Digital ESG Commodities 1.0

Principles for Building a Common Data Governance Framework for Market & Environmental Integrity 1

Jeff Cohen and Cameron Prell, Xpansiv CBL Holding Group (XCHG)
June 2020

These principles are part of a series of collaborative governance and market-design initiatives led by XCHG to foster a common digital ecosystem for trusted, transparent markets in energy, environmental, and climate-related data. This document will be updated periodically to reflect advances in industry, policy, technology, and markets. 

As part of the transition to a sustainable, low-carbon economy, governments, capital markets, investors, multinational companies, consumers, and other stakeholders are increasingly focused on corporate performance against environmental, social, and governance (ESG) factors, and more broadly, progress toward UN Sustainable Development Goals (SDGs). 2 Data-backed insights and intelligence have become a central governing component of the transition economy, and by extension, core to any decarbonization pathway. 

Consequently, there is strong demand for trusted, transparent, data-driven methods to:

  • Quantify investment risks and returns on the basis of environmental and social impacts. 
  • Assess climate change and transition-related risks on companies’ core valuations.
  • Identify, track, and disclose the resilience of supply chains to climate risks.
  • Assess risks to companies’ compliance with regulatory obligations and license to operate.
  • Allocate capital and/or align financial markets with opportunities to strengthen companies’ long-term value with targeted environmental benefits.
  • Score corporate progress relative to sustainability, net-zero climate commitments, transparency, and governance standards.

Digital technology solutions — e.g., Industrial Internet of Things, remote sensing, artificial intelligence, distributed ledger technology — are rapidly being deployed to help markets address the massive data collection and management challenges ahead. Companies in every economic sector are digitizing their supply chains 3, their physical and intangible assets, and engaging digital platforms to help optimize operational efficiencies, disintermediate financial management and market channels, and innovative business risk management. In parallel, real-time measurement, reporting, and verification is rapidly becoming available on the environmental impacts of energy, food, transportation, buildings, apparel, and multiple other systems. 

The combination of demand for reliable measures of environmental performance and advances in digitization is enabling a new asset class: ESG performance data that can be automated, packaged, and transacted as digital tags, environmental commodities, certification products, and security-based tokens. 

The Digital ESG Commodity

A primary goal for this document is to support an open-source framework that encourages collaborations among market participants to place value (positive or negative) on packaged ESG performance data. 

Environmental claims about corporate ESG performance have been treated as intangible assets. With the advent of data-driven digital networks, measurements of ESG performance tied to a company’s operations, supply chain inputs, products, and services can be converted into a new, marketable product — the digital ESG commodity (d-ESGc). 

A digital ESG commodity can be programmed with data, MRV methodologies, third-party certifications, quantified environmental impacts, and other “intelligence” that meets demand from regulators, partners, consumers, financial institutions, and other stakeholders and market participants. 

Figure 1 illustrates the basic components and general stages in the lifecycle of a d-ESGc — in this case, representing the environmental attributes associated with production of a hypothetical raw material commodity. 4

  • Production of the raw material commodity.
  • Collection of corresponding primary data, augmented with relevant secondary data (e.g., satellite imagery). 
  • Digitizing and onboarding data in conformance with data-management standards to create a verified database.
  • Certification(s) that qualifies a particular production facility, farm, or other source. 
  • Application of digitally enabled monitoring, reporting, and verification (d-MRV) standard(s) to create high-fidelity, digital representation of environmental, ESG, or climate-related performance “attributes.” 
  • Independent verification of calculated ESG attributes. 
  • Encryption of digitized ESG attributes into a secure, immutable, interoperable digital format which constitutes the d-ESG commodity. 
    • Collectively, the environmental, social, and other impact claim(s), digitized ESG attribute(s), reference data, and standards and certifications comprise the d-ESG commodity.
    • The digital format should enable asset registration, data traceability, auditable transactions, and market valuation.
  • Registration of the d-ESGc with constituent environmental performance metrics onto a digitally-enabled platform that provides market functionality and enables transfers of the assets between parties, retirement of the assets, and/or specific ESG attributes contained in the d-ESGc. 
  • Companies are free to disclose, sell, trade, dispose of, retire, transfer, collateralize (or create derivative products for) their authentic, registered digital ESG commodities.

