Renewable energy: Tokenization makes investment prospects visible to investors and gives tiny businesses access to a much larger pool of prospective backers.
Over the next years, financing must be significantly increased to support the global energy transformation. However, finance is still relatively ineffective, particularly in private debt. For projects that previously could not access a larger investor pool, tokenization may help open up new funding sources.
The global power demand is increasing, causing a rise in greenhouse gas emissions. The International Energy Agency (IEA) estimates that in 2023, global CO2 emissions associated with energy increased to their highest level, hitting 36.3 gigatons.
The faster use of renewable energy technologies will be combined with sustainable investments to reduce these emissions.
Incorporating environmental, social, and governance (ESG) criteria in businesses and investment choices is crucial to this transition inside the private sector. By monitoring the data’s origin and confirming its legitimacy and reliability, tokenization can significantly improve ESG data’s transparency. Tokens can store money and data on the blockchain as a financial instrument, and they can be transferred or sold nearly quickly in a traceable and effective way.
A major enabler and barrier to sustainable financing is ESG data.
The two primary sources of information are corporate reports and specialized third-party ESG evaluations. Investors increasingly integrate ESG data into their investment decisions, but finding credible and comparable data remains a barrier. Investors also require access to more detailed data at the project level and broader data from across the ESG value chain of a company.
Because it is difficult to gather and authenticate performance data and transaction costs associated with structuring, due diligence, and other aspects of traditional funding are high relative to the amounts. Better access to less expensive funding is also essential for such modest enterprises.
Tokenizing ESG investments to increase their scale
“Tokenization will change finance that is ESG-linked. Khoi-Ahn Berger-Luong, Head of BNP Paribas Real Assets, notes that it offers ESG data across the entire value chain transparency, scale, improved granularity for smaller amounts, and verifiability.
Because of its digital format and cheap cost per trade, tokenization allows small enterprises to reach a far wider range of potential investors and develop new avenues for raising cash. As a result, it not only gives investors access to more transparent investment opportunities. Tokenization is issuing securities as native digital assets, allowing for their transparent recording, transfer, and storage on the blockchain.
BNP Paribas CIB’s Tokenization & Digital Assets Platform’s Head of AssetFoundry, Julien Clausse, says that tokenization presents a rare chance to combine the financing mechanism (the Bond) and the data of the underlying asset, specifically ESG. AssetFoundry has an end-to-end originate-to-distribute methodology gives our clients strong transparency and investment decision assistance.
Blockchains are reducing carbon emissions.
Due to the unique way, blockchain systems are built, new generations of blockchain have addressed difficulties with energy consumption.
Early blockchain technology required computers to solve difficult mathematical puzzles to validate transactions, which used a lot of energy. Since its conception, blockchain technology has advanced significantly and uses much less energy now than in the past.
For instance, the most recent version of Ethereum, often called Layer 1 blockchain or primary chain, published in September 2022, reduced energy use by 99.9%+ while enhancing the security of the network’s validation process. The third-generation blockchain protocol Tezos’ total annual carbon footprint is comparable to the average annual energy footprint of 17 people worldwide.
Case study: Tokenization of financing for renewable energy
Through AssetFoundry, the digital assets platform of BNP Paribas, EDF ENR, a French electric utility firm EDF division, and BNP Paribas released an ESG tokenized bond in July 2022. Security tokens can help finance small-scale photovoltaic solar panel projects, as shown through the tokenization of a solar energy project bond.
To verify the strategy, the project put the following two particular use cases to the test:
Use Case #1: BNP Paribas CIB issued the solar energy project bond as a native digital asset issued, registered, and transferred on the open Ethereum blockchain by French law for unlisted securities. The security was tokenized and structured as a native digital asset.
BNP Paribas Asset Management used conventional cash to buy the security token. At the same time, BNP Paribas Securities Services handled the token’s custody-related tasks, such as protecting the private keys needed for access and transfer. Developing digital asset services encompassing new kinds of regulated and traditional digital assets is part of their continuous endeavour to help their clients.
The security token contained:
- The international securities identification number (ISIN).
- Term sheet.
- ESG information for the Bond.
It suggested improved transparency and verifiability of the data across the entire value chain and marked a considerable advance in confirming investors’ ESG effect.
The AssetFoundry platform from BNP Paribas handled all commercial, legal, regulatory, and tokenization processes. The platform is connected with the Bank’s business systems and procedures to provide scalable and smooth digital asset solutions to its clients.
From a legal and technological perspective, this bond tokenization project provided the chance to create new due diligence procedures to decrease the time and expense connected with small-scale enterprises and to do in-depth research on all the risks involved.
Use Case #2: Reversibility of the tokenized solar energy project bond is the subject of the business continuity plan.
Blockchain legislation and technologies are developing quickly. In light of this, it is crucial to handle continuity plans appropriately, especially for long-term bonds. The issued Bond might have remained as a token until its maturity because the Bank had properly processed it. The tokenized Bond, however, was changed back to a standard bond as part of AssetFoundry’s continuity strategy without changing the Bond’s structure; for example, the ISIN remained the same. It demonstrated BNP Paribas’ ability to convert the Bond back to its conventional format if necessary, demonstrating that the bond value is guaranteed for the duration of the Bond.
While we are still in the early stages of the asset tokenization journey, this first ESG financing initiative has verified the main commercial advantages of asset tokenization. The “EU pilot regime” legislation for market infrastructure based on blockchain technology, which enters into force on March 23, 2023, has also created prospects for tokenizing other asset classes.
