ESG issues and opportunities arise as companies and asset managers focus on blockchain-based tech investments – FinTech

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Beyond the broader adoption of cryptocurrencies by consumers in recent years, businesses and organizations have also shown increased interest in crypto-assets over the past year. A myriad of industries, from sports and fashion to art, video games and music, are entering NFTs, which depending on the market, can be minted on a PoW or PoS blockchain. Financial institutions are exploring how to compete with decentralized financial products by offering services on blockchains to provide more security and less friction in an effort towards safer and faster transactions. Depending on how these platforms are structured, these services will also be on a PoW or PoS network. This increase in investment in blockchain-based products and services by many varied shareholders has resulted in increased due diligence on the amount of investments that comply with ESG mandates. Corporate balance sheets are increasingly filled with cryptocurrencies, presumably as an inflation hedge or overall investment strategy, potentially impacting their ESG practices. At least one financial company has announced that employers may soon have the option of offering workers the option of placing a portion of 401(k) retirement savings in bitcoin. Additionally, potential ESG issues may arise not only when investing in a cryptominer or in verified cryptocurrencies with a PoW consensus mechanism, but also with investing in an exchange that transacts in certain cryptocurrencies. energy-intensive.

Simply put, with the increased use of these types of emerging technologies, ESG concerns are likely to arise. It remains to be seen how these emerging technologies will balance innovation, while respecting ESG issues.

This is Part II of a two-part article on the issues raised by the Congressional hearing on the energy use of blockchains. In this part, we will raise some ESG considerations that now affect companies when it comes to cryptocurrency investments and the use of blockchain. In First partwhich was published in February 2022, we discussed the impact of different blockchain consensus mechanisms on energy consumption and some potential solutions discussed during the hearing.

Focusing on the E in ESG, environmental risks resulting from exposure to cryptocurrencies include, but are not limited to, greenhouse gas emissions from energy consumption. Of course, not all crypto investments involve Bitcoin and can encompass less energy-intensive blockchains. Additionally, some DeFi tokens and projects have attempted to strike a more eco-friendly pose by purchasing carbon offsets to help their validator networks move towards a goal of carbon neutrality.

As heard during this congressional hearing on the energy impacts of blockchains in January, it has been argued that cryptocurrencies, in some cases, can boost clean energy investment in the United States. For example, solar and wind energy can be difficult energy sources due to their inherent nature. unpredictability – sometimes the sun shines and the wind blows with varying intensities, or not at all. So, depending on the weather, there may be too much energy or not enough. As discussed earlier, in Part I, miners can utilize this reduced excess energy that could otherwise be wasted if there is no adequate battery storage, thus providing much needed capital to green energy providers, essentially subsidizing clean energy capacity.

Stranded natural gas and other fossil fuels are also problematic because stranded energy is burnt or burnt and released into the atmosphere for disposal, contributing to air pollution and loss of potential revenue. The global potential for flare gas recovery has been reported to be eight times greater than Bitcoin network usage in 2021, according to a separate study by the University of Cambridge. ESG investing can incentivize nomadic Bitcoin miners to use stranded natural gas so that the gas and carbon are not directly released into the atmosphere through combustion. ESG-conscious investors could also invest, with the aim of eliminating “dirty” mining, by discouraging the rehabilitation of coal-fired power plants. Admittedly, investments in blockchain technologies do not necessarily mean that funds are flowing into power-intensive PoW networks. To that end, some states, such as New York, are considering boosting the move away from energy-intensive cryptomining. Recently, the New York Legislature passed a bill (S6486D) that would, among other things, put in place a two-year moratorium on the approval of any new carbon-powered PoW mines and preventing miners from renewing their permits. if their facility uses carbon-based energy and the mine seeks to increase its energy consumption (New York Governor Kathy Hochul has not yet indicated whether she will sign the bill).

Much attention is paid to the “E” in ESG, but let’s not forget the “S” and the “G”. Some Fund Managers Say Cryptocurrency and Mining Are Not ESG Compliant [log-in required] due to their high energy consumption; on the other hand, others argue that the nascent technology will continue to decarbonize while delivering social and governance benefits. Cryptocurrency is seen as a potential solution for funding the unbanked and underbanked because anyone can access cryptocurrencies with a phone or laptop and an internet connection. Additionally, some cryptocurrencies offer lower transaction fees than traditional centralized coordinated transfers, allowing systems to be set up cheaply and quickly to provide greater financial inclusion. NFTs may prove to provide artists with a way to control their works and provide additional sources of income. ESG investors also have an opportunity to advocate for greater gender and racial inclusion in the hiring and retention practices of cryptocurrency companies to fulfill their governance mission.

Ultimately, there is room for growth on all ESG fronts in the cryptocurrency space, and it remains to be seen how ESG investment goals will impact cryptomining and how future blockchain platforms will be less energy intensive per transaction. As cryptocurrencies and blockchains continue to be the focus of institutional investors and government regulators, the development of new technologies is expected alongside. ESG objectives can ideally positively impact and shape emerging, world-changing technology and its related industry.

ESG issues and opportunities arise as companies and asset managers focus on blockchain-based technology investments

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


The SEC steps up its efforts to control the crypto industry

Duane Morris LLP

As the crypto industry continues to grow and market volatility remains high, the Securities and Exchange Commission (SEC) has announced plans to increase its regulation in the area.

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