With COP28 in Dubai over and financial pledges well short of the necessary targets, trillions are still needed annually between now and 2030 if we have any hope of mitigating and adapting to climate change. To bridge this gap, private finance has emerged as a critical funding source. Case in point, a Standard Chartered report on sustainable banking in 2022 suggested that retail investors alone have some $10 trillion in investable wealth ready to be directed at sustainability investments.
The challenge so far has been providing such investment opportunities beyond basic environmental, social and governance (ESG) exchange-traded funds (ETFs)—which can be difficult to link to actual impact on the ground. This is a primary reason why asset tokenization is poised to have a big year in 2024. It can rapidly expand offerings for retail investors in ways that traditional finance can’t.
Barriers to Sustainable Investing
Despite the fact that 40% of US consumers stated in a recent survey by McKinsey Sustainability that they are interested in participating in a climate-linked financial product, few such products exist that draw a direct line between dollars invested and impact on the ground. The typical offering is an ESG ETF that provides exposure to companies who have strong ESG policies and performance. For many, this hardly constitutes an investment in sustainability, especially considering people can invest in these companies via non-ESG instruments.
Sustainability investing is also a complex issue. It can be challenging to differentiate between the instruments that are currently available or know how to accurately assess the risks involved. There’s also the issue of greenwashing and how to determine whether a company’s claims are scientifically accurate. The voluntary carbon markets, for example, have been maligned over questions of credit quality and actual vs. estimated impact, which has led to a decline in trust. What this means is that even if impactful sustainability investments are made available, there would still be trust issues to overcome.
The Promise of Asset Tokenization
As a quick refresher, asset tokenization refers to putting an asset like equity, bonds, and carbon credits on a blockchain so that they can be more easily fractionalized, leveraged and exchanged. It’s seen by many as the next big thing in the Web3 space and represents the possibility of access to investments that weren’t previously available to retail investors—things like fractionalized real estate, art, private debt, and private equity.
From the perspective of sustainability investments, asset tokenization provides the direct link between investment and impact that investors want. Instead of investing in for-profit companies via an ESG ETF, retail investors can allocate their funds directly to reforestation projects, climate startups, micro-lending products, and green bonds. And being so close to projects means updates will come more frequently and in the form of social media posts and other rich media, as opposed to bland annual reports. And with all transactions conducted on blockchain, there is an element of transparency that isn’t typically present with more traditional investments.
The Imperative for Regulation
One of the primary challenges faced by the blockchain/cryptocurrency industry over the years has been negative public perception. There have been too many scams, too many deified crypto bros, and too much avoidance of regulation for the general public to believe in the benefits of the tools and how they might relate to climate impact. What this has ultimately resulted in is an absence of trust in virtual assets, regardless of their origin or intention. Education is often cited as a solution to the trust issue, but I would argue that education isn’t going to be very effective in the absence of regulation.
Instead, a commitment to regulation—from both the regulators and companies—is the first step towards rebuilding trust. It fosters the accountability, support services like analysts and ratings agencies, and accessibility via fintech investing apps needed for tokenized sustainability investments to be accepted by retail investors. Regulation also establishes disclosure requirements and lays the groundwork for a much healthier information landscape than the one we see today. We won’t have any of this if companies
Embracing Regulation for Climate Impact Investments
Regulatory Advancements and Their Impact
In the rapidly evolving landscape of climate impact investments, achieving regulatory compliance is paramount. As more jurisdictions, including Dubai, Hong Kong, and Singapore, bolster their regulatory frameworks, a pivotal opportunity emerges to galvanize retail and high-net-worth capital towards early-stage climate startups. The recent attainment of a Virtual Asset Service Provider (VASP) license by the AYA platform from the Virtual Assets Regulatory Authority of Dubai (VARA) marks a significant milestone in this journey.
Asset Tokenization and Sustainability Investing
The emergence of asset tokenization presents a compelling avenue for sustainability investing. However, at the heart of this pursuit lies the imperative to prioritize climate impact. Trust, transparency, and comprehension are essential prerequisites in this domain, and they are best fostered through a commitment to navigating within sound regulatory frameworks. Without this dedication, the potential to direct trillions of dollars toward climate impact will remain unrealized.
The Author’s Perspective
Prakash Somosundram, CEO and co-founder of Enjinstarter and AYA Foundation, affirms the significance of regulatory diligence in the pursuit of climate impact investments. Drawing on his expertise as a seasoned entrepreneur, Prakash underscores the critical role of regulatory adherence in creating a conducive environment for channeling private capital into early-stage climate startups. His dedication to advancing this cause reflects a profound commitment to leveraging private finance as a force for positive environmental change.
