ESG investing started to become mainstream when the UN PRI was founded in 2006. Since then, the number of signatories pledging for more responsible and sustainable investing keeps increasing. ESG investing continued to rise in 2020 and has even outperformed the traditional stocks.
Meanwhile, people are so hyped up when it comes to cryptocurrency. If you’re going to look at the historical prices of various coins such as Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), Ripple (XRP), and Cardano (ADA), 2021 is the highest one yet. Even more so, Bitcoin is becoming a globally accepted and traded cryptocurrency. Even large publicly traded companies like Tesla, Inc. and Square, Inc. bought millions of Bitcoin investments.
But with more people eager to try their hand at crypto, the numbers are also increasing for the pragmatic bunch.
How Does Bitcoin Mining Expand the Scope of ESG Investing?
ESG investing is a type of investing strategy where investors look into companies with sustainable programs that improve environmental, social, and governance issues. For those of you who are not familiar with ESG investing, don’t worry I got you. I suggest you read my previous post where I shared more about how it works and some of the proven ESG companies today.
Effect of Bitcoin Mining on Environmental Issues
With environmental issues alone, there’s already a hot debate whether investing in cryptocurrency can ever be sustainable. There’s no denying that Bitcoin mining takes up a lot of energy. But whether the energy comes from fossil fuels or renewable energy, there’s no conclusive data yet. To address this gap, here are some of the organizations that are working on standardized data reporting:
Bitcoin Mining Council
This group came about when Michael Saylor, CEO of a business analytics software company called MicroStrategy, hosted a closed-door meeting with some of the Bitcoin miners in North America. They aim to voluntarily divulge energy use data for transparency, share their best practices with each other, and educate the public on Bitcoin mining.
The Bitcoin Mining Council is a young group created in May 2021 to standardize Bitcoin energy reporting. There are 9 founding members of the BMC — Argo, Blockcap, and Hive are just a few to mention. Any Bitcoin miner is welcome to join the group. Although some say that Elon Musk is also a co-founder of BMC, the group clarified that Musk has no role other than joining the meeting to discuss Bitcoin mining.
Hopefully, the BMC will also encourage other Bitcoin miners around the world, especially in China where the hotspot for Bitcoin mining across the world is located.
Crypto Climate Accord
With a mix of crypto and fintech industry leaders signatories, the Crypto Climate Accord is an international private sector organization inspired by the UN’s Paris Climate Agreement. The 2 big goals of the CCA are:
- By 2030: Decarbonizing the cryptocurrency industry starting with its signatories
- By 2025: Develop frameworks to achieve 100% renewable-powered blockchains
It’s not an easy feat to tick these goals. But with support from various sectors in energy, climate, technology, NGOs, and especially the United Nations, this will be made more possible. A more detailed description of their solutions can be found here, but some of the promising aspects worth mentioning are:
- Develop an open-source software to track and report how much of the mining is sustainably operated. It will need the participation of grid operators and renewable energy companies for verification.
- Crypto investors — whether corporate, institutional, or retail — can choose to purchase renewable investments with their “green” crypto. An example cited in their website is a retail investor charged with an additional payment on top of their crypto trades. The additional charges will be kept in an escrow account to raise funds for renewable projects.
Both of these organizations are proof that companies around the world are cooperating by taking initiatives to combine cryptocurrency with ESG investing
Effect of Bitcoin Mining on Social and Governance Issues
What about the social and governance factors? Let’s not forget that ESG investing is not only about environmental issues.
Social factors are typically about human rights, equal opportunities, product/service responsibility, workforce diversity, and other social benefits. Initially, when we think about it, the nature of crypto’s decentralization offers equal opportunities and inclusion. Here are some of the positive effects of the crypto industry socially:
- Because of initial coin offerings (or ICOs), many startups were given a chance to raise funds and start a business through blockchain’s unconventional ways.
- Artists get to showcase and earn from their digital artworks — more commonly referred to as NFTs.
- People without bank accounts before because they have insufficient minimum deposits now have digital wallets.
- A new demand for job opportunities for computer programmers was opened.
- Some businesses, especially in China, use a blockchain-based barcode for their products. When scanned, you can see the history of transactions of where the product came from. This promotes transparency and accountability to customers.
- There’s a non-profit organization called the Blockchain for Social Impact Coalition (BSIC) with around 216 members which focus on Ethereum Dapps that help address social and environmental issues.
All of the above-mentioned social benefits definitely outweigh the negative impacts. Ever heard of Silk Road? It was an online black market for illegal drugs made possible with the help of the Bitcoin blockchain. Since these are digital assets, they are more prone to illegal activities (e.g. hacking and money laundering) for self-profit gains.
But then again, traditional financial institutions are also prone to the same illegal activities. Just that with blockchain technology where transactions are public, criminals are easier to track down.
When it comes to governance issues such as corporate politics, corruption, board diversity, and executive compensation, the crypto industry is free of most of this mess. The blockchain is a trustless, peer-to-peer network that eliminates the need for a central authority. No board of directors, no executive committee. Just an economy built on codes.
But investors might think, what if there are loopholes in the codes? What if these loopholes were detected by hackers and used as a way to disrupt the economy?
Well, this what-if situation actually happened during 2017 in the DAO (Decentralized Autonomous Organization). It was a crowdfunding project hosted by the Ethereum blockchain. Hackers found a loophole and used it to steal the investors’ money worth around US$50 million that time.
When this happens, who makes the big decisions?
Instead of a board of directors conducting a closed-room meeting to discuss solutions, the Ethereum blockchain community discussed and tried out several solutions. Eventually, they went with the hard fork route which returned the money to the investors. For more information on the DAO events, you can read more here.
So there’s an ambiguity with the governance issue of blockchains like Bitcoin. Investing in them will mean investing with confidence in the blockchain community.
As an ESG investor, my perspective is not on investing in perfect businesses. But rather, it’s investing in companies or assets that strive to do better practices.
I’m aware that Bitcoin mining has some valid environmental concerns. But avoiding blockchain technology and cryptocurrency is a losing battle. The winning team goes to people who can adapt fast. As they say, if you can’t beat them, join them. But still, do it with your guiding principles.
For those who are skeptical about investing in crypto, hold the thought but don’t avoid it. To my fellow ESG investors, let us keep our eyes and ears open. The crypto industry is still evolving. I’m excited to see what improvements it could impact on key ESG issues.