An ESG Public Ledger POC
Nov 09, 2022
by Nicola Attico
Blockchain/DLT Solution Engineer, Vision&Innovation
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by Wes Geisenberger
VP, Sustainability & ESG, The HBAR Foundation
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by Justin Atwell
Developer Advocate at Swirlds Labs

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The Overarching Problem

Companies keep track of their financial assets and liabilities in the general ledger. Bookkeeping has been the foundation of modern accounting and financial reporting since the invention of the double-entry system in 1494 by Luca Pacioli.

Climate issues humankind faces today have a similar accounting need at a much bigger scale. Solving these challenges requires worldwide coordination. The balance sheet of our Planet must live on a public ledger, which is globally available and auditable.

Besides financials, a climate or natural asset-focused public ledger must manage the accounting of CO2, Greenhouse Gases (GHG), and other natural resources.

A climate asset, or credit, typically represents a reduction or avoidance of CO2 emissions. Standards exist in these assets, like Verra REDD+, Gold Standard, and I-REC.

Despite their tremendous growth, climate assets today lack much information about provenance and chain of trust. Verification as a buyer or auditor is impossible, even when this information exists. Double counting is another recurring issue, which implies that the same ecological activity is used to justify the creation of multiple assets.

A liability, or debit, is a mtCO2e emission in the atmosphere. The Greenhouse Gas Protocol defines a standard by which an organization must allocate and reconcile GHG emissions across different scopes, often tied to a product or organizational standards.

Emissions disclosure has become a concern for organizations to avoid the risk of greenwashing and comply with regulations. Notable cases like Ryanair and the Volkswagen Dieselgate warn the entire business community.

The lack of verifiable data exposes all parties to reputational risks due to mistakes or tampering. No organization should accept that.

Tokenized Assets

Tokenized Assets use a Distributed Ledger Technology (DLT) to overcome many of the difficulties of today's ESG assets. They leverage DLT's unique immutability, cryptography, and timestamping capabilities to make assets verifiable and linked to the originating data.

ServiceNow plays an essential role in managing data generated by devices (e.g., sensors, solar panels, satellites), data entered through integrations (with any other system of records), and human input (which is still often used in ESG reporting). ServiceNow makes it easy to interact with digitized Measurement, Reporting, and Verification (dMRV).

Moreover, the ESG Public Ledger tracks all the audit logs and orchestrates token-related activities verifiably. Events like the delegation of credentials, the assertion of information, and asset events such as minting, burning, and transferring are all visible on the DLT.

A virtually unbounded number of participants constitute an ESG business network. Their onboarding and lifecycle workflows are vital to the functioning of the ledger. These are some of the primary roles:

  • The ecological project is the supply side, which aims to tokenize a reduction or avoidance of CO2.
  • The buyer is the demand side, virtually any company willing to offset its emissions.
  • A registry is an institution overseeing the ecosystem and allowing the creation of tokens (e.g., Verra, Gold Standard, etc.)
  • A validation and verification body audits the claims from the ecological project, analyzing dMRV data or doing onsite inspections.
  • A marketplace or exchange allows matching demand and supply through a price discovery mechanism.
  • A financial intermediary is an organization that provides services for buyers and sellers like financing, portfolio management, custody, or reporting.

We recommend reading the document “Voluntary Ecological Markets Overview” by the InterWork Alliance for an in-depth description of the ESG token taxonomy.

The figure represents a typical interaction between the supply and demand sides.

Service Now ESG Public Ledger Picture1

The upper branch of the process is carbon accounting. Emissions are determined using sensors, integrations, or manual inputs. Organizations collect the data on the Now Platform and send it to the DLT, where it is made immutable. This dMRV data, either in a raw or aggregated form, is linked to "brown tokens" (the ecological debt).

Suppose an entire supply chain is onboard on the ESG Public Ledger. In that case, we will also be able to reconcile emissions with suppliers (downstream) and customers (upstream) to identify gaps, allowing a more granular control.

