Environmental, social, and corporate governance (ESG) is billed as a powerful vehicle to create value, drive sustainability, and deliver a more equitable world.
But behind the social justice warrior hype lies the potential to pick winners and losers, and unfortunately for crypto, the verdict is mainly negative from an ESG perspective.
However, diving deeper reveals that’s not necessarily a bad thing.
What is ESG?
ESG are criteria for assessing a company’s socially conscious behavior. For example, regarding the environmental aspect, assessments are made on whether a company reports on carbon emissions and sustainability, actively seeks to limit pollutants, including greenhouse gases, and whether it uses renewable energy sources.
“Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example.
Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates.
Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.”
With the focus on sustainability and responsible investing, ESG has become more prevalent in the corporate and investment world. So much so, ESG dedicated ETFs, and financial products have sprung up catering to demand.
ESG and crypto on a collision course
Global law firm Kennedys recently published an article pointing out the paradox between institutional investors, including BlackRock, going heavy with crypto while also lauding their ESG credentials.
There’s no escaping the impact of Bitcoin’s energy-intensive Proof-of-Work consensus mechanism, which is said to use more electricity per year than the annual electricity consumption of the Netherlands.
A year ago, Elon Musk claimed that Bitcoin miners use mostly polluting non-renewable sources of energy to power their equipment. Conflicting reports estimate up to 75% of the Bitcoin network uses renewable energy sources.
Despite the inconsistent reports, Bitcoin mining, at least from the perspective of the legacy crowd, is still primarily seen as a blight, environmentally speaking.
To that end, Kennedys justified its position, saying mining one Bitcoin generates the same carbon emissions as two billion Visa transactions. The firm stated that crypto also “raises major red flags” socially, pointing out the prevalence of pump and dump schemes and the frequent occurrence of DeFi hacks.
Further associations with cybercrime, sanction evasion, and money laundering mean “crypto probably does not belong in an ESG compatible portfolio,” said the firm.
“As things stand, crypto probably does not belong in an ESG compatible portfolio. Until Bitcoin cleans up its act, or less energy intensive coins become more mainstream, a company or investor engaging in crypto-related activities risks damaging their ESG credibility and reputation.”
That being said, Kennedys’ assessment of cryptocurrency’s ESG credentials had one glaring problem. As demonstrated in the quote above, the report lumped together Bitcoin and cryptocurrencies, often using the terms interchangeably.
There was also no mention of blockchain technology opening up access to financial services in economically marginalized communities or how cryptocurrencies have become unofficial currencies in inflation-hit countries, including Argentina.
While it’s tough to argue in favor of Bitcoin’s ESG compliance, with a wide variety of protocols in the space, it’s incorrect to treat the rest of the crypto industry the same.
In any case, the bigger question at hand is whether ESG compliance actually encourages responsible corporate behavior?
The tide is turning against ESG
ESG could be considered a way to reconcile internal conflicts between growing wealth and acting responsibly. But a recent Harvard Business Review found that ESG funds fared poorly when it came to the former.
“Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.”
While some investors may expect to concede returns in favor of ESG performance, it was also noted that ESG funds aren’t much cop when it comes to ESG performance either.
A study conducted by Columbia University and the London School of Economics looked at the ESG record of US firms in 147 ESG fund portfolios versus that of US firms in non-ESG portfolios. Those in the ESG portfolios were noted to have worse compliance records and failed to improve compliance once added to an ESG portfolio.
“They found that the companies in the ESG portfolios had worse compliance record for both labor and environmental rules. They also found that companies added to ESG portfolios did not subsequently improve compliance with labor or environmental regulations.”
The author concluded that funds invested in companies that champion ESG gain little in returns or in furthering ESG interests.
Musk calls ESG a scam
Last week, the S&P 500 ESG Index dropped Tesla while keeping oil firm ExxonMobil. Tesla CEO Elon Musk responded by calling “ESG a scam,” that has become “weaponized by phony social justice warriors.”
The report marked down Tesla, over its social and governance aspects, due to claims of racial discrimination and poor working conditions at its Fremont plant. It also mentioned the deaths linked to the carmaker’s autopilot feature.
Shedding light on the matter, Tony Tursich, Fund Manager at Calamos Global Sustainable Equities Fund, said there is little substance behind ESG, as investment managers rely on data providers to determine compliance.
“The majority of investment managers that are applying ESG are simply paying money to data providers to tell them what is good ESG.”
What’s more, unlike credit scores applied by credit agencies, ESG has no standard definitions. One could say the system is as meticulous as sticking a finger in the air.
As such, casting the lip service to one side, it’s no significant loss if crypto is deemed non-ESG compliant.
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