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The Future of Sustainability Investing Is Tied to Asset Tokenization and Regulation

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. Trillions of dollars in investable wealth are ready to be directed at sustainability investments according to a Standard Chartered report on sustainable banking in 2022.

Traditional environmental, social and governance (ESG) exchange-traded funds (ETFs) have struggled to demonstrate a direct impact on the ground, limiting their appeal to retail investors. However, asset tokenization is poised to have a big year in 2024, offering a novel way to expand offerings for retail investors in the sustainability space.

For the potential of asset tokenization to be fully realized, licensed companies within robust regulatory frameworks need to issue tokenized sustainability investments. Otherwise, the transformative power of tokenization in funneling trillions of dollars in private finance towards addressing climate change will be curtailed.

The Challenges of Sustainability Investing

A recent survey by McKinsey Sustainability found that 40% of US consumers are interested in participating in climate-linked financial products. Despite this interest, few existing financial products establish a clear correlation between investment and real-world impact. Current offerings primarily consist of ESG ETFs, which provide exposure to companies with strong ESG policies and performance but fail to represent a direct investment in sustainability.

Sustainability investing is further complicated by the difficulty of distinguishing between available instruments and assessing associated risks. The prevalence of greenwashing and the lack of verifiable scientific claims pose additional barriers to trust and transparency in sustainability investments.

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The Potential of Asset Tokenization

Asset tokenization, involving the placement of assets like equity, bonds, and carbon credits on a blockchain for fractionalization and exchange, is being heralded as the next major innovation in the Web3 space. It promises to provide retail investors with access to previously unavailable investments, such as fractionalized real estate, art, private debt, and private equity.

From a sustainability investing perspective, asset tokenization offers a direct link between investment and impact. Retail investors can allocate funds directly to reforestation projects, climate startups, micro-lending products, and green bonds. The use of blockchain technology enhances transparency and introduces more frequent and engaging project updates compared to conventional investment channels.

However, the widespread availability of tokenized sustainability investments hinges on coherent virtual asset regulatory frameworks within jurisdictions. Trust and accountability are essential components of the investment landscape for this paradigm shift to materialize.

The Imperative for Regulation

The blockchain/cryptocurrency industry has contended with negative public perception due to fraudulent schemes, the flamboyant behavior of some cryptocurrency proponents, and a general avoidance of regulation. This has eroded trust in virtual assets, regardless of their underlying purpose.

Addressing this trust deficit requires a commitment to regulation from both regulators and companies. Regulation fosters accountability, facilitates the provision of support services like analysts and ratings agencies, and enhances accessibility through fintech investing apps. It also establishes disclosure requirements and cultivates a more robust information landscape conducive to building trust among retail investors.