Figure 1. Example Digital ESG Commodity Lifecycle 

A specific example of how a d-ESGc would function is a steelmaker that uses alternative, hydrogen-based technology, producing steel “embedded” with lower carbon intensity relative to conventional iron ore reduction technology, registering associated reductions in GHG emissions (e.g., 1000 mtCO2eq per 5000 tons of steel produced):

  • Digital certifications of the GHG reductions could be transferred on the registry from the steelmaker to a downstream end-user (e.g., an automobile manufacturer), with or without the physical steel itself. In either case, when the automobile manufacturer retires that d-ESGc, it could exclusively make the claim of the reduction of 1000 mtCO2eq emissions upstream in the steel supply chain.
Building Market Trust and Integrity in Digital-ESG Commodities

Based on experience with other environmental commodities such as carbon offsets and renewable fuel credits, the market value of each new d-ESG commodity will directly correlate to the applicable standard of performance and the level of assurance and auditable veracity (integrity, provenance) of both the ESG data and any derived claims. Another tradable environmental commodity, renewable energy certificates (RECs)—and similar products with different titles around the world 5—qualify as compliance instruments in jurisdictions with mandatory renewable portfolio standards, and have economic value in “voluntary” markets because they are generated from verified, auditable primary data collected at the source (e.g., metered kilowatt-hours), assigned unique identification numbers by a certifying agency, and tracked through regional tracking systems/registries 6.

To ensure market credibility, the d-ESG commodities generated and used within this framework should be able to define, monitor, evaluate, and report on the quality and results of ESG performance activities and investments, while enabling organizations flexibility for their individual business models, internal operations, market drivers, and other priorities. 

The principles and associated guidelines outlined below are intended to help market participants accurately assess the value of ESG performance claims, based on a shared understanding and degree of trust in the underlying data, how those data are managed and converted into ESG-performance claims, and how the claims themselves are tracked across their lifecycle. 

Recommended Principles for Digital ESG-Commodities
  • Market-accounting standards should be harmonized to help classify and quantify the value of ESG-related environmental performance. Efforts to establish common sector-by-sector taxonomies for the benchmarking and digital measurement, reporting, and verification (MRV) of energy, environmental, and climate-related data (hereafter “Digital MRV”) should be encouraged to enable the automation, transparent collection, harmonized processing, and third-party certification of material resource, ESG, and/or climate-related data. 
  • Data integrity and performance standards should be asset- and commodity-specific. Digitizing MRV methodologies and economic valuation of ESG data can ensure that the underlying data are immutable as representing a tangible or intangible asset or liability. Assurance of data integrity (e.g., via audit and proven provenance) is essential for establishing the legitimacy and value of a digital ESG-commodity.
  • Processing data in ESG or climate-related context should be predictable, auditable, and replicable. Digital ESG commodities that include claims with ESG and climate-related performance metrics should include an auditability function to (i) identify the digital standard(s) being employed, (ii) certify the data in the context of all applicable primary and secondary datasets deemed best practice, and (iii) verify the highest standards of data fidelity and accuracy.
  • Digital ESG commodities should be considered intangible assets. Energy, environmental, ESG, or climate-related data and any associated claims of corporate performance — if certified as traceable to source and processed using Digital MRV best practices — should be distinguished as a new digital asset class with unique identification.
  • Digitized environmental attributes or ESG claims should be publicly registered. Trusted registry platforms, ledgers, or meta-registries should be established to identify and track the existence, type, quality, and legal ownership rights associated with any certified digital ESG commodities that measure ESG and/or environmental performance based on real world data. In the context of environmental-commodities markets, d-ESGc registries are also fundamental to prevent manipulation, fraud, and unintentional double counting. 
Recommended Guidelines for Implementing Digital ESG-Commodities

The guidelines that follow are organized into the foundational, essential elements to cover the lifecycle of a digital ESG commodity, from origination (issuance and registration), transaction (transfer and settlement), to resolution (retirement and reporting). 

