Is Blockchain the ultimate ESG investment?
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 2018estimates 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.
The Obvious Use Cases
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 cn 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:
- More Collaborative
- More Transparent
- More Secure
- More Accurate
- More Consistent
- More Timely
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:
- Environmental: Climate Change — Blockchain is perfect for tracking carbon credits, and there are already several companies working on this problem. (Carbon Grid Protocol, Carbon X, Veridium, Poseidon, and others)
- Social: Product Liability — Blockchain’s immutable public database makes it ideal for supply chain logistics in pharmaceuticals to combat counterfeit drugs and medical devices
- Governance: Corporate Governance — This might be the space where blockchain has the greatest impact. The consensus mechanisms and ability to gauge participants preferences of blockchain are spurring tremendous innovation in this area. If you want to go deep, check out Governance in the Blockchain Economy: A Framework and Research Agenda.
These use cases alone should make investors interested in ESG look into blockchain projects.
The Bigger Picture — The Death of Trust
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?
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About Rayne Steinberg:
Rayne Steinberg is CEO and co-founder of Arca. Prior to founding Arca, Rayne co-founded asset management company, WisdomTree. There, he was responsible for raising capital, creating intellectual property and building and overseeing the sales team responsible for raising $50 billion in ETF AUM.
About Arca:
Arca is a full-service investment management offering institutional-caliber products for institutional and accredited investors to confidently gain exposure to digital assets. Arca blends the stability of traditional finance with the transparency, immutability, and transactional efficiency of the blockchain technology to create better, stronger, and faster financial products. The suite of investment products gives investors access to current blockchain products while building the infrastructure that will support the ability for any asset, in any asset class, to become a digital product.
