Responsible Investment

How ESG is Bitcoin?

Discover what positive and negative ESG issues apply to Bitcoin and whether the cryptocurrency is a responsible investment.
February 2021

David Sneyd

Vice President, Responsible Investment

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Record prices have put Bitcoin back into the headlines, with the recent increases reflecting a growing acceptance from institutional investors that cryptocurrencies may be a credible asset class. However, for those who wish to invest responsibly with environmental, social and governance (ESG) considerations at the forefront, it is not immediately clear if this technology is suitable.

Before we get into it, let’s define what Bitcoin actually is. It is a digital currency (or ‘cryptocurrency’) that offers lower transaction fees than traditional online payment methods. Unlike government-issued currencies (the British pound, US dollar etc), it is operated by a decentralised authority. Learn more here.

Bitcoin’s potentially positive ESG factors…

On the surface, the proposition from Bitcoin to democratise financial markets by removing intermediaries certainly does have its social advantages. For example, reducing the cost of remittance corridors between richer and poorer countries, through which migrant workers send funds home to their families, feature within the UN’s Sustainable Development Goals (SDGs). In addition, the anonymity that Bitcoin and other cryptocurrencies provides can give security to those under oppressive regimes or provide a level of privacy to users that is being eroded in these digital times.

…versus its negative ESG factors

This decentralised monetary model reliant upon advanced cryptography comes at a significant environmental cost. As widely reported, Bitcoin’s estimated annual power consumption matches that of various countries around the world. Back in 2018 the Guardian flagged that the Bitcoin network was consuming more power than the likes of the Republic of Ireland and Hungary. More recent analysis from Digiconomist puts Bitcoin’s annual energy consumption just behind that of Chile. More significantly, with two-thirds of mining taking place in coal-heavy regions like China where energy costs are subsidised, the resultant carbon footprint is huge. Over the long term, it is difficult to see how this is consistent with a transition to a low carbon economy.

In addition, Bitcoin needs to work on shedding its shady reputation amongst financial regulators that its design prioritising anonymity means it has historically been used online to facilitate money laundering and financed criminal activity that undermines social institutions. Just last month headlines such as this one by The Times reported European Central Bank President Christine Lagarde’s call for regulation to address ‘funny business’ associated with the cryptocurrency. Although still not anywhere near as significant as the use of conventional cash for these purposes in the offline world today, its use as a digital currency used predominately online makes this comparison seen as less relevant to these gate-keepers. This is changing as more transactions take place on formal exchanges that have anti-money laundering and “Know Your Customer” (KYC) procedures in place, but recent comments by the Biden administration show that this opinion remains a headwind.

Our verdict

All of this is to say that, overall, we consider Bitcoin, and other cryptocurrencies, to be a net negative from an ESG standpoint. As it currently stands, the positive potential of Bitcoin remains unproven, but the negatives are very real and present.

Yet that is not necessarily the end of the story, as we consider that the blockchain technology that underpins cryptocurrencies has a lot more promise at providing solutions to long-standing ESG problems. By offering a new method to record information in a manner that is more open while also being secure, it could address issues with supply chain traceability, renewable energy distribution, anti-money laundering and proxy voting. It might not grab the headlines in the way that its cryptocurrency cousins have done so before it, but in the background (or rather back-office) and behind the scenes, it could provide exciting opportunities in helping companies tackle the sustainability issues that their businesses face.

Interested in discovering more about how blockchain works, its advantages and ESG applications? LEARN MORE

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Disclosures

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms. 

®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

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