Environmental, Social, Governance (ESG) refers to the purpose of environmental, social, and governance aspects to measure how far along businesses and nations are with sustainability. The question is, does ESG and cryptocurrency align?
Last year, Bloomberg Intelligence predicted that Global ESG assets are on track to hit USD53 trillion by 2025 (a third of total Global Assets Under Management). Approach to social and environmental issues offers a particularly compelling picture of how ESG analysis may aid to improve currency investment and understanding of ESG and cryptocurrency in the area of modern money.
Deutsche Bank analyst provide an explanation on how ESG can be further understood in this area particularly regarding Fiat money and Crypto to being the possible ESG assets. It was observed that Fiat money is known to have issues towards the environment and can be considered to have a far greater but much subtle problem.
In addition, the influence of national policymakers to manufacture money through quantitative easing made central bank-backed currencies as the ultimate tool in bringing forward consumption from tomorrow to today, which also made it unreasonable to be accepted as ESG asset.
Similarly, there are considerable dangers associated with cryptocurrencies, particularly for prudent investors. The usage of virtual currency for illegal purposes is nevertheless widespread. According to Chainalysis, a Cryptocurrency monitoring firm, despite its transparent and traceable architecture, Bitcoin is still appealing to criminals because of its pseudonymous nature and the simplicity which enables users to move money immediately anywhere in the world.
Read: Be Wary Of Crypto Scams In Malaysia
Can ESG And Cryptocurrency Align?
As cryptocurrencies become more popular, some people are becoming concerned with the conflict of values between ESG and cryptocurrency especially regarding how much energy is being used in the mining process. The analysis report from Betterment estimates that just Bitcoin mining alone uses more power than several nations consumption.
The energy required to mine cryptocurrencies is tied to fossil fuels, which might increase greenhouse gas emissions. However, some might think otherwise as carbon impact of bitcoin mining is also decreasing particularly since China this year outlawed private coins and shut down massive mining operations.
Newer blockchains might even reduce the energy requirements of conventional central payment systems, providing encouragement that distributed ledger technology may help to effectively tackle climate change. For instance, the Crypto Climate Accord seeks to decarbonize the cryptocurrency industry by 2030.
Jan Kregel, Director of research at the Levy Economics Institute at Bard College in New York pointed out that a worse disaster than the subprime crisis might result from the Cryptocurrency market. According to him, although Crypto is not suitable in the ESG asset portfolio, the underlying technology (blockchain) is most likely to be accepted as ESG asset.
With all of these obstacles, in the context of ESG and cryptocurrency especially Bitcoin is doomed. This is due to its energy-heavy proof-of-work model. However, investors are told to be cautious in putting cryptocurrencies on par with fiat money, though both are dreadful on the ESG side.
Read: Crypto Investment: A Very High Risk Game, Are You Sure You’re Up To It?
ESG And Fiat Versus ESG And Cryptocurrency
Some of the ESG arguments against cryptocurrency could also be said of fiat money. For example, Scott Eichler of Standing Oak Financial, argue that 80% to 90% of fiat money has traces of cocaine on it. On the other hand, Coinshare’s 2019 analysis of the energy used by the bitcoin network suggested that 74.1% of the electricity it used then came from renewable sources.
The average lifetime of USD5 and USD10 Fiat money notes, according to the Fed, is thought to be five years. In addition to electricity, the production of fresh banknotes and coins requires water, wood pulp, cotton, different metals, linen, and other natural resources.
Hence, how effective are ESG reporting since ESG sometimes seems to contradict itself, especially in relation to virtual assets such as cryptocurrency?
Fossil Fuel And Cigarette Company Tops In ESG Ranking?
Back in May 2022, Co-founder of Tesla and SpaceX owner Elon Musk, claimed ESG is a fraud according to his Twitter. Both the oil behemoth Exxon and the corporation Philip Morris that is heavily involved in the cigarette business are included in ESG funds. Due to the variety of ESG grading systems, the reality of ESG investment can become even more perplexing.
Similar to this, Damodaran, a Professor of Finance at the Stern School of Business at New York University- agreed with Musk. He argues that ESG is not just an error that will cost businesses and investors’ money, while also making the world a poorer place. He added that it does more harm to society than benefit.
“Why is ESG being marketed so vigorously? Because of the ESG gravy train, which is funded by investors and taxpayers, includes accountants, measurement services, fund managers, and consultants. Corporate CEOs are embracing ESG because it liberates them from all required responsibility”, according to Damodaran.
Damodaran statements appears somewhat true when an online survey done by Betterment, who hired 1,000 individuals who own taxable investments to participate in a survey to determine who is and who is not investing in ESG and why. The findings show ESG investors also hold cryptocurrencies, which have also raised environmental concerns due to energy consumption.
80% respondents of those who hold ESG-themed investments also hold crypto investments. In comparison, just 22% of those without ESG-themed investments have crypto in their portfolio.
In recent years, the popularity of sustainable investment have increased in part due to climate emergency and the present public health crisis. Be mindful although many would favour ESG due to the idea, trend, or the benefit it would bring, we must remember when there are financial parameter or indicators being established, there are always possible ethical drawbacks especially when it runs behind human actions.
Therefore, ensuring ESG being managed and used properly and honestly practice is a must. And that’s why there’s a need to reevaluate ESG and cryptocurrency in the context of modern money.
Read: Crypto And Digital Asset, Learn Before You Earn
About the Author
Azah Atikah Binti Anwar Batcha has an Accounting, Finance, Auditing, and Islamic Finance background. She has worked with two of the Big four firms prior to pursuing her postgraduate studies at University of Technology Malaysia (UTM), Kuala Lumpur. She can be contacted at [email protected]
