With COP28 in Dubai concluded, financial pledges have fallen far short of the necessary targets, leaving a gaping trillions-needed abyss to be filled annually until 2030 in a bid to mitigate and adapt to climate change.
Bridge-building efforts are turning toward private finance. A 2022 Standard Chartered report on sustainable banking revealed that retail investors possess a staggering $10 trillion in investable wealth, waiting to be channeled into sustainability investments.
The challenge so far has been the scarcity of investment opportunities beyond standard environmental, social, and governance (ESG) exchange-traded funds (ETFs), which struggle to tangibly connect with real-world impact. This bottleneck is what positions asset tokenization to break ground in 2024, expanding options for retail investors in ways conventional finance cannot. The hitch, however, is that tokenized sustainability investments must be issued by licensed companies in jurisdictions with robust regulatory frameworks. Any other approach risks constraining the potential of tokenization in boosting private finance to combat climate change.
The Hurdles of Sustainability Investing
A recent McKinsey Sustainability survey revealed that 40% of US consumers are eager to engage with a climate-linked financial product. Nevertheless, few such products exist that establish a direct link between invested funds and tangible impact. The commonplace offering is an ESG ETF, providing exposure to companies with robust ESG policies and tracks. For many, this hardly qualifies as a genuine sustainability investment, especially as these companies can be invested in through non-ESG instruments.
Sustainability investing is a tangled web, making it arduous to differentiate between existing instruments or accurately assess associated risks. Additionally, the challenge of greenwashing muddies the waters, seeding doubt about a company’s scientifically sound claims. Voluntary carbon markets, for instance, have grappled with issues surrounding credit quality and actual versus estimated impact, leading to a plunge in trust. This implies that even if impactful sustainability investments are made available, trust hurdles still lie ahead.
The Prowess of Asset Tokenization
Asset tokenization entails placing an asset, such as equity, bonds, or carbon credits, on a blockchain to enable easier fractionalization, leveraging, and exchange. Widely heralded as the next frontier in the Web3 domain, it promises access to investments that were previously beyond the reach of retail investors—areas like fractionalized real estate, art, private debt, and private equity.
From the angle of sustainability investments, asset tokenization forges the direct link between investment and impact that investors crave. Instead of backing for-profit companies through an ESG ETF, retail investors can channel their funds directly into reforestation projects, climate startups, micro-lending products, and green bonds. This proximity to projects means more frequent updates through social media posts and rich media, in contrast to bland annual reports. Additionally, with all transactions occurring on the blockchain, there exists a level of transparency not typically seen with more traditional investments. Unquestionably, the proliferation of tokenized sustainability investments can only transpire within jurisdictions equipped with comprehensive virtual asset regulatory frameworks, where trust and accountability are foundational pillars of the investment landscape.
The Imperative of Regulation
The blockchain/cryptocurrency sector has grappled with a chief challenge: negative public perception. An excess of scams, idolized crypto influencers, and a resistance to regulation have eroded public faith in the sector and its potential impact on the climate. This has culminated in a dearth of trust in virtual assets, regardless of their origins or intentions. Education has been advocated as a solution to the trust predicament, yet without regulation, its effectiveness proves futile.
Contrarily, a commitment to regulation, from both regulators and companies, stands as the initial stride in rebuilding trust. It nurtures the accountability, bolstered by services like analysts and ratings agencies, and accessibility via fintech investing apps critical for tokenized sustainability investments to gain acceptance among retail investors. Regulation also establishes disclosure requirements and lays the groundwork for a much healthier information landscape than what is currently witnessed.
Opportunity Lost: Failure to Embrace Regulation Jeopardizes Climate Investment
Climate change, an existential threat to the planet, has prompted investors worldwide to direct their capital toward sustainable assets. At the forefront of this movement are platforms facilitating the connection between private finance and early-stage climate startups. However, the failure to secure necessary operating licenses puts this crucial initiative at risk.
Importance of Regulatory Frameworks
In the landscape of global finance, emerging jurisdictions such as Dubai, Hong Kong, and Singapore have established robust regulatory frameworks to govern the issuance and exchange of virtual assets. This newfound stability presents an opportunity for platforms like AYA to operate within a secure environment, safeguarding the interests of retail and high-net-worth investors.
A Paradigm Shift in Asset Tokenization
Asset tokenization can serve as a cornerstone for sustainability investing. However, the ultimate goal remains mitigating climate impact. To achieve this, it is imperative to offer investment instruments that are transparent, trustworthy, and compliant with regulatory requirements. By failing to acquire essential licenses, the opportunity to channel trillions of dollars toward climate impact hangs in the balance.
Prakash Somosundram is CEO and co-founder of Enjinstarter, a blockchain-based crowdsourcing platform and incubator for gaming, metaverse, and Web3 projects, and AYA Foundation, a licensed virtual asset platform headquartered in Dubai. Prakash is also a serial entrepreneur and was awarded a medal for public service, the “Pingkat Bakti Masyarakat” (PBM) by the Singaporean Prime Minister’s Office for his work on the Social Development Network Council.
