Is crypto at odds with ESG?

  • 29 July 2022 (5 min read)

Even with active efforts to shift the environmental impact of current cryptocurrency operations, green investors should approach this asset class with caution  — especially considering the market’s longstanding volatility.

With major companies like Bitcoin, Ethereum, and Luna 1 and crypto’s reputation for being 2 can responsible investors ever tap into the intrigue of cryptocurrency? For now, crypto remains unsustainable — in more ways than one — but a freeze in the market could be the opportunity companies need to rethink crypto with an 3

The Environmental Impact of Cryptocurrency

When Bitcoin first debuted in 2009, the process of mining a single coin was a modest endeavor, taking no more than a few seconds of energy using one’s personal computer. Now, the mining process paints a much different picture. Today, the cost of maintaining 4 digital infrastructure consumes more energy than some countries. According to the Cambridge Bitcoin Electricity Consumption Index, it takes roughly 2,292.5 kilowatt-hours (kWh) of energy to power a single Bitcoin transaction. To put that into perspective,the average American household consumes  5 household consumes about 10,715 kWh per year.

Most cryptocurrencies utilize a proof-of-work mechanism. This protocol validates transactions in a decentralized manner through a system in which “miners” must quickly solve cryptographic functions to extend the length of a blockchain. This protocol turned crypto mining into a race as the first person to successfully solve the equation is rewarded with a newly minted — and highly valued — coin. Wanting to better their chances of obtaining coins, miners developed large networks of computing power, creating energy-intensive rigs that run 24 hours a day and consume more electricity annually than the country of Argentina.6

Significant energy expenditure isn't the only way crypto negatively impacts the environment. For example, bitcoin mining produces a staggering 22.0 to 22.9 metric tons (MtCO2) of CO2 emissions each year. Not to mention, most data mining rigs are reliant on fossil fuels. Plants such as the Greenidge Generation Plant7 siphon millions of gallons of fresh water from nearby lakes to keep operations running, only to spew it back out 30–50º hotter. This temperature increase negatively affects the wildlife, water quality, and even the quality of life of the locals in areas where these plants run.

E-waste is also an issue. Thanks to planned obsolescence, computers have relatively short life cycles, with crypto-mining computers becoming obsolete roughly every year or so. When that hardware isn’t recycled (and not much of it is), it ends up in landfills.

As the window to limit the effects of global warming8 gets smaller and smaller, eco-conscious investors are noting crypto’s environmental impact and wondering how they can diversify into an asset class that seems so to oppose ESG’s core principles. 

How Crypto Can Fit into an ESG Framework

Despite the headlines, crypto isn’t all bad. There’s something to be said for trustless transactions, decentralized systems that mitigate the necessity for intermediaries, guaranteed traceability, and a labor-intensive validation system that discourages counterfeiting. However, crypto comes with a few double-edged swords. 

For example, the distributed ledger offers data transparency (governance). Unfortunately, this also means there is no central register to turn to should an investor need authorized assistance to recover lost or stolen funds. Similarly, crypto’s barrier to entry is both low — banks are not required and anyone can access with just a smartphone (social) — and high where the very idea of how crypto works is incredibly nuanced. This widens the digital divide, and many crypto hopefuls find themselves on the outside looking in.

But hope is not lost for crypto’s ESG-friendly future. As crypto re-enters the broader public consciousness, it’s become more important than ever for investors to stay well-informed of not only market shifts, but what major players are doing to align crypto with ESG requirements.

In 2021, the first ESG-compliant Bitcoin ETF (BITC)9 was launched by Ninepoint. By setting aside a portion of their management fees, the company offset the carbon footprint created by the Bitcoin they held by 100 percent. Shortly after, the Viridi Cleaner Energy Crypto-Mining and Semiconductor ETF (RIGZ)10 was launched to show investors that lower carbon emission mining was not only possible but more profitable than mining methods reliant on carbon-intensive energy. Hut 8 Mining10 , one of RIGZ's primary holdings, gained 124 percent in only three months.

Is Sustainable Crypto Possible?

Sustainable crypto is possible — but not without a firm commitment from sectors across the board to effect real, tangible change. The world is becoming more aware of cryptocurrency’s environmental impact, and companies are finally taking strides to achieve net zero. Many miners have begun turning to alternative methods for mining, using sources such as solar, wind, and hydro. Also, other currencies are adopting a proof-of-stake method that uses significantly less energy to validate transactions while still maintaining the credibility that’s become one of blockchain technology’s biggest boons.

Even the Crypto Climate Accord11 seeks to "decarbonize the global crypto industry by prioritizing climate stewardship and supporting the entire crypto industry's transition to net-zero greenhouse gas emissions by 2040." With over 200 signatories already under the accord’s register, a greener future for crypto may one day come to fruition if the market can find a way to stabilize.

Where We Go From Here

In early June 2022, the crypto market cap fell below $1 trillion12 for the first time since 2021. Pair an already-risky market with significant inflation shifts, and we’re approaching what many believe is another crypto winter.13 This deceleration could lead to the brighter future ESG investors are looking for. In the wake of the current crypto panic, a potential freeze may be the opportunity crypto companies need to address their environmental impact and align operations with ESG standards.

While the environmental impacts of crypto are being addressed through green bonds13 and the use of renewable energy sources to power blockchain protocols, the cryptocurrency industry still has a long way to go regarding ESG compliance. Still, investors can move the needle by bringing awareness to the subject and keeping an eye on crypto companies that utilize less energy-intensive methods.

If you’re a responsible investor looking to diversify your portfolio and want to learn more about assets that fully meet the ESG criteria, reach out to the experts at AXA IM today

  • https://www.sciencedirect.com/science/article/pii/S221462962200007X
  • https://www.sciencedirect.com/science/article/pii/S221462962200007X
  • https://www.axa-im-usa.com/insights/sustainability/environmental/so-what-esg
  • https://www.axa-im.co.uk/insights/future-trends/digital-economy/bitcoin-it-asset-or-just-pure-speculation
  • https://www.eia.gov/tools/faqs/faq.php?id=97&t=3
  • https://www.bbc.com/news/technology-56012952
  • https://grist.org/technology/bitcoin-greenidge-seneca-lake-cryptocurrency/
  • https://news.un.org/en/story/2022/04/1115452
  • https://www.asianinvestor.net/article/esg-friendly-crypto-emerging-as-institutional-demand-surges/473103
  • https://www.etf.com/RIGZ
  • https://www.etf.com/RIGZ
  • https://cryptoclimate.org/accord/
  • https://www.coindesk.com/markets/2022/06/13/bitcoin-plunges-below-25k-lowest-level-since-december-2020/
  • https://www.forbes.com/advisor/investing/cryptocurrency/what-is-crypto-winter/
  • https://www.forbes.com/advisor/investing/cryptocurrency/what-is-crypto-winter/

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