โ suddenly poorer countries can leapfrog richer countries thanks to technology. Kenyan M-Pesa is an example of mobile payments becoming mainstream in Africa, some 15 years prior to the West (where it is still not the case today). Other examples are Chinese WeChat ecosystem and India national tech stack. ย ย ย ย ย
COVID-19 pandemics threw many people in poorer countries back into extreme poverty and the current Russian invasion of Ukraine might decimate also middle-income families around the world. So SDGs wonโt be most probably achieved, because they are focused on concrete goals set for 2030 and thus couldnโt take into accounts black swan events we saw in recent years. A much better approach is vector-based theory of change, presented by Dave Snowden, the leading expert in anthropo-complexity. Its basic idea is โletโs have more positive stories like these, and less negative stories like thoseโ. Thus, moving slowly into a certain positive direction, while being mindful of where we stand and what is the โadjacent possibleโ.ย
There are 17 Sustainable Development Goals, 169 targets and over 200 indicators. Still one can get far with SDG prioritization. One approach it to make a network analysis and ask which SDGs are the most connected to other SDGs, and thus the most central? The World Bank paper found out that SDG7 Energy and SDG6 Water & Sanitation are the two most central goals. Using also the Copenhagen Consensus Centerโs approach of value for money prioritization, one can assume that investing in innovation in cheap and clean energy/water/sanitation is upstream of just scaling current solutions.
This can be abstracted further into general support for technological progressivism and win-win solutions to โgrow the pieโ (as Balaji Srinivasan says: โWin and let winโ ideology. This is opposed to both technological conservativism and political progressivism that discount the importance of technology and tend to be zero-sum.
ESG practitioners could create tech trees or use tools like Wardley Maps to map the interlinkages of various technologies and visualize what is the focus of their companies and competitors. This can spur collective impact initiatives geared towards tech progress in certain sectors. And all of this can be linked to the most central SDG targets and also to where the highest value for money lies.
A new international standard driven by OECD and called TOSSD, or Total Official Support for Sustainable Development, can in fact help ESG practitioners to focus on technological progress and invest in innovation that benefits global commons. ย ย ย
If politics is the sublimation of war, alignment is the sublimation of politics
War with exponential technology is negative-sum, all sides lose. Politics is continuation of war with other means. Memetic tribes fight a social war on social media for the domination of a noosphere. But again social media being exponential tech, all sides lose and discourse suffers.
ย Balaji Srinivasan explains how good can be defined as helping others without self-regard. Evil is the obverse โ harming others while helping yourself. Both are zero sum. Smart means helping others while benefiting yourself. A positive sum solution. And stupid is harming others while harming yourself.
Both war and politics in times of exponential technology means eventual destruction of biosphere, geosphere and noosphere. Our global commons. Only true alignment is the way forward.
Fiat money is backed by men with guns, as Paul Krugman says. And bitcoin is money backed by math. No amount of violence can solve a math problem. Web3 means smart contracts, DAOs, NFTs and crypto certificates.
Web3 enables pseudonymous economy, what Balaji Srinivasan calls a new digital Peace of Westphalia, as well as truly reproducible and cryptographically verified research and news reporting โ the Ledger of Record.
After this tragic and stupid invasion is over, and Ukraine defends itself kinetically and memetically, hopefully without the conflict spreading to more countries, we need a new Peace of Westphalia.
It will be a more deglobalized and decentralized world. With automation, neutral web3 protocols, national tech stacks and pseudonymous economy as some of the building blocks.
Providing hope for a new civilization and the aligned movement with the rule of code, where money backed by math brings more peaceful times, than fiat money backed by men with guns ever did.
ESG can help with that.