Much has been written about the potential for automation, digitisation and artificial intelligence to reshape the financial system. Institutional investors are acutely aware of this. The PRI’s recent megatrends survey with Willis Towers Watsonfound that investors expect technological advances to have an “extremely significant impact” over the coming years on the financial markets in which they operate.
One of the disruptors is the emergence of blockchain technology, which has generated substantial hype though the proliferation of cryptocurrencies such as Bitcoin and Ethereum. Amid the speculative frenzy, discussion has mainly focused on cryptocurrencies, rather than the underlying blockchain technology, which has the potential to reshape the investment industry and help solve some of the biggest challenges facing responsible investors by increasing transparency and strengthening shareholder democracy.
Proxy voting upgrades
Of immediate relevance to institutional shareholders are the innovations in proxy voting that blockchain technology brings about. Several financial institutions and central share depositories (CSDs) have been investigating the use of private blockchain systems to implement shareholder e-voting infrastructure.
An early mover was Nasdaq, which launched a pilot project in Estonia in February 2016 to reduce the time, complexity and cost of shareholder voting. The Nasdaq system essentially piggybacks on CSD registers to assign voting rights and voting tokens to shareholders, who can spend them on agenda items.
Broadridge has completed a pilot project with JP Morgan, Northern Trust and Banco Santander using a private, Ethereum-derived blockchain to show how clients could use a distributed ledger to gain daily insight into voting progress.
A recent Oxford University report called for an even more dramatic modernisation of the annual general meeting, with the use of a private blockchain system and smart contracts that would allow shareholders to place proposals and immediatelynotify other shareholders of them so they could exercise their vote. Proxymity, a digital voting system that will launch in the UK in time for the 2018 proxy season, will enable investors to vote in real time, potentially removing inefficiencies such as the need to submit votes days ahead of company AGMs.
‘Blockchain for good’
Blockchain technology also has the potential to give beneficiaries a louder voice in communicating their ESG preferences to asset owners and their managers. London-based CAPITALusM is building a system to provide a direct conduit to fund managers for individual beneficiaries of funds to express their voting wishes. Those managers will, in turn, split their total votes to reflect the preferences of their clients. Also under development are a feature that would allow individuals to delegate their votes to non-government organisations – known as liquid democracy – and a process for proposing resolutions.
While most of the activity in the blockchain space has been motivated by peoplespeculating for profit or cutting business costs, there is an emergent ‘blockchain forgood’ or ‘blockchain for impact’ community, attempting to use it for non-commercial purposes. Humanitarian organisations, United Nations agencies and social enterprises have all launched private initiatives and other coalitions are emerging. Organisations include the Blockchain for Impact Coalition, set up as a conduit for UN agencies to engage with private blockchain technology vendors, the Blockchain for Social Impact project, and the Blockchain for Good think tank.
The European Commission has also put out ‘blockchain for social good’ calls focused, for example, on strengthening financial inclusion, tracking the origins of raw materials in supply chains, and e-voting systems that will help deliver tamper-proof elections.
Real-time tracking of ESG data may also be improved through blockchain. In June 2017, the United Nations Framework Convention on Climate Change stated that blockchain could aid the tracking and reporting of greenhouse-gasemissions reduction and avoid double counting. The convention launched a ‘climate chain’ coalition and called for groups such as Hack4Climate to come up with solutions.
It’s worth noting that many projects within these areas remain aspirational and are not widely deployed, so a healthy dose of scepticism is advised when assessing them. However, with technology disrupting and transforming the economy, society and the environment at an ever-increasing pace, those with an interest in the development of a more efficient and participatory financial market supply chain would be well advised to stay on top of developments in this field.