Satellites, blockchain and ESG - a marriage made in heaven?

Perhaps the biggest issue facing corporations and government today is verification of ESG initiatives. While reporting on the governance and social elements of ESG can usually be satisfied by company and external reporting, measuring environmental impact is far more challenging.

It’s made even harder when there are reporting requirements under scope 2 (emissions associated with the purchase of an energy commodity, such as emissions associated with the company’s use of electricity from coal fired electricity grids) and scope 3 (emissions through the supply chain outside of the company’s direct control).

Recently, interest has surged in satellite and blockchain in the ESG space. This is partly due to investor and stakeholder pressure for verifiable environmental metrics to substantiate green initiatives.

It’s also because satellites can provide the data (from satellite observation or satellite-enabled terrestrial devices) for scope 2 and 3 reporting, while blockchain can provide the solution to the decentralised management and verification of the data, and smart contracts provide the mechanism for incentive and distributed financing systems driven by this data.

Satellite 2.0 – what’s new?

Although rockets and space travel get most of the attention, transformation in the way satellites are manufactured and operated has fuelled the explosion of data and imagery from them.

Satellites used to be the size of a shipping container and cost upwards of USD500 million. Now they’re no larger than a microwave, cost less than USD1 million and can be mass produced anywhere (even in school classrooms).

While it took almost 50 years to reach 1,000 satellites in space, in 2020 over 1,200 were launched. And that number with will continue to rise with operators like Starlink, OneWeb, AST and Amazon’s Project Kuiper planning constellations of thousands of satellites, with many predicting over 100,000 satellites in space by the end of the decade.

Not only has the cost and size dropped, but the services available have increased exponentially. Today’s satellites operate as easily upgradeable data centres in space, opening up access to application developers around the world without the need for specialised satellite knowledge. Today, any software developer can be a rocket scientist, and any organisation can be a space company.

Satellites now provide a huge array of near-continuous remote recording of the planet’s sensory experience, from the gases in the air to the health of individual trees in a forest. They also provide archives of this data. And, perhaps more importantly, the ability to enable continuous ground-based measurements through internet of things (IoT) devices previously not possible due to the constraints of terrestrial communications.

In response, companies are looking to satellite data to monitor supply chains. They’re doing this both reactively, by keeping a check on risks such as deforestation, route optimisation and greenhouse gas emissions, and proactively, by tracking intended positive impacts, such as tree planting, reduction in emissions and trading carbon credits.

Monitoring at greenhouse gas emissions at the facility level

Space agencies NASA have been monitoring greenhouse gas emissions for years. But the new generation of private satellite operators, such as Spire Global and GHGSat, focus on individual facilities and can detect with much lower emission rates, working with the operators of those facilities to understand, control and reduce their emissions.

Corporations from the oil and gas sector (the largest industrial source of emissions worldwide) are the biggest users of these services, followed by the next most prominent sources of emissions: power generation, coal mining, agriculture and waste management.

The availability of satellite data has also given rise to specialised data analytics firms like Descartes Labs, Kayrros, and Enverus. These cater to the needs of the emission generators themselves, regulators and market analysts. Investors and fund managers are interested in using the data to better understand whether an organisation’s claims are simply greenwashing.

Monitoring deforestation in the supply chain

Starling supports companies using palm oil to show how they’re implementing their commitments to “No Deforestation.” Globally integrated companies such as Ferrero and Nestle use the service to monitor deforestation in their palm oil supply chains in support of their sustainability commitments.

Along similar lines, Orbital Insight worked with Unilever, to track the relationships between farms, mills, refineries and ports, with images of the forests, biodiversity and water cycles that intersect Unilever’s palm oil supply chain. These let Unilever see into the elusive “first mile” of its supply chains to identify potential deforestation issues.

Delivering on the promise of IoT

Satellites’ ubiquitous communications capabilities enable the collection of ground-based data by IoT devices in areas where it isn’t economical (or feasible) to use terrestrial communications. For example, the ability to access reliable data from supply chain elements, whether that be raw materials or manufacturing in remote areas, transportation and distribution tracing across geographies.

Current use cases include:

• route optimisation/“green shipping” (combining traditional GPS data with IoT devices to monitor emissions, fuel use, routing and even ship scrapping practices);
• crop monitoring (such as Australia’s Farmbot sensors and Aerobotics pest detection);
• pipeline monitoring, air and water quality monitoring; and
• tracking goods from point of origin to point of destruction.

Where does blockchain and smart contracts fit into the picture?

There’s an overarching lack of transparency in unregulated carbon offset marketplaces, including the absence of auditable proof that offsets are, in fact, real and aren’t sold in a duplicate fashion. To put this into perspective, it’s estimated there is a gap of 5.5 billion tons per year between what individual nations report and the emissions calculated by independent models.

