Does Crypto Have a Place in an ESG Portfolio?

  • Institutional investors may not be as concerned about ESG when it comes to crypto allocation as they once were
  • Bitcoin mining continues to dominate ESG discussions around crypto investing

Institutional investors that have shied away from cryptocurrencies on concerns that the asset class did not meet environmental, social and governance (ESG) standards are having a change of heart, analysts say. 

As traditional financial institutions start to take a closer look at allocating capital to the digital asset space, crypto’s once nefarious reputation may be starting to change.

“If you had asked me a year ago about ESG, I would have said yes, it is a primary concern, especially since it was such a hot topic in the media,” said Martha Reyes, head of research at Bequant. “Now, I don’t think ESG is a primary concern, but it is still relevant.”  

Institutional investors are more concerned with regulation and security than ESG when it comes to digital assets, Reyes said.

Research from Fidelity Digital Assets shows that most institutions are worried about volatility in the asset class more than anything else. 

“While ESG does come up in conversations I have, it comes up a lot less than I think what people think it does,” said Chris Kuiper, head of research at Fidelity Digital Assets. “I don’t know if this is just because it’s not as big of a concern or because these investors are just still so early on their journey and they have not gotten to ESG yet.” 

Of the ESG concerns that do exist around crypto investing, environmental concerns come up the most, experts agree. The narrative that bitcoin and other cryptocurrency mining is harmful for the environment that has been prominent for years continues to linger. 

“We have conversations with institutions that have questions and concerns about ESG and what I find curious is there tends to be a specific focus on the ‘E’ component and less of a focus on the ‘S’ and the ‘G’ components,” said Christine Sandler, head of sales and marketing at Fidelity Digital Assets. 

The crypto mining industry has made strides in recent years to be more transparent about where energy is coming from, Sandler said. There are also a number of efforts to offset carbon emissions and use renewables, helping to ease environmental concerns. 

“There’s a lot more awareness and the industry is a lot more proactive,” said Reyes. “We have the Bitcoin mining Council, which is skewed towards the US and the Nordic countries and of course they use voluntary reporting, so it’s going to be biased, but it’s a move toward transparency.”

Mining energy usage also impacts more than just the environment, Kuiper pointed out. The social and economic value of digital asset technology needs to be considered in discussions of energy usage and ESG concerns, he said. 

“I think the question people need to ask themselves is, is this a valuable technology?” 

“Bitcoin uses a lot of energy, but compared to what?” Kuiper said.

ESG investing boom 

Interest in ESG-focused investing has exploded in recent years. Inflows into sustainable open-end and exchange-traded funds in the US rose to a record $83.04 billion in the first half of 2021, according to ETFGI data. Inflows for the first six months of 2021 came in just shy of the total inflows for 2020, which was $88.95 billion. In 2018, inflows were $5.4 billion. 

“Now, everyone sees a business opportunity around ESG, they slap ESG labels on everything,” said Reyes. 

The rise of ESG has sparked concern and controversy over reporting requirements. The US Securities and Exchange Commission (SEC) has warned investors to be careful when taking ESG labels at face-value, but has not yet set any requirements around product labeling. 

“There are inconsistencies around the benchmarks that measure ESG in traditional markets, so these are the sorts of issues that need to be sorted out,” Reyes said. “We don’t know yet how this will play into the digital asset space, but it will happen.”

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