All eyes on: ESG assurance through blockchain technology

With the environmental, social and governance (ESG) agenda so critical to businesses today, rapidly increasing levels of ESG information will be reported to the market. This will involve vast amounts of data, which needs to be collated by businesses and then checked and assured by auditors.

It’s a complex undertaking, and especially so for Scope 3 emissions data as one example, which involves emissions created from upstream and downstream operations along an organization’s supply chain. Although some companies may not be required to report on Scope 3 emissions, it’s where the majority of many businesses’ emissions lie – and it’s also the hardest to capture, quantify and report.

But could emerging technology and specifically blockchain help to provide an answer? I had a fascinating discussion with Ed Moran, Innovation Leader, KPMG in the US and Maura Hodge, ESG Audit Leader, KPMG in the US on this question. Maura stated that: “The use of blockchain to gather and report on Scope 3 emissions is an emerging trend. By creating an immutable and transparent data chain, it can make information accessible to all users who need it in a standardized format, with increased efficiencies and oversight. The potential benefits – for auditors, businesses, investors and other stakeholders – are enormous.”

As my colleagues said, the use of blockchain here is still in its early stages. So how is it likely to develop and what opportunities, challenges and risks does it raise, specifically in and around ESG?

Blockchain creates a permanent record and a single source of truth – so one of the key tasks for auditors is to ensure that all information coming onto the blockchain is accurate and complete before being published in the shared ledger. To an extent therefore it will shift auditors’ attention to earlier in the data cycle. But it will also mean less checking of individual source documentation and less risk of manual error or inconsistencies.

There is a lot of time spent today in the audit practice performing inquiries and conducting detailed testing of individual inputs and supporting documentations, for example looking at invoices or looking at initial source documentation such as meter readings. By utilizing the blockchain, all of this information now becomes electronic, immutable once it’s input into the system and ultimately eliminates some of the specific detailed work that we would have done in the past. The blockchain fundamentally shifts the way auditors think about the risks that may occur when generating the data and reporting that information, and as a result will change the procedures that are performed in order to address those risks.

Blockchain will open the possibility for businesses to capture and report richer datasets, using enormous amounts of additional metadata. For example, not just how much energy was used but at what times of day, in which forms (fossil fuel, wind, solar etc), in which locations, and more. Those granted access to the blockchain, such as management for internal decision making, can therefore gain a more complete view. With that, for this to really work, everyone involved needs to be granted access to the blockchain.

Different industries are likely to adopt blockchain at different rates, the time to market, depending on the nature of their business and the complexity of their supply chains. There is clear potential for oil & gas, for example, as they are such heavy users of energy. Other industries with product-heavy business models may also lead the way. For example, imagine an automotive business being able to give a detailed break-down regarding the carbon emission profile of all the myriad components that go into making a vehicle.

It’s critical that all information presented in a blockchain is complete and true. Much of that information may have been generated by AI-powered applications – so are the algorithms behind them robust and free of any bias?

More broadly, the governance around setting up and running the blockchain will be vitally important. Who can enter information onto the blockchain, with what prior checks and controls, what are the permission rights and how are those granted and supervised? Blockchain will become a whole ecosystem of its own – and will need its own clear processes and rules.

At KPMG, we’re excited about the potential that blockchain holds. This isn’t only for Scope 3 reporting but also aspects of Scope 1 and 2, and indeed areas of mainstream audit and financial statement reporting too.

We’re investing significantly to make sure we have the range and depth of skills and expertise needed. We’re training and equipping our auditors and also investing in our teams of data scientists, ESG specialists and climate change experts.

Blockchain won’t be a ‘silver bullet’ that solves all the complex issues around Scope 3 reporting, but it can bring significant benefits and advancements for everyone involved. As auditors, we’ve been providing ESG assurance for decades already – and we’re actively positioning ourselves for the next iteration of the story as technology takes us to new and exciting places.