The demand for environmental, social and governance (ESG) investing is accelerating, and several key trends are emerging — from climate change to social unrest. The coronavirus pandemic, in particular, appears to have intensified discussions about the interconnectedness of sustainability and the financial system.
Blockchain has emerged as a powerful and transformative technology of the 4th industrial revolution and is being used across an ever-growing range of sectors, but its energy footprint has been deemed as unsustainable at the current pace. As a result, many investors with a focus on ESG issues are still hesitant to participate in this new technology, despite the potential profits.
2021 is the year that ESG investment propelled the largest shift in capital allocation, and ESG considerations are steering business decisions in a way that has never been seen. The singular corporate single bottom line of profit at all costs is changing to a “triple bottom line” focused on people, planet and profit.
“When investors come in, they’re looking for an ESG-compliant company investment opportunity before they allocate funds into a specific proposition, project, opportunity, company or business,” said Stefan Rust, CEO and co-founder of Sonic Capital and HydrogenX, in an interview with Forkast.News.
According to the latest Bloomberg Intelligence ESG 2021 Midyear Outlook report, ESG assets are on track to exceed US$53 trillion by 2025, representing more than a third of the projected US$140.5 trillion in total global assets under management. Bloomberg Intelligence also reported that the S&P 500 ESG Index has outperformed the S&P 500 Index year to date by around 15%.
Despite the bad press, Blockchain-based technology and business solutions show significant potential to deliver a positive impact on society and the environment, and products are coming to market for the ESG focused investor.
Blockchain for the planet
The 17 U.N. Sustainable Development Goals (SDGs) aim to address the world’s most pressing challenges. Climate Action is one of them, and the U.N. goal requires a strict reduction in greenhouse gas emissions as well as climate adaptation action or taking action to prepare for the effects of climate change and the predicted impacts in the future.
In collaboration with Zurich-based Tavis Digital, Sonic Capital has launched Sphere, a new investment product that uses the U.N. Sustainable Development Goals framework as a guide while applying ESG investment criteria.
According to Rust of Sonic Capital, an ecological blockchain industry is evolving. While the market is still nascent, Sphere sees an endless capacity for growth. Its potential becomes increasingly more evident with the uptick of blue-chip corporates entering the space and their desire for a more fluid, efficient and transparent marketplace.
“We break down ESG into three compartments: energy, carbon, and sort of other, and if you combine all of those ESG activities, you’re seeing a large movement from corporations and enterprise into those categories, from all the big tech companies to multinationals, as well as to local governments trying to drive that and make that aligned with the 17 SDG goals that the U.N. has stipulated,” Rust said.
Particularly in Asia, Rust sees sustainable investment as being largely driven by government support and an effort to drive greater inclusion of traditionally underrepresented groups across the markets.
“In China, it’s a big mandate. It’s huge. In Korea, the premium for being ESG compliant or SDG compliant is very high, higher than anywhere in the world,” Rust said. “The more developed markets are very bullish on it and taking proactive steps in that direction.”
Through Sphere, investors can capitalize on the growing opportunities of the sustainable economy and technology sector by identifying blockchain protocols with a positive environmental impact.
“We truly believe in the potential and the future of impact-relevant blockchain technology applications and their ability to generate a positive impact on society and the environment,” said Christian Speckhardt, partner at Tavis Digital and impact investment veteran in an email to Forkast.News.
Blockchain is misunderstood
The carbon footprint of Bitcoin’s blockchain has become a growing concern for environmentally conscious investors. In fact, the recent crypto market crash initially began in mid-May, when Elon Musk suddenly declared that Tesla would no longer accept Bitcoin as payment due to environmental concerns.
Blockchains like Bitcoin work off of proof-of-work algorithms, which must be solved by computers through cryptographic calculations in order to mine the BTC tokens. The energy required by miners for these calculations results in high energy consumption.
However, Sphere will have a focus on proof-of-stake blockchain investment. Staking is estimated to use 99.9% less energy than existing proof-of-work systems. This allows investors to profit while helping move the industry towards greener solutions.
Despite the focus on proof-of-stake, Rust argued that there were actually a lot of misconceptions in the industry around proof-of-work.
“Around 60 to 70 percent of the electricity consumed by proof-of-work networks are actually sourced from renewable energy sources or even sourced from wasted electricity that will not be pumped into the grid,” Rust said. “In essence, proof of work is a lot more environmentally friendly than a lot of people think.”
Sphere is an Actively Managed Certificate (AMC), which are bankable securities that can be purchased via a Swiss International Securities Identification Number (ISIN). Investors will be able to participate in impact-related blockchain technologies via their respective crypto assets, which offers the potential for price appreciation in addition to staking rewards, according to Sonic Capital.
The AMC also removes the complexities of the crypto world for new investors and provides a fiat on-ramp. By providing the bank with Sphere’s ISIN, investors can subscribe directly via an existing bank account — comparable to buying traditional equities.