The Future of Sustainability Investing: Unleashing Asset Tokenization with Regulatory Guardrails

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By Ronald Tech

By an Industry Expert

Following COP28 in Dubai and the outcry for financial backing that resonates with the severity of climate challenges, the onus of funding has shifted to private finance. Notably, a Standard Chartered report unveiled that retail investors possess a staggering $10 trillion in investable wealth, all ready to be channeled into sustainability investments.

Nevertheless, conventional environmental, social, and governance (ESG) exchange-traded funds (ETFs) have struggled to tangibly link investments to real-world impact. Consequently, the imminent surge of asset tokenization in 2024 holds great potential to expand sustainable investment options for retail investors beyond the limitations of traditional finance.

Hurdles in Sustaining Sustainability Investments

A recent McKinsey Sustainability survey highlighted that 40% of US consumers expressed interest in climate-tied financial products, yet few offerings directly correlate their investment with tangible impact, generating skepticism among potential investors regarding the efficacy of such instruments.

Sustainability investment proves intricate, steeped in challenges of differentiating available instruments, assessing risks accurately, combating greenwashing, and discerning companies’ scientifically accurate environmental claims. The shadow of trust issues looms, perpetuated by the controversy surrounding voluntary carbon markets.

The Prospects of Asset Tokenization

Asset tokenization, involving the blockchain-based fractionalization, leveraging, and exchange of assets like equity, bonds, and carbon credits, is poised to revolutionize the Web3 paradigm. It promises retail investors access to previously inaccessible investments, such as fractionalized real estate, art, private debt, and private equity.

Conversely, for sustainability investment, asset tokenization presents the coveted direct link between investment and impact. Retail investors can now channel funds directly into reforestation projects, climate startups, micro-lending products, and green bonds, providing updates through interactive social media channels, fostering transparent transactions conducted on blockchain.

Imperative of Regulatory Frameworks

While the blockchain and cryptocurrency industry is marred by skepticism due to scams, a lack of regulation, and a dearth of accountability, education alone cannot rectify the trust deficit. Regulatory commitment underpins trust, accountability, and the accessibility of tokenized sustainability investments, laying the foundation for an information-rich investment landscape.

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The embrace of robust regulatory frameworks by companies and regulators alike fosters transparency, disclosure requirements, and accountability, essential elements for the widespread acceptance of tokenized sustainability investments among retail investors.

Asset Tokenization: Leveraging Sound Regulatory Frameworks for Climate Impact

Asset Tokenization: Leveraging Sound Regulatory Frameworks for Climate Impact

Embracing Regulation for the Greater Good

There is a growing momentum driving the embrace of sound regulatory frameworks such as those in Dubai, Hong Kong, and Singapore. These jurisdictions provide an opportunity to promote transparency and trust in the realm of asset tokenization. The AYA platform, designed to mobilize retail and HNWI capital towards early-stage climate startups, has recently obtained a Virtual Asset Service Provider (VASP) license from the Virtual Assets Regulatory Authority of Dubai (VARA).

Ushering in Transparency and Trust

Asset tokenization holds significant potential for sustainability investing, but this must not come at the cost of deviating from the ultimate goal: climate impact. To realize this ambition, it is paramount for companies to operate within the spheres of well-regulated frameworks. By seeking and upholding the necessary licenses, the industry can provide investment instruments that are genuine, crystal-clear, and readily comprehensible. Failures in achieving this commitment imply a missed opportunity to steer trillions of dollars towards amplifying climate impact.

Author: Prakash Somosundram

Prakash Somosundram is CEO and co-founder of Enjinstarter, a blockchain-based crowdsourcing platform and incubator for gaming, metaverse, and other Web3 projects, as well as AYA Foundation, a licensed virtual asset platform headquartered in Dubai that connects private finance with early-stage climate startups. Prakash is also a serial entrepreneur who sold his digital advertising business, Yolk to WPP in 2011. In 2021, Prakash was awarded a medal for public service, the “Pingkat Bakti Masyarakat” (PBM) by the Singaporean Prime Minister’s Office for his work on the Social Development Network Council.