The report underscores institutional investors’ fiduciary duty to act in beneficiaries’ long-term interests, integrating environmental, social, and governance (ESG) factors into investment processes. The six Principles for Responsible Investment (PRI) encourage ESG analysis, active ownership, disclosure advocacy, industry-wide promotion, collaboration, and reporting.

Introduction

Blockchain is recognised as a transformative technology within financial markets, offering both opportunities and risks. Institutional investors rated technology advancements, such as blockchain, as having a significant impact on financial systems. Blockchain supports decentralised transactions, increases transparency, and reduces fraud. Its applications include finance, energy, and real estate.

Part one: A primer on blockchain

Blockchain is a decentralised ledger facilitating secure, transparent transactions without a central authority. It includes key features like tokens, consensus protocols, and smart contracts. Tokens may represent cryptocurrencies, utility assets, or real-world assets like gold. Ethereum’s smart contracts enable automation, offering potential efficiency gains. However, legal and regulatory challenges persist, particularly with linking digital tokens to real-world assets.

Private or permissioned blockchain systems cater to organisations, enabling controlled access, tailored functionalities, and enhanced inter-party collaboration. Financial institutions, such as R3, are leveraging blockchain to automate operations like inter-bank coordination.

Part two: The implications of blockchain for responsible investment

Central share depositories

Blockchain can decentralise share registers, potentially eliminating intermediaries like central share depositories. By issuing shares as digital tokens, shareholders could hold and transfer shares directly. Initiatives in Delaware and NASDAQ’s Linq system aim to integrate blockchain for crypto-equity issuance.

Shareholder e-voting platforms

Blockchain-based systems can streamline proxy voting by reducing time, complexity, and costs. NASDAQ’s pilot in Estonia and Broadridge’s private Ethereum blockchain exemplify such innovations. Blockchain’s potential to modernise annual general meetings (AGMs) by integrating smart contracts has also been explored.

Giving voice to beneficiary ESG preferences

Projects like CAPITALusM aim to enable fund beneficiaries to express ESG preferences. Blockchain’s transparency could align voting rights with beneficiary interests and introduce democratic processes.

Real-time tracking of ESG data

Blockchain promises improved ESG data visibility. For instance, it could track greenhouse gas emissions or certify sustainability attributes of commodities like milk or gold. However, the report notes that data acquisition and reporting challenges extend beyond blockchain’s capabilities.

Automating inter-bank coordination

Financial institutions are exploring blockchain to improve coordination in areas like trade finance, syndicated loans, and clearing. Systems like R3’s Corda aim to modernise inter-bank processes while retaining legacy systems.

Cryptocurrencies as an investment asset class

Despite regulatory ambiguity, cryptocurrencies have grown as an asset class. Products like Bitcoin trackers and derivatives are emerging. However, concerns about energy-intensive mining processes and association with illicit activities temper enthusiasm.

Alternative capital raising

Initial coin offerings (ICOs) have gained traction as unregulated fundraising mechanisms. While they present speculative opportunities, their legal and financial structures remain unclear. Institutional investors largely avoid ICOs due to associated risks.

Blockchain for good: Blockchain for environmental, humanitarian, and social services

Blockchain’s applications extend to areas like financial inclusion, transparent supply chains, e-voting, and renewable energy trading. Projects such as Provenance and Everledger illustrate its potential in tracking ethical commodities. However, many initiatives remain aspirational, and blockchain’s necessity in these contexts is debated.

Conclusion

Blockchain enables decentralised processes, offering efficiency and inclusivity benefits. However, challenges like regulation, scalability, and energy use remain barriers. Investors must critically evaluate blockchain projects’ potential and feasibility.