Trakti Smart "Legal" Contracts Blog

Implementing and managing ESGs through smart contracts

Implementing and managing ESGs through smart contracts

on July 7, 2022

Socially responsible operations that track factors like environmental, social, and governance principles are more than just a feel-good phenomenon. They can affect credit risk and investment performance as well as your relationship with clients and vendors. In the era of climate change action and corporate social responsibility, managing ESGs through smart contracts is the next step in propelling businesses to high performance.

ESG criteria refer to environmental, social and corporate governance factors that are taken into account when investing in a company. Although their origin dates back several decades, they have become a reference for socially responsible investing in recent years.

Develop a culture that promotes you

A well defined, established corporate culture will provide the framework for your organizational development and strategic planning. Allow this culture to guide your planning process. Though there is no single, perfect, cookie-cutter method to ensure that your culture and organizational strategy align, there are some critical pieces that should be considered. Companies focused on implementing its sustainability strategy, with a special interest in climate change, may look into ways to align activities and relations with other companies to incentivise efficiency in the production chain. It is important to have uniform data on sustainability across entities in order to be able to compare and evaluate the actual efforts they are making towards achieving their sustainability goals.

Strategic alignment of ESGs amongst your company and the ones you work with is the process of working with business units, departments, teams, and individuals to connect their strategic efforts to your organization’s overarching ESG goals, objectives, and actions. It’s not enough to align internal processes to ESGs, we have to track the whole business ecosystem in an automated way. The companies you work with represent a slice of your reputation, and what they do and how they behave, reflects on how customers perceive you. Alignment begins when senior executives share or cascade the enterprise strategy throughout the organization and engage functional leaders, team leaders, and individuals to help them identify and develop their own goals, plans, and actions.  We like to call it the organization’s GPA.

Goals

Plans

Actions

It’s great to pull all these pieces of the puzzle together, but you need to plan how you will keep them all afloat. Smart contracts make it easy to know if you are managing performance, communications, personnel, resources and all the moving parts that lead your company towards meeting its ESG goals.

Managing ESGs through smart contracts means full control over every aspect of procedures, strategies and operations with minimal manual input.

Bringing smart contracts into the ESG strategy equation means is the most logical step as blockchain has the capacity to build ethical and sustainable supply chains. It enables organizations to ensure transparency of information about all suppliers, through systems that capture and manage information across the supply chain. You can manage and regulate all procedures, including the shaping of the incentives model that backs up these processes. One way to refine your strategy is by tokenizing the reward mechanism and incentivizing participants to comply with your ESGs while penalizing those who don’t.

Wait. How does this work?

The idea is quite simple: the smart contract that regulates the relationship between your company and your suppliers, vendors and internal processes can include a rewarding system. For example, whoever meets your ESGs gets a prize and who doesn’t receives a sanction. Tokens are just the way a smart contract, and everything on the blockchain, represents assets, may they be tangible or intangible (just think of cryptocurrencies, that do not reflect anything in the “real” world). This way you can use a token to represent an amount of money or anything else you like. At this point, the token can be used in the smart contract as a prize or penalty at your discretion.

Your strategy of managing ESGs through smart contracts is yours to develop. Create the company you want through a clearly defined culture and a solid strategy for getting to a point where ESGs are aligned with your internal processes and employee values.

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Sarah GiannelliImplementing and managing ESGs through smart contracts