  1. A registered d-ESGc should be traceable to unique identifiers.
    1. Primary Data Source Traceability. Sources of primary data should be identified by:
      • Ownership (company)
      • What (physical assets or activities)
      • When (time domains/measurement frequency)
      • Where (geospatial location)
      • Assessment/lifecycle boundary within which the data is applied (e.g., production segment from point of extraction to point of sale into a distribution system)
      • Type of monitor or other measurement instrument and applicable calibration standards
    2. Primary Data Integrity. Any measure of ESG attributes and performance of a given commodity begins with proof of production, or proof of harvesting of the actual physical commodity at a specific site (e.g., well pad for natural gas, steel mill, cacao farm, palm oil plantation) and that the data are real.
      • Production data should be captured from meters, scales, certified chemical analysis, sales records, or other primary sources that are auditable/verifiable and calibrated to regulatory/technical specifications.
      • Production data should be accessed, uploaded, or transmitted via interface (e.g., API) into a secure and standard operating software system, using automated processes, and “fit for purposes” data file architecture.
      • Without assurance of data integrity (e.g., via verifiable veracity of the information, and proven provenance), a digital ESG commodity (or any other digital asset) cannot exist. Without data integrity, ownership of any claimed attributes would be unreliable.
    3. Supplemental Information and Secondary Dataset Enhancements
      • Primary production data can be supplemented by digital links to auditable environmental permits required by local and federal regulations, and to independent, third-party certifications of operational protocols, data-management systems, and other baseline conditions relevant to production.
      • Auditable and verified secondary data, if available, should be correlated to primary production data to create a more complete profile of the underlying physical commodity and its environmental impacts.
      • Sources of secondary data can include facility and ambient measurements for regulatory compliance or permits, modeling using established emission factors, material flows, lifecycle inventories, remote sensing, satellite measurements, internet of things (IoT) infrastructure, and other environmental monitoring systems. 
  2. Data refinement should meet threshold-integrity requirements.
    • Production data must be managed, configured, processed, stored/secured, linked, and recorded to meet veracity/provenance requirements specified in relevant energy, environmental, or climate MRV standards. 
    • Processes must be in place to identify and correct data fidelity errors and anomalies within reasonable variance limits.
    • Data management software must conform to an approved or certified data governance system or inter-operable data architecture with automatic and verifiable data reconciliation.
    • Data should be stored, and where permitted, distributed in an immutable format that ensures transparency and information security.
    • The data file format should enable asset registration and property right claims on approved platforms that do not compromise confidentiality, trade secrets, or personal privacy.
  3. Standards to contextualize data should meet consensus thresholds.
    1. Standards for data management should:
      • Follow standardized protocols for digitized data acquisition, onboarding, quality control, storage, and transfers.
      • Include protocols to certify the source of all data used to generate the d-ESGc.
      • Conform to a common operating system with general specifications for data management, accounting standards, classifications, performance indicators, transparency, and other elements needed for interoperability and credibility in market ecosystems. 
    2. Standards to quantify/characterize ESG performance should: 
      • Include digital capabilities to implement monitoring, reporting, and verification (MRV) requirements as well as quantification models or algorithms to generate environmental performance metrics.
      • Conform to foundational frameworks such as ISO Quantification and reporting of greenhouse gas emissions and removals (ISO 14064), Greenhouse Life Cycle Assessment standards (ISO 14040, 14044), The Greenhouse Gas Protocol 7, IFC Performance Standards on Environmental and Social Sustainability 8, and the World Bank Group Environmental, Health, and Safety Guidelines. 9
      • Digital MRV standards must include an auditability function to (i) trace and identify the standard being employed, (ii) certify that the data-application process was executed accurately in the context of applicable data-acquisition standards and the full dataset profile, and (iii) verify that the MRV certification meets the highest standards of fidelity and accuracy.
  4. Digital ESG certifications should be transparent and linked to data ownership and provenance.
    • Data should be certified and auditable as being accurately benchmarked or measured against an established MRV standard or other publicly available metric/reference (e.g., industry target, national, or regional average). 
    • Certifications of ESG impacts and attributes of commodity production should demonstrate conformance with industry best practice, protocols, and/or methodologies published by an accredited, third-party standards organization.
    • Certified data on environmental impacts (or avoided impacts) and related attributes comprising the d-ESGc should be permanently maintained as immutable, cryptographic “fingerprints,” hashtags, metadata, or other verifiable data chains. 
    • Claims of environmental, social, and other impacts (or avoided impacts), commodity attributes, and/or the associated d-ESGc should be given a unique digital identifier traceable to the underlying physical commodity, the certification standard(s), and the derived environmental metrics.
  5. D-ESG commodities should be registered on an approved digital trust platform to prevent manipulation, fraud, and unintentional double counting.
    • To claim property rights of intangible ownership in any certified energy, environmental, or climate-related data, producers should properly record and register such information as a d-ESG commodity on a digital trust platform (DTP).
    • Digital trust platforms should be capable of recording or maintaining a company’s d-ESG commodities on an auditable ledger and/or asset registry system. 
    • D-ESG commodities registered on a DTP must be serialized and registered in an encrypted, immutable file format that preserves confidentiality, privacy, and custodial management and transfer of assets to third-party registry accounts.
    • Each registered and recorded d-ESGc and digitized ESG attribute can be owned by no more than one party at any given time.
    • Each d-ESGc can be registered on only one registry/DTP.
  6. Digital trust platforms should provide essential market and compliance functions.
    1. Asset Registration and Transfers. D-ESG commodities should be capable of being listed, encumbered, sold, collateralized, transferred, or otherwise disposed of on a DTP in an immutable format by asset owners.
      • DTPs must comply with all applicable market rules and regulations for the registration, holding, and recorded transfer of intangible assets. 
      • D-ESG commodities should be capable of being cancelled or retired on a DTP upon final consumption, use, or disposal of such assets to ensure market and environmental integrity.Once a claim or d-ESGc is retired, the impacts/attributes (e.g., reduced GHG emissions, quantified protections for worker welfare, Indigenous Peoples, biodiversity, etc.) and the source of the ESG claims (e.g., natural gas well, manufacturing plant, farm, mine, etc.) must be reported to a reporting system with open-source data portals and data sets that can be accessed by the public. 
      • Transfer of the claims or assets between buyer and seller must be completed on the same registry where the claim or asset was issued.
    2. Settlement
      • Buyer and seller must have accounts on the same registry to register the claim or ESG asset.
      • The DTP or other platform on which the accounts reside must be capable of providing confidentiality and any other security assurances. 
    3. Retirement
      • Claims or ESG commodities must be retired on a registry that ensures the d-ESGc cannot be used again by any party.
    4. Reporting and Transparency
      • Once a claim or d-ESGc is retired, the impacts/attributes (e.g., reduced GHG emissions, quantified protections for worker welfare, Indigenous Peoples, biodiversity, etc.) and the source of the ESG claims (e.g., natural gas well, manufacturing plant, farm, mine, etc.) must be reported to a reporting system with open-source data portals and data sets that can be accessed by the public. 
      • Information sharing shall not relate to or otherwise threaten any competitively sensitive information.

