Risk warnings
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
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 through a decentralised system with no central authority, where trading is directly peer-to-peer. Learn more here.
On the surface, the proposition from Bitcoin to democratise financial markets and lower transaction costs 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.
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.
All of this is to say that, overall, we consider Bitcoin, and many 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
Risk warnings
The value of investments and any income derived from them can go down as well as up and investors may not get back the original amount invested.
The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.
Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.
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David Sneyd, Vice President, Responsible Investment
After studying philosophy at university, David entered the responsible investment industry 13 years ago, with a desire to use investor influence to improve the sustainability of companies. He covers US corporate governance, data stewardship and the technology sector within the Responsible Investment team. Outside of work David likes to spend time in Brighton, where he lives, and recently took up the hobby of lockpicking.
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