The lower branch in the figure represents the CO2 avoidance or reduction process. dMRV data is the proof of “green tokens” (the ecological credit). Once minted, the owner can transfer these tokens to a marketplace or trade them over the counter (OTC).

A company owning brown tokens which aims to reduce its carbon emissions can acquire green tokens and verifiably burn the same amount of both, certifying the retirement on the ledger.

The entire process is fully auditable in real time, as all the data is available on the DLT. All parties can analyze the data stream through manual inspection or, more effectively, automated and AI-based techniques.

The following will focus on a specific asset category, the Renewable Energy Credits, and how the ESG Public Ledger helps manage them.

The REC use case

A REC is a tradable, non-tangible asset representing one megawatt-hour of green energy. Whereas a carbon offset represents a reduction in GHG emissions, a REC represents a quantity of energy produced from renewable sources like solar panels and wind.

RECs allow companies to decrease CO2 emissions from energy usage and can be treated as carbon offsets in some cases, although the two concepts are separated.

RECs are experiencing significant growth, and they’re forecasted to grow even further from today to 2030. They’re experiencing issues related to transparency and effectiveness. The International REC Standard, or I-REC, is one of the most adopted standards for RECs.

One frequent criticism is that RECs have minimal traceability about the actual projects, geographies, and parties involved in their generation.

Also, there is no way for the buyers to verify the history of the REC. The entire system depends on authorities' central control, which is challenging to scale. This way of functioning exposes parties to errors, double-counting, and greenwashing.

Service Now ESG Public Ledger Picture2

The figure shows the workflow for I-REC built on the Now Platform. This workflow involves a minimal number of participants: the I-REC Registry and a company called Solar Inc.

The steps you will see in the live demo are (1) project and device creation, (2) dMRV data entry, (3) user KYC, and finally, (4) REC minting.

In another article, we will go through the buying, selling, and retirement of these tokens, which requires first covering the carbon accounting flow.

The Technology Stack

The Now Platform manages the user experience and workflows of the ESG Public Ledger, like user onboarding and approvals. The Now Platform integrates into the Guardian, using the Guardian spoke built in the context of the POC, which in ServiceNow terminology is a no-code integration that allows the creation of any workflow and automation using configurable building blocks called activities.

The Guardian is a modular open-source solution that includes best-in-class identity management and tokenization libraries. At the heart of the Guardian is a Policy Workflow Engine (PWE) using the Hedera Consensus Service and Token Service, driven by configurable policies that enable applications to offer a requirement-based tokenization implementation. Guardian ensures that the entire history of the ESG asset is visible as the token chain of trust.

Hedera Hashgraph is the Layer-1 for the ESG Public Ledger. Hedera is ideal for many reasons: governance, economics, and performance. One that is especially important is being carbon neutral. Hedera has been evaluated as the greenest Proof-of-Stake (PoS) ledger by the Centre for Blockchain Technology (CBT) of the University College of London (UCL). Hedera scores the most green, with 0.04 Wh per transaction, lower than all the other PoS networks, non-PoS networks like Bitcoin, or non-DLT networks like Visa.

Key Takeaways

Our Planet requires an ESG Public Ledger to manage climate assets, liabilities, and verifiable data. ServiceNow and Hedera Guardian enable this worldwide ledger to be directly plugged into the enterprise processes.

The Now Platform manages workflows for participants’ onboarding, token lifecycle, and approvals, allowing DLT data visibility and analytics.

ServiceNow applications (part of Technology Excellence, Customer Experience, Employee Experience, or Operational Excellence) and third-party applications published on the Store can be data providers.

Moreover, ServiceNow ESG Management collects and aggregates data from internal and external sources. External sources include integrations through IntegrationHub and Edge-to-Cloud capabilities.

Finally, ServiceNow collects and aggregates data through the ESG Management and ESG Command Center applications across the Now Platform, serving this data to the Guardian.

The recording shows ServiceNow managing Renewable Energy Credits (RECs) through a manual data collection and tokenization workflow. The same approach applies across virtually all policies for tokenized ESG assets like the GHG Protocol or Verra.