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Blockchain could be the missing link in sustainable finance

Smart contracts could turn empty sustainability pledges into impact-linked investments.

16 Aug 2021by Geoffrey Lyons

The following is by Kevin Pettit, Chief Product Officer at data intelligence platform Proof Of Impact

Imagine a world where businesses were actually rewarded for hitting social or environmental impact targets.

There is an idea called performance-based finance in which investment terms can change based on achieving agreed-upon targets. We’ve seen this, most egregiously, when executives get a fat bonus for hitting revenue targets. But what if instead of rewarding financial targets, we also rewarded social and environmental targets?

Every day we hear companies like Amazon or Google making lofty sustainability pledges. But what are these pledges backed by? Why can’t we make investors put their money where their mouth is and link carbon or diversity goals directly to their investments?

Enter the blockchain. Before blockchain, impact-linked investments were too difficult to be created at scale. It was cumbersome and costly to organize and execute the payment rules and deal structures across various stakeholders with different incentives. Smart contracts, like those created on Ethereum, solve that. Designed specifically to digitally execute rules across stakeholders with different incentives, smart contracts are the missing link in sustainable finance.

Why can’t we make investors put their money where their mouth is and link carbon or diversity goals directly to their investments?

People are starting to wake up to this reality. In the last few years, the impact investing market has witnessed explosive growth from $228B to $715B, with investors looking to link purpose and profit. Meanwhile, decentralized finance (DeFi) has grown from $16B to $80B in total value this year alone. These two innovative industries are converging to create the newest disruption to traditional finance.

But how does it work in practice?

Suppose you you go on Shark Tank to raise money for your company. You pitch your idea, and you get an offer from Mr. Wonderful to borrow $1M for 10% interest over 3 years. Entrepreneurs will often refuse this sort of offer, saying that it's too “sharky” to take on expensive debt.

But what if you countered?

“I’ll take your loan,” you say, “but with one caveat: I’ve seen you tweet about sustainability and the environment. If my company meets a net zero carbon footprint over three years, I will only have to pay you back 5% interest instead of 10.”

There's a host of innovations built into blockchain that make these new performance-based investment structures possible.

This type of deal can be a win-win for both the company and the investor. If companies can prove that they are resource-efficient through cost savings and effective management, then they can prove to be less risky for investors and gain access to more favorable financing.

Imagine if investors and companies could enter into these deals quickly, removing many of the barriers to entry that would normally exist in trying to create a structure like this.

Smart contracts, oracles, multi-sig — there's a host of innovations built into blockchain that make these new performance-based investment structures possible, creating cost reductions and capital efficiencies that will bring in the next generation of trillion-dollar impactful asset classes.

Blockchain will be the infrastructure for a new age of investors who want to see both purpose and profit.