Bitcoin and ESG Concerns
Tesla CEO, Elon Musk, has been vocal on social media platform Twitter regarding the potential environmental harm from Bitcoin mining. Despite having concerns about the environmental impacts that the cryptocurrency poses, he mentioned that he and his aerospace company SpaceX hold the digital currency and have been accepting it for payment, but that it is set to change. Tesla’s turnabout on environmental matters has fuelled major industry players to address the Environmental, Social and Governance (ESG) aspects to justify the value of cryptocurrency and energy consumption.
Jesse Powell, CEO of Kraken, a cryptocurrency exchange company, told Bloomberg in an interview that Bitcoin is “a lot greener than people give it credit for.” To which Musk tweeted a response to, questioning his source his data. Cryptocurrencies and crypto-startups have received a reputation as big consumers of energy and not meeting ESG standards, leading to investors placing pressure of the industry toward adopting more sustainable practices. As Bitcoin and ESG-related risks battle it out, it is important to consider about the future ESG potential of cryptocurrency, and also to understand the ESG narrative.
Why is ESG Investing and ESG Risk Management an increasingly hot topic?
Global sustainability challenges such as the rise of natural disasters, privacy and data security and regulatory pressures are introducing new risk factors for investors that may not have been seen previously. As companies face rising complexity on a global scale, socially conscious investors may re-evaluate traditional investment measures to ensure that they are adopting a more sustainable investment approach. The rise of ESG concerns has caused a dramatically accelerated growth of ESG-themed exchange-traded funds (ESG ETF) where it increased by a striking 223% from 2019 to 2020.
ESG Investing is the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.
Remy Briand, Managing Director, MSCI ESG Research
What are the 3 principles for responsible investment?
ESG investing has been gaining momentum. ESG Investment has been driven by an increased proportion of investors who are looking to make a positive impact by investing in companies that are committed to being environmentally conscious, socially conscious and/or have good governance.
Some of the common ESG criteria may include the following: Being carbon negative, actively incorporating renewable energy sources, supporting income equality and diversity at the workplace etc.
1. Incorporating ESG factors into financial investment analysis and decision-making processes
ESG conscious investors actively incorporate a systematic and explicit inclusion of ESG risks and opportunities to enhance long-term risk-adjusted financial returns. On a practical level, ESG criteria can help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.
2. Analysing ESG criteria to invest based on their moral values and beliefs
Socially conscious investors analyse ESG criteria of potential investments. This is based on ESG criteria such as the incorporation of environmental, social and governance investing in alignment with an organisation or investors' moral values and beliefs.
In the past decade, sustainable and socially responsible investments often involve a trade-off on the investors' part. This includes potential profits. Although generalised, many companies have performed environmentally and socially irresponsible business practices for profit as evidenced by BP's 2010 oil spill and Volkswagen's emissions scandal.
Today, more than 11,000 companies worldwide report on how they incorporate ESG principles into their business strategies, resources, and operations.
3. Supporting impact investing to make a positive change
As ESG-centric business practices are starting to gain more traction and investment, investment firms are increasingly tracking their performance. This includes financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs, who have all published annual reports that extensively review their ESG approaches and the bottom-line results.
Impact investments are made with the intention to support positive and measurable social and environmental impact, alongside a financial return.
ESG Risk Management
ESG risks are now playing a much larger role in contributing to the overall risk exposure of organisations. With the rise of ESG concerns within the decentralised finance industry and the financial industry in general, business leaders are looking to adopt an appropriate ESG Risk Management process that sufficiently addresses the non-financial information relevant to their organisation.
Understand your ESG risk exposure and quantify ESG Value at Risk (VaR)
To adopt a holistic understanding of the full suite of risks in your organisation, it is imperative to incorporate ESG risk factors into your Enterprise Risk Management (ERM) framework. Having a holistic understanding will set a clear direction for your organisation to best enhance overall business performance.
Here at Alyne, we understand the importance of leveraging the right tool that is designed to address regulation ambiguity and can easily identify risks that will provide greater risk insights on your ESG maturity and reporting. Alyne's capabilities and comprehensive mapping of ESG-related risks provide your organisation with valuable quantified Value at Risk to give you a full picture of your overall risk exposure.