This is where blockchain comes in.

Blockchain provides the auditable, immutable, and standardised system of record without the need for centralised management or control. It can record, track and manage environmental impact data that’s critical for ESG environmental reporting. Until this is in place, investors will find it difficult to verify ESG claims and better evaluate ESG risks.

When environmental data is captured by satellites and IoT connected devices, real-time measurements and other information sources are transferred to the blockchain by trusted intermediaries (oracles). These can then be used to confirm pre-agreed contractual terms have been satisfied and trigger automatic transactions (smart contracts) based on actual numbers, not guesswork. Here are a few examples.

Sustainable agriculture

Smart contracts can enable regenerative agriculture programmes. These include efforts to reward raw materials providers for reducing their carbon footprints through more sustainable land-use practices – usually a combination of planting trees and conservation.

For example, the Green World Campaign is building smart contracts that use satellite data to automatically dispense rewards to people who successfully regenerate bodies of land by increasing tree cover, improving soil, and more. Payouts happen when oracles pull data from satellite images to trigger smart contracts built on a blockchain, guaranteeing people on the ground earn rewards fairly and transparently.

Tokenized carbon credits

Organisations such as Moss, the Toucan Protocol and C3 enable the creation of tokenized carbon credits, which enables its integration into the decentralised finance markets such as KlimaDAO.

Carbon offsetting is achieved when a carbon credit is ‘retired’ in the name of an individual or an organization. The retirement process removes the carbon credit from the market, meaning no one else can claim responsibility for the positive carbon impact associated with the individual credit. When the retirement is executed, an offset can be claimed.

These tokenized carbon credits can be created only if satellites or IoT devices report meaningful reforestation to a smart contract. So these organizations can verify that their funds have actually made a real impact.

Decentralised energy grids

Instead of centralising enormous facilities that typically cause considerable sustainability issues, decentralised grids aggregate the decentralised production of energy from distributed energy resources. These are typically renewable sources such as wind, solar, and hydropower. Decentralised grids are an optimal solution to empower communities and individuals, so they become the holders of their energy distribution and production.

Decentralised energy grids can use real-time satellite weather data to predict load throughout the grid. They can respond to any changes in weather and fluctuating energy supply from renewable sources by redistributing energy around the grid.

Examples like Powerledger’s blockchain-powered energy trading platform use smart contracts to give consumers the ability to produce and trade solar electricity with their neighbours.

This reduces energy transportation costs and greenhouse gas emissions. The Brooklyn microgrid project is often cited as a leading example of a blockchain based decentralized energy grid. But closer to home are Australia’s Powerclub and VB Solar Exchange, which let participants trade their excess solar energy for VB beer.

Challenges

Standards

The lack of ESG regulations, standards and universally recognised guidelines is a huge challenge for the industry. Investors and stakeholders increasingly demanding transparency and accountability on climate-related risks and opportunities. And that they expect companies to provide clear and appropriately detailed disclosure of climate change governance, strategy, risk mitigation efforts and targets.

But this situation is likely to change soon, following the recommendations from the 2021 UN Climate change conference (COP26) and establishment of the International Sustainability Standards Board. The ISSB which will follow on from the work started in 2015 by the Task Force on Climate-Related Financial Disclosures (TCFD) to develop a set of voluntary climate-related financial risk disclosures.

The ideal outcome is the ISSB standards becomes a global standard that integrates the work of all previous standards and frameworks (such as the TCFD recommendations) focused on investor needs.

The ISSB’s standards could provide globally consistent, trusted, non-financial reporting as robust as financial reporting today. This would give investors a better understanding of a company’s long-term performance and value-creation prospects. It would provide a link between ESG risks and opportunities and the financial performance of a company, and allow investors to compare across companies and over time.

More data, more insight, more progress.

Historically, the main sources of ESG data have been voluntary disclosures by companies through corporate social responsibility reports. But this process has been criticised for being susceptible to positive bias, a lack of standardisation on the methodologies used and the infrequent nature of the reports.

However, the extensive and accessible earth observation capabilities of satellite 2.0 and its enablement of IoT earth-monitoring services can change this paradigm with verifiable, standardised and continuously updated data.

And when combined with the data recording, security, decentralised management and smart contract capabilities of blockchain, this provides a powerful platform for corporations to move forward on the environmental element of ESG governance.

Corporations that embrace this approach will have early mover advantages and are less likely to be subject to claims of greenwashing, with scientific data as proof they’ve achieved their commitments.

How we can help

For many years, we’ve been advising on satellite systems, including regulatory issues and venture capital funding models. We have dedicated teams in the US, Europe and Asia Pacific. We’ve also advised on the commercial use of blockchain and the development of smart contracts, including dedicated practices for tokenisation, funding models and regulatory considerations. Get in touch if you’d like to find out how we can help you succeed.