Unlocking the Potential of Asset Tokenization in Sustainability Investing Unlocking the Potential of Asset Tokenization in Sustainability Investing

By: Alex Freidmen

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. Case in point, a recent report on sustainable banking in 2022 suggested that retail investors alone have some $10 trillion in investable wealth ready to be directed at sustainability investments.

The challenge so far has been providing such investment opportunities beyond basic environmental, social and governance (ESG) exchange-traded funds (ETFs)—which can be difficult to link to actual impact on the ground. This is a primary reason why asset tokenization is poised to have a big year in 2024. It can rapidly expand offerings for retail investors in ways that traditional finance can’t.

Dismantling Obstacles to Sustainability Investing

Despite the fact that 40% of US consumers stated in a recent survey by McKinsey Sustainability that they are interested in participating in a climate-linked financial product, few such products exist that draw a direct line between dollars invested and impact on the ground. The typical offering is an ESG ETF that provides exposure to companies who have strong ESG policies and performance. For many, this hardly constitutes an investment in sustainability, especially considering people can invest in these companies via non-ESG instruments.

Sustainability investing is also a complex issue. It can be challenging to differentiate between the instruments that are currently available or know how to accurately assess the risks involved. There’s also the issue of greenwashing and how to determine whether a company’s claims are scientifically accurate. The voluntary carbon markets, for example, have been maligned over questions of credit quality and actual vs. estimated impact, which has led to a decline in trust. What this means is that even if impactful sustainability investments are made available, there would still be trust issues to overcome.

The Promise of Asset Tokenization

As a quick refresher, asset tokenization refers to putting an asset like equity, bonds, and carbon credits on a blockchain so that they can be more easily fractionalized, leveraged, and exchanged. It’s seen by many as the next big thing in the Web3 space and represents the possibility of access to investments that weren’t previously available to retail investors—things like fractionalized real estate, art, private debt, and private equity.

From the perspective of sustainability investments, asset tokenization provides the direct link between investment and impact that investors want. Instead of investing in for-profit companies via an ESG ETF, retail investors can allocate their funds directly to reforestation projects, climate startups, micro-lending products, and green bonds. And being so close to projects means updates will come more frequently and in the form of social media posts and other rich media, as opposed to bland annual reports. And with all transactions conducted on the blockchain, there is an element of transparency that isn’t typically present with more traditional investments.

Necessity for Regulation

One of the primary challenges faced by the blockchain/cryptocurrency industry over the years has been negative public perception. There have been too many scams, too many deified crypto bros, and too much avoidance of regulation for the general public to believe in the benefits of the tools and how they might relate to climate impact. What this has ultimately resulted in is an absence of trust in virtual assets, regardless of their origin or intention. Education is often cited as a solution to the trust issue, but I would argue that education isn’t going to be very effective in the absence of regulation.

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Instead, a commitment to regulation—from both the regulators and companies—is the first step towards rebuilding trust. It fosters the accountability, support services like analysts and ratings agencies, and accessibility via fintech investing apps needed for tokenized sustainability investments to be accepted by retail investors. Regulation also establishes disclosure requirements and lays the groundwork for a much healthier information landscape than the one we see today. We won’t have any of this if companies



The Importance of Regulatory Compliance in Climate Impact Investing

Compliance: A Crucial Step in Directing Trillions to Climate Impact

Opportunities in Asset Tokenization for Sustainability Investing

Asset tokenization for sustainability investing offers a promising opportunity, but not at the expense of regulatory compliance. The end goal always remains climate impact, and this is achievable only when investment instruments are trusted, transparent, and well-understood within sound regulatory frameworks. Any organization involved in sustainable climate impact investing must prioritize the acquisition of the necessary licenses, with jurisdictions such as Dubai, Hong Kong, and Singapore offering strong regulatory frameworks. The completion of the licensing process is an essential step toward ensuring that retail investors have the proper tools to contribute significantly to the fight against climate change.

AYA Foundation’s Commitment to Regulatory Compliance

The AYA platform, dedicated to linking retail and HNWI capital with early-stage climate startups, has demonstrated a proactive approach in this regard by securing a Virtual Asset Service Provider (VASP) license from the Virtual Assets Regulatory Authority of Dubai (VARA). This exemplifies a strong commitment to empowering investors through regulatory compliance within established frameworks.

The Ripple Effects of Ignoring Regulatory Compliance

Failure to seek the necessary operating licenses within regulatory frameworks can only be detrimental. It poses a threat to the credibility and long-term success of sustainability investing. Unregulated assets may lack the transparency and trust required to attract substantial funds for climate impact. The ongoing evasion of regulation is a high-stakes gamble; the repercussions could negatively impact the viability of sustainable investments and the crucial fight against climate change.

Conclusion

Climate impact investing is not just about the potential returns; it is about directing trillions of dollars toward a cause that is vital for the future of our planet. Institutions and platforms involved in this sector must acknowledge the significance of regulatory compliance in achieving the larger goal of combating climate change. By seeking and obtaining the necessary licenses within sound regulatory frameworks, they instill confidence and trust in investors, paving the way for massive capital allocation toward projects that can drive tangible climate impact.