TL;DR:

• A recent report from KPMG highlights some of the common misconceptions about Bitcoin’s relationship to environmental, social, and governance (ESG) considerations.  

• The authors point out that Bitcoin is incentivizing the development of renewable energy, promoting financial inclusion, and is designed with strong governance protocols. 

• The report underscores our belief that bitcoin adoption will continue to accelerate as myths are dispelled and institutions get more comfortable with the technology. 

 

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For the past five years, most of the mainstream consensus around Bitcoin and ESG has been "Bitcoin is bad because it consumes too much energy." As a result, many investors have blacklisted Bitcoin as a de facto non-ESG compliant asset.

The reality, however, is that Bitcoin and ESG are not antonymous. This is a perspective supported by a recent study from KPMG, Bitcoin's role in the ESG imperative, which provides a much more fact-based and nuanced take than what is often seen in the media. 

One of the most important points in the paper is that perspective matters when looking at Bitcoin’s energy use (for more on this topic see our article on bitcoin mining). For example, the gold industry generates 50% more CO2 emissions than BTC, while television networks generate 500% more emissions. Yet, investors have seldom divested from or blacklisted gold, TV manufacturers, cable networks, or data centers because of their carbon emissions. What they have done is (i) encourage these industries to become more sustainable and (ii) push them to buy carbon credits to neutralize their carbon footprint. Both of these levers apply to bitcoin.

 

 

_{Source: KPMG, Bitcoin’s role in the ESG imperative}

 

 

The KPMG study also makes the ESG case for Bitcoin with some informative perspectives:

• Environmental: Bitcoin mining is incentivizing the development of renewable energy systems, as bitcoin miners act as energy buyers of last resort. Mining also helps reduce greenhouse gas emissions by repurposing flared gas from methane burning as an energy source. We have referenced separate research in the past that found that Bitcoin consumes 56 times less energy than the traditional payments industry and a single Proof-of-Work transaction is 1 to 5 times more energy efficient than traditional payment transactions¹.

• Social: The percentage of crypto used in illicit and illegal transactions is 0.24%, a tiny fraction when compared to the 2% - 5% of global GDP used for money laundering. Bitcoin also enables better remittances and cross-border payments (more convenient, cheaper, and/or faster) and financial inclusion by democratizing access to wallets to receive, send, or store value as a censorship-resistant alternative to repressive governments in many countries.

• Governance: This is an obvious strong point of Bitcoin compared to many existing monetary systems because Bitcoin is a decentralized network with known rules built into the code/system (“code is law”) that can't be abused or changed by individual participants.

 

Overall, on all three dimensions there are very sensible arguments to be made for Bitcoin. While the E factor, BTC’s environmental footprint, is usually a sticking point, there are drivers that could put investors at ease when it comes to these concerns, including:

• There is a clear trend towards the use of sustainable energy sources (renewable and nuclear) in bitcoin mining that will continue to drive the environmental footprint of mining lower: Earlier this year we wrote about this, highlighting that as of January 2022, approximately 53% of the total electricity used already came from sustainable sources, with 1% coming from flare-gas and 11% derived from renewable off-grid energy usage. 

• Some crypto companies are actively engaged in offsetting the carbon footprint of their BTC holdings. Since 2021, Hashdex has partnered with Germany’s Crypto Carbon Ratings Institute to produce an annual report on the energy consumption and carbon emissions of the Hashdex Nasdaq Bitcoin ETF, a product in which we use a portion of management fees to buy carbon credits to reach carbon neutrality.

 

Assuming a similar environmental footprint, bitcoin is likely to have a better ESG score than many traditional assets driven by the S and G. For instance, compared to precious metals such as gold or silver, bitcoin will score higher on the S (it's easier to access and cheaper to transact in than gold and silver) and G (it’s more decentralized and transparent than the gold and silver industries). So if ESG-concerned investors are comfortable with large investments in gold and silver, they certainly have no reason to dismiss bitcoin as an investment.   

Our team at Hashdex believes the days when institutional investors considered bitcoin mining a deal-breaker to allocate to crypto are over. Any intellectually honest ESG-motivated critiques of bitcoin as an investment should be supported by a rigorous analysis across the ESG factors, not simply focused on the E. Even so, a fuller understanding of bitcoin’s environmental impact should take into account the new dynamics on mining and the mitigation tools, such as carbon offsets, addressing its environmental footprint.

A month ago, BlackRock CEO Larry Fink publicly said “bitcoin is digitizing gold and has a role in portfolios.” The KPMG report, on the heels of BlackRock and other large institutional commitments to this space, is another sign that institutional adoption of bitcoin continues to gather steam. The acceptance of bitcoin by institutions is something we have anticipated for many years, and we are glad that the market consensus—on both a strengthening investment case for bitcoin and a more nuanced ESG conversation—are converging to the benefit of investors.  

 

¹ _{Khazzaka, Michel; “Bitcoin: Cryptopayments Energy Efficiency,” April 20, 2022.}

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