1 Jeff Cohen & Cameron Prell, Xpansiv CBL Holding Group (June 2020).
2 More than 25% of assets under management globally are being invested based on the premise that ESG performance embedded into corporate strategies correlates with improved long-term returns — McKinsey & Company (2017) “From why to why not: Sustainable investing as the new normal”; Eccles, R.G. and Kimenko, S. (2019) “The Investor Revolution”; Harvard Business Review, May–June 2019, pp 106–116; MSCI “2020 ESG trends to watch”, “Quantifying ESG Performance” www.msci.com/www/blog-posts/quantifying-esg-fund/01760099215
3 PwC Strategy “Industry 4.0: how digitization makes the supply chain more efficient, agile, and customer-focused.”
4 Commodities such as steel, aluminum, cement, cotton, palm oil, and natural gas are the primary feedstock to global supply chains. Although priced uniformly, commodities can have widely different environmental impacts (aka “attributes”) depending on the energy, water, land, labor, and other inputs into how they are grown, harvested, extracted, refined, etc. across individual producers. In addition to environmental impacts, production of commodities may also have social impacts, such as community development and fair-labor conditions, and would adhere to similar general principles outlined here.
5 For example, Green Tags, Guarantees of Origin in Europe, Green Energy Certificates in Japan, Large-Scale Generation Certificates in Europe, and International RECs and Tradeable Instruments for Global Renewables in much of the rest of the world.
6 For example, WREGIS, NEPOOL, GATS, ERCOT, NYGATS, NAR, MIRECS, NC-RETS, NVTREC, and M-RETS.
7 www.ghgprotocol.org
8 www.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/Sustainability-At-IFC/Policies-Standards/Performance-Standards
9 www.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/sustainability-at-ifc/policies-standards/ehs-guidelines