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Commodities and ESG – Uncomfortable Bedfellows

Wall St

On the face of it, ESG is a great idea - hold companies and institutions to account for their actions on a range of criteria ranging from environmental impact, through social democracy to how you conduct business so that those who adhere to the rules gain and those who don’t lose. Of course, life isn’t that simple and it would be naive to think that all of the world's problems could be solved by a set of criteria by which we all abide - a modern day 10 Commandments if you like. It would be even more naive to think that there would be one set of criteria - of course not.

Like most bandwagons, initial enthusiasm has led to the grim reality that adhering to such guidelines costs money and ESG has recently taken a less prominent seat in many financial markets. Inflationary pressures and higher interest rate environments have forced a large number of consumers to make the choice between saving the planet (tomorrow’s problem in many eyes) and financial survival (very much a ‘now’ problem). Essentially, ‘if my beliefs cost me money, I had better change my beliefs’.

In all of this, though there is a real issue struggling to get out and nowhere is it starker than the physical (cash) commodities markets. Whilst we might be able to work out the diversity of a FTSE100 listed company reasonably easily (or should be able to), how can we tell how diverse the workforce harvesting coffee in Honduras is? What is the energy consumption of the production of corn in various regions of Brazil? How much water is being used for the mining of copper in the DRC? Traditionally the answer would be “well we can’t” but increasingly that answer is no longer acceptable.

These questions matter to manufacturers as they seek to provide ever greater information to consumers around the procurement, lifecycle and resource utilisation in the production of certain commodities. The evidence is that this information is of increasing importance to consumers as well with information transparency driving purchasing behaviour – particularly in the younger end of the market.

Related: Houthis Continue To Attack Ships Near Vital Oil Chokepoints

So, we need to define what information we require and how it will be collected. But before doing that we have to disassociate the path to consumption of a commodity from the commodity itself. Whilst coal is never going to be an environmentally friendly product, its use will not stop overnight but we can, at least, begin to define which coals are produced in a way that is most resource-sensitive.

What information might we wish to collect? The following might be a starting point:

  • Energy consumption during production
  • Water usage during production and water cleanliness as a result
  • Employment terms and conditions including likelihood of child labour
  • Deforestation as a direct result of production
  • Sustainability of production

Much of this information is already being captured as there are organisations - such as Enveritas in coffee and cocoa - who are using satellite imaging to do just that. Additionally, large swathes of information are collected by Governments which can also be accessed.

Knowing the information exists is one thing but collecting it is quite another and for this job I believe that tokenisation is the technology that should be used as it is already widely tested and in use across multiple markets for title transfer.

The information collected at a regional level could be embedded in generic tokens that store the data until it is called. The moment a product enters production - whether that is seed planting, commencement of mining operations or another beginning of lifecycle event, the generic information could/should be downloaded into another token that will be the identity for that product throughout its lifecycle.

As the product proceeds from production, through transport to usage, any additional step or interaction with it can then be captured which will include ownership, sampling, shipping and storage.

Ultimately, the potential exists for the tokens themselves to replace the current paper trail. They will provide way more information than is currently available about the product, its provenance and ownership and will be a useful warning sign for products that have miraculously had a ‘change’ of identity - and let’s be realistic, this is commodities and it happens all too regularly….

At an individual company level, working on this type of new information flow would really only be achievable by the largest firms, which is why this needs to be based around a central set of data requirements but be entirely agnostic as to the technology that is capturing the data. Such technology will commoditise quickly and enable even the smallest operators to access it and extract value from it.

More than anything, being technology-agnostic is critical to enable the free flow of commodities from producer to consumer. There would be little point (and probably no uptake) if all that was created was a series of technologically advanced silos that were not linked in any way.

The ultimate goal, of course, is for manufacturers, and therefore the public, to be as aware and informed as they can be of the conditions that existed before, during and after production of the commodities that they use and consume.

Derivatives exchanges could also use such technology for the evolution of their deliverable stock - and whilst they seem to be paying such criteria lip service, there is little or no movement in terms of contract change around data requirements for the commodities in question.

As I pointed out at the beginning, this is not easy but it is essential that commodity markets start to get their houses in order and to understand that the digitisation of information not only delivers stories that can have additional value, but starts to create a new stream of information that can and should be monetised.

By Clive Furness via ChAI Predict

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Leave a comment
  • Mamdouh Salameh on December 16 2023 said:
    The main purpose of ESG is to exert pressure on investors so as not to invest in fossil fuels and for banks not to extend bank loans to the oil industry.

    But this amounts to swimming against the tide. Investors want the best return on their investments and this means investing in the oil industry.

    Fossil fuels are the driver of the global economy. Moreover, the global economy wants energy security aNd affordable and sustainable prices.

    Most of the world overwhelmingly wants solutions to todays’ problems and needs . Tomorrow’ problems can wait. That is why the ESG is failing.

    Dr Mamdouh G Salameh
    International Oil Economist
    Global Energy Expert

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