Environmental, Social and Governance (ESG) investing is important -- there is no denying that. The recently published Report on US Sustainable, Responsible and Impact Investing Trends 2018 estimates that the assets tied to ESG investments in the US alone reached nearly $12 Trillion dollars by the end of 2018:
Investors have become more concerned with societal impacts of their investments, so funds and products have been created to meet these needs. What is less accepted, and perhaps counterintuitive, is the fact that crypto and blockchain may be the ultimate ESG investments.
To understand why blockchain technology is potentially a great ESG investment, it is important to have a broad understanding of what it does. BMO explains it as:
In its simplest form, it can be best described as a “distributed ledger” technology. A “ledger” is essentially a list that gathers in one place a collection of transactions or records of information. “Distributed” means that this ledger is shared between a network of peers rather than stored in a central location and administered by a single authority.
This decentralized structure makes it useful in several ways:
These inherent qualities overlap with many areas of ESG investing. MSCI breaks them down broadly as follows:
Let’s look at a few areas where blockchain’s overlap:
These use cases alone should make investors interested in ESG look into blockchain projects.
Beyond these straight line use cases lies an even more fundamental ESG application. Blockchain technology is the technology behind Bitcoin and all cryptocurrencies. Bitcoin was born out of the financial crisis and was designed to solve the problems that arise when trusted financial authorities like central banks and systemically important financial institutions no longer fill their broader societal obligations.
You have the very concrete monetary losses of the great recession, that the Federal Reserve Board estimates cost every American approximately $70,000. The dollar costs, while significant, are not paramount. The real and harder to measure damage was the erosion of trust. And the ramifications from this may be much more serious and far-reaching.
In complex societies, trust is an underrated and misunderstood component. Even going all the way back to Adam Smith’s The Wealth of Nations, trust is identified as a major ingredient in the complex stew of economic success.
Trust is needed to spur the accumulation of capital to be deployed in economic activity. The Journal of the History of Economic Thought puts it thusly:
Clearly, there is no incentive to accumulate capital if that stock is at all times vulnerable to the whim and power of individuals and institutions that feel no constraint in taking it. The emergence of accumulation depends, therefore, on trust that this accumulated wealth will be secure. The constraints of civic ethics and positive law are the only barriers that stand between one’s wealth and its loss to unconstrained greed.
Our current society is suffering from a crisis in trust. Trust in government, NGOs, the media and almost every institution are at all time lows. The faltering trust in money is just a further extension of this phenomenon. And this is bad news for society in general.
When trust erodes, extremism tends to rise. We have seen an explosion of populism and a shift to the extremes across the globe. Ray Dalio and Bridgewater has been tracking it and associates it with major cataclysmic events. Their Developed World Populism Index has not been this high since the outbreak of World War II, and we all know how that ended.
Blockchain and cryptocurrencies have the potential to help restore trust throughout our financial system. This, in turn, could mitigate or prevent a societal calamity on the order of magnitude of a Major Power conflict. Considering the stakes, is there an ESG investment application with greater potential impact than this?
Disclaimer: This commentary is provided as general information only and is in no way intended as investment advice, investment research, legal advice, tax advice, a research report, or a recommendation. Any decision to invest or take any other action with respect to any investments discussed in this commentary may involve risks not discussed, and therefore, such decisions should not be based solely on the information contained in this document. Please consult your own financial/legal/tax professional.
Statements in this communication may include forward-looking information and/or may be based on various assumptions. The forward-looking statements and other views or opinions expressed are those of the author, and are made as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated and there is no guarantee that any particular outcome will come to pass. The statements made herein are subject to change at any time. Arca disclaims any obligation to update or revise any statements or views expressed herein. Past performance is not a guarantee of future results and there can be no assurance that any future results will be realized. Some or all of the information provided herein may be or be based on statements of opinion. In addition, certain information provided herein may be based on third-party sources, which is believed to be accurate, but has not been independently verified. Arca and/or certain of its affiliates and/or clients may now, or in the future, hold a financial interest in investments that are the same as or substantially similar to the investments discussed in this commentary. No claims are made as to the profitability of such financial interests, now, in the past or in the future and Arca and/or its clients may sell such financial interests at any time. The information provided herein is not intended to be, nor should it be construed as an offer to sell or a solicitation of any offer to buy any securities, or a solicitation to provide investment advisory services.