Does crypto belong in an ESG portfolio?


Doug Miller is a firm believer in the power of technology to solve environmental problems.

As a master’s student at London’s Imperial College, the American orchestrated a field study on office workers and energy consumption. He found that automating light switches was more effective and cheaper than relying on the last person to leave a room to turn off the lights.

In his current position at the global non-profit organization Energy Web, he has become even more high-tech: He has developed a certification system for digital assets that depend on clean energy. “I come purely from an environmental point of view,” he says. “Blockchain is an important part of the energy transition.”

But asset managers with environmental, social and governance responsibilities might think differently. Blockchain is best known as the technology that underpins cryptocurrencies like Bitcoin – assets whose carbon footprint and uses in illicit transactions take them beyond the ESG realm. That could change, however, as – thanks to the efforts of Miller and others – blockchain penetrates more areas of the economy.

Cryptocurrencies owe their dubious reputation in the environment to the vast amounts of electricity, often generated from coal, that computers require to generate it. And because they are not subject to any state regulation, they are a popular medium of exchange for criminals and terrorists: for example, the hackers who shut down the Colonial Pipeline in the USA in May received their ransom in Bitcoin.

European wealth manager Candriam said earlier this year that “cryptocurrencies still have a long way to go to meet ESG criteria,” citing money laundering and the environmental impact of “mining” coins (through the complex calculations they to generate).

However, Miller tries hard to highlight the difference between speculative currencies and the technology that supports not only these but also other, more innocuous digital assets – like the supposedly ad-safe tickets sold for the 2018 World Cup. Central banks also use the technology.

“There is a risk that blockchain technology and crypto will merge,” he says. “Helping energy companies better manage their grid is very different from [cryptocurrency] Dogecoin. “Energy Web operates such a network project with an Australian electricity company.

Last month, UBS Wealth Management said that alongside healthcare and sustainability, “the digital transformation of sectors ranging from transportation to manufacturing to financial services is creating opportunities”.

In a paper evaluating cryptocurrency investments, the asset manager’s analysts recommended that “investors should focus on companies exposed to the development of distributed ledger technology rather than dealing directly with cryptos”.

Distributed ledgers – of which blockchain is a type – are systems that rely on users’ collective agreement to verify transactions.

More recently, technology has advanced to reduce the number of users required to authorize transactions, making these systems more energy efficient. A recent study by University College London found that some new distributed ledger technologies – which use the so-called “proof-of-stake” protocol instead of the older “proof-of-work” method – were up to three times more efficient than earlier systems.

“Our work shows that[newer blockchains]. . . could even undercut the energy requirements of traditional central payment systems, raising hopes that distributed ledger technologies can make a positive contribution to combating climate change, ”the paper concluded. Further impetus could come from the Crypto Climate Accord, which aims to decarbonise the crypto industry by 2030 (and which Miller was instrumental in founding).

Crypto insiders also point out that Bitcoin mining’s carbon footprint is falling, especially since China banned private cryptocurrencies and shut down huge mining operations this year.

The effects can already be seen in the data. In May, the Cambridge Bitcoin Electricity Consumption Index estimated that Bitcoin’s global electricity consumption was roughly equivalent to that of Sweden. This month it is at the level of Kyrgyzstan – a significantly lower level.

And conventional assets have their own problems. “One could argue that there is a much bigger but more subtle problem with fiat money when it comes to the environment,” said Deutsche Bank analysts in a recently released report. Currencies backed by the central bank, they argue, are “the ultimate tool for accelerating consumption tomorrow” and point to the ability of national policymakers to print money through quantitative easing.

Still, there are significant risks associated with cryptocurrencies, especially for responsible investors. The use of digital coins for illegal activities remains widespread. Chainalysis, a crypto surveillance company, says Bitcoin remains attractive to criminals “because of its pseudonymous nature and the ease with which users can instantly send funds anywhere in the world despite its transparent and traceable design.”

Still, there are some hopeful signs for crypto fans. Chainalysis found that approximately $ 21.4 billion worth of remittances in 2019 were due to illegal activity, representing 2.1 percent of all cryptocurrency transactions. Last year, such activity had declined to transactions valued at approximately $ 10 billion, or 0.34 percent of the total.

Many continue to believe that due to their speculative nature and lack of inherent value, cryptocurrencies will ultimately fade away after they crash and burn. Regulation and central bank digital currencies are also threats.

“Bitcoin is a video game,” says Jan Kregel, economist and research director at the FT’s Levy Economics Institute at Bard College, New York. “There is potential for the crypto world to explode and cause a bigger crisis than subprime.” The technology behind it is likely to stay, however.

About Paige McCarthy

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