If some of the Environmental, Social, and Governance (ESG) rating agencies were to apply an ESG risk rating to Bitcoin, it would probably be a laggard and would be a nightmare to assign a risk rating to.
The energy-intensive process by which computers solve complex algorithmic problems to verify blockchain transactions is an undeniable “Environmental” offender, the E of ESG.1 The carbon footprint is massive – Bitcoin’s annual electricity consumption puts it at the edge of being the equivalent of a top 30 country. In one year, it uses around the same electricity as the entire population of Pakistan (c.217m people) and in the developed world more than Holland’s (c.17.5m people).2
Looking at the S (“Social”) of ESG, Bitcoin gets low marks here as well for human rights. For Bitcoin, decision-making is not subject to a centralized authority (i.e., no “censorship”); therefore, anyone can mine bitcoin. A large amount of new Bitcoin comes from Xinjiang, the region in northwest China where more than a million Uighur Muslims and other minorities have been imprisoned in concentration camps. Roughly 20% of the world’s Bitcoin mining takes place in China’s Xinjiang region because costs to mine Bitcoin are cheaper by using coal (another environmental concern).3
Now let us look at the G (“Governance”) of ESG and the fact that the anonymous nature of Bitcoin transactions has the potential to facilitate criminal activity.
There are many environmental, social, and governance reasons not to buy Bitcoin on top of the regulatory reasons and the rampant speculation occurring with some of the cryptocurrencies. It is important to note the technology behind various cryptocurrencies has merit. Imagine a world where transactions costs are near zero, the integrity of the transaction can be quickly verified, the transaction happens almost immediately, and the system is secure from an outside attack. This is the blockchain opportunity and it goes beyond finance. To learn more about blockchain, click here to watch our “Blockchain and Cryptocurrencies” webinar.
BFSG recently launched “Climate Change and Green” investment portfolios built on the fundamental investment principles that have guided our company’s value analysis and interject important environmental factors into our investment process. You will not find Bitcoin investments in our Green Portfolios, but we will invest in the securities of environmentally (green) responsible and sustainable global companies that make an environmental contribution. We are excited to be environmental investment stewards in the search for new green investments and if you are interested in learning more, please reach out to your BFSG financial adviser.
- Many governments around the world could eventually regulate cryptocurrency mining and force these miners to use renewable energy to some degree or promote carbon credits.
- Source: University of Cambridge, Deutsche Bank, “Chart of the Day: Bitcoin and ESG…”, February 19, 2021
- Source: Barron’s, “Bitcoin’s Worrying China Connection”, February 22, 2021
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