Does cryptocurrency belong in ESG investing?
What’s happening? MSCI has said that institutional investors may have a “creeping” exposure to cryptocurrencies as more companies begin to invest in these and companies built around digital currencies are added to indexes. MSCI ESG Research found 52 public companies which have exposure to cryptocurrencies, 26 of which are constituents of the MSCI ACWI Index. MSCI also outlines the ESG risks associated with cryptocurrency exposure – for instance, environmental risks due to emissions from energy usage. MSCI also warns of social risks such as transaction disputes for companies which accept cryptocurrency as payment. (MSCI)
Why does this matter? With bitcoin recently hitting record highs, it’s worth a reminder that cryptocurrency has many ESG risks associated with it. Some investors have been divesting from the asset class as they become more aware of these.
However, recent weeks have seen the launch of the first US bitcoin ETF on the New York Stock Exchange while one of Australia’s largest pension funds said it’s consideringcryptocurrency investment. In this environment, where the asset class’s popularity is seemingly still on the rise, ESG investors who want to divest from cryptocurrency should be cautious of having unintended exposure via their pension or any index investments.
What are the ESG risks of cryptocurrency? The most often mentioned ESG risk of cryptocurrency comes in the form of environmental risks. The Cambridge Bitcoin Electricity Consumption found that bitcoin’s global electricity consumption in September 2021 was 7.97 TWh. Furthermore, bitcoin miners in New York recently resurrected a fossil fuel power plant to power 15,300 computer servers.
Social risks also exist. The hackers who attacked the Colonial Pipeline in the US reportedly received their $4.4m ransom in bitcoin and in 2020 at least $350m was paid out in crypto ransoms to hacker gangs. It’s also frequently been argued the anonymous nature of cryptocurrency could facilitate other criminal activity, such as tax evasion, money laundering and evasion of exchange controls.
Cryptocurrency is governed by a community of software developers, miners and other actors. If investing in crypto, investors should develop a risk governance framework to manage the risks associated with informal governance frameworks.
How can blockchain help sustainability causes? While cryptocurrency may not be a viable investment for certain ESG-conscious investors, the underlying technology in blockchain could be. In fact, when evaluating cryptocurrency investments, UBS Wealth Management recommended investors to focus on firms exposed to distributed ledger technology rather than cryptocurrency directly due to the uncertain price outlook of digital currencies. This approach could be expanded through an ESG lens.
Blockchain technology can be used to aid ESG causes. For instance, VeChain introduced a blockchain-backed platform that enables firms to calculate, track and report their carbon emissions across an entire value chain.
Blockchain can also be used to track carbon offsets – Restart Energy recently launched a platform dubbed RED offering tokenised carbon credits to businesses and individuals as well as origin certification for energy providers. The Bank for International Settlements and the Honk Kong Monetary Authority are also looking to use blockchain to track green bonds and improve their transparency to reduce greenwashing.