On July 27th, 2021, the cryptocurrency exchange, FTX, announced the creation of the FTX Climate Program. Showing its commitment to fight climate change with a nicely designed website, presenting a well-thought out and wide list of strategies and projects.
However, in November 2022, FTX filed for bankruptcy after the world discovered massive wrongdoings – a fraud only comparable to Bernie Madoff’s multi-billion-dollar Ponzi scheme that hit Wall Street fifteen years ago. After the collapse, FTX founder Sam Bankman-Fried admitted that the FTX Climate Program was just a façade. A scam to attract environmentally conscious people.
Sustainability requires trust
With sustainability scams like this, how can you as an individual or a business leader spend any money on sustainability?
Personally, I have offset flights when I couldn’t avoid flying, and supported reforestation projects at other times. I did this because I believe we must do something now to avoid a climate disaster. But at the precise time I was typing my credit card details, did I know if those euros would reach the correct destination to have a positive impact? I had no choice but to simply trust that they would.
If you offset a flight, you trust in the airline. But does the airline really know if those carbon credits you bought will lead to a real offset? Do they know the whole supply chain of actors (companies, auditors, projects, field operators) for those carbon credits?
The harsh answer is No. Today hardly anybody can say for sure where the money will end up.
Transparency in the voluntary carbon market
Today, both individuals and companies that wish to reduce the devastating effect of the climate crisis can buy different types of carbon credits (e.g. offset a flight) to reduce their carbon footprint. All these transactions are made in the voluntary carbon market, so called because the purchases are made without any obligation, such as a government mandate.
At this point, hundreds of innovative companies have appeared with the promise of using the best of today’s technology to catalyse the voluntary carbon markets. Bringing transparency is a promise these ventures overwhelmingly have in common. Such services are tackling this problem through different fronts, for example:
- A carbon accounting SaaS application that helps a company measure, report, and reduce carbon impact from a single web user interface. Such an application would help a company with their environmental, social, and governance (ESG) reporting.
- A platform that “tokenises” carbon assets, so carbon credits are listed on blockchains.
- A game-like app that makes it very easy to buy carbon credits, paying with either fiat or cryptocurrencies.
In these cases, the services rely on several 3rd party actors (partners), for instance: reforestation projects, carbon removal companies, laboratories, marketplaces, auditors, and more. These partners have to be vetted and onboarded. If—as the end buyer—I see a list of some of these partners, can I really know who I’m transacting with? No. Do I know how their identity is being verified? No. Even though these services claim to be using the latest technology, the identity verification doesn’t seem to be based on digital identity’s latest standards.
Environmental, social, and governance
Where ESG (environmental, social, and governance) is concerned, as GLEIF’s Clare Rowley said in our History of LEIs Podcast Episode, “data is core to addressing the question of sustainability and the current climate crisis.” Publicly traded companies are already publishing these ESG reports, which are read by different regulators, existing and potential investors, the media, and consumers. Such reports include traditional financial information on their investments, but the missing piece is that they should also include a verified profile of the company and their partners. Otherwise, we don’t know whom we’re doing business with, and the data is indeed insufficient. Also, in the same interview, Clare shared that, “As the world around sustainability reporting becomes more standardised, we expect the LEI there growing as a tool to connect.”
How verified digital identities can help
Verified digital identities are a crucial element to solve this problem, which, strictly speaking, has two main elements:
First and foremost, we must verify the real identity of every organisation globally. Regardless of whether it’s a startup, listed company, non-profit, educational institution, or alternative. Every time you interact or do business with a company, even on the other side of the globe, you must be 100% sure it’s a real company. If real, you must then be sure that the person you are talking with has the right to legally represent that company, and that you can know who the owners of that company are. The LEI (Legal Entity Identifier) is the only technology that can make this happen and must be incorporated in every sustainability solution.
The second part of the solution is verifying the real identity of the person behind every transaction, as that builds trust. In the Nordics, bank authentication is widely available and popular. Other countries have similarly highly assured identification methods. The European Union’s eIDAS 2.0 will come soon to fill this gap at a European level, and we must embrace similar initiatives globally.
Bringing together sustainability and transparency
We need verification of both companies’ and individuals’ identities, for the whole supply chain, of every carbon credit. This is the only way to add real transparency and build the trust that we need for both businesses and individuals to embrace sustainability.
Using the word transparency in a company’s motto or putting it in bold fonts on a flashy website, is not enough. Sometimes I feel that companies trying to build sustainability solutions and talking about transparency provide the argument that “we are a web3 solution, therefore trust us.” Instead, trust is built on concrete actions, not with ethereal visions. The good news is that today we have the right tools at our disposal.
Without verified digital identities, sustainability will lose its battle. And this battle must be won, and we all must help to win it.