Is it crucial for cryptocurrencies and blockchain to be Environmentally-friendly? What does it mean for crypto stakeholders? And how ESG reporting can help?

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Coinmonks

8 min readMay 16, 2022

Given the recently growing media attention to the massive Bitcoin, Ethereum and other cryptocurrencies’ carbon footprint related to enormous energy consumption, crypto stakeholders are questioning the future of blockchain technology or at least demanding effective alternatives.

Stakeholders (investors, customers, regulators and the public) want to encourage blockchain companies to improve their ESG and sustainability disclosure and reporting practices. They demand transparency and it is not enough anymore saying that our crypto is eco-friendly, stakeholders require facts — audited sustainability report showing current carbon footprint and plans to become net-zero.

In this paper, Hermesnet discusses the increased scrutiny surrounding cryptocurrencies from a sustainability point of view and how they can become a credible alternative asset class from an ESG perspective. We will deep dive into the emergence of cryptocurrencies and why suddenly both investors and business has shied away from it, and how it can become an integral part of the green transition towards a net-zero stable blockchain and crypto economy.

For crypto and blockchain, the importance of the environmental factors and carbon footprint has increased tremendously in the last couple of years for two main reasons: regulatory pressure and blockchain community demands.

Regulatory pressure

The Paris Agreement from 2015, the COP26 meetings, and the latest IPCC reports set global frameworks and policy ambitions on tackling climate change and greenhouse gas emissions, which forces large corporations, heavy emitting sectors such as oil & gas, energy, airplanes, manufacturing and cement, and constructions industries to act now.

Overall, the main forces for the strive towards net-zero are driven by regulators setting ambitious climate regulatory packages in place targeting the mentioned sectors. And by extension impacts the whole society in general and influences the demand for sustainability reporting across the business.

Governments worldwide have set climate-related targets of reaching net-zero targets, much in line with the 1.5-degree target. This means that companies, sectors, and countries need to lower their carbon emissions drastically. Otherwise, we hear heading towards trespassing our planetary boundaries and the tipping points as outlined in the latest IPCC report.

There is no direct regulation of blockchain and cryptocurrency sectors, but massive sectors’ electricity consumption influences our society’s perception and forces the industry to act accordingly.

Blockchain community demands

In the light of combating climate change and the externalities that will follow, there has been an increased focus on setting carbon footprint trajectories and conducting sustainability assessments to get a sense of how significant the impact is for particular industries and companies operating in those industries.

Carbon footprint is a big problem for cryptocurrencies because the majority of investors (77%) are aged under 45, according to a study published earlier this year by Gemini Exchange. These consumers are also more eco-conscious than older generations.

For the general public, the debate and critics came after Elon Musk, in May 2021, decided not to accept Bitcoin as a valid payment for their cars. This, of course, sheds ample light on the problem with most cryptocurrencies, which are, in general, very energy-intensive.

Every year, the world is also getting increasingly more digitalized, the speed of the technology revolution is accelerating, and the blockchain industry should follow the trend.

Crypto emissions

The biggest and most famous cryptocurrency now is Bitcoin, and its emissions have grown rapidly in the last two years, as shown below.

By the amount of energy consumed by data centres, these servers, on their own, are emitted more carbon dioxide than some industrialized countries in Europe. According to research from Bank of America, bitcoin emissions are equal to those of Greece. At the same time, Cambridge Bitcoin Electricity Consumption indexes indicate bitcoin consumes more energy than countries such as the Netherlands, Argentina, and the UAE in a year.

**Bitcoin energy consumption compared to select countries**

In a recent study conducted by the University of Cambridge Centre for Alternative Finance (CCAF), coal power accounted for two-thirds of the energy used to perform the ‘proof of work’ process central to bitcoin’s secure production.

Considering that this process essentially involves different miners competing to verify 1MB worth of transactions — known as a hashing puzzle — as quickly as possible, this is a problem. The probability of a participant finding the solution before their competitors are proportional to their share of total mining power on a network.

In combination with the rise of more powerful and more energy-intensive graphics processing units (GPUs) and application-specific integrated circuits (ASICs), an increase in competitive miners has resulted in a vicious cycle of outpacing each other.

Environmental concerns surrounding cryptocurrency stem from mining: electricity used for powering complex algorithms and non-renewable energy sources.

The study by Bendiksen says that bitcoin miners are mobile and prefer to access the cheapest and often most easily available energy sources — not just coal. The rainy season in countries like China and the Democratic Republic of Congo is often when miners rely on hydroelectricity since these sources offer cheap power during that time. However, that is just one-third of the energy used for mining.

There is already a sense that bitcoin mining will be an ecological disaster. Most bitcoin mining is done in China, where coal is the predominant fuel. Bitcoin is mined where electricity is the cheapest, where fossil fuels are abundant. Another mining centre is Iran, where more than 90% of electricity production comes from burning fossil fuels, according to the International Energy Agency (the United States’ bitcoin output is just 7% of the total).

It is clear to everyone that the crypto industry should act now and become eco-friendly, preventing ecological disasters and saving our planet.

How cryptocurrencies can become more eco-friendly

The first and obvious option is to switch to renewable energy, but the trend is the opposite. A scientific journal article published on February 25, 2022, on https://www.researchgate.net, “Revisiting Bitcoin’s carbon footprint,” explains how information on miner locations can be used to estimate the network’s electricity mix and carbon footprint.

The article explains that after the crackdown on mining in China in the Spring of 2021, the network's percentage of renewable energy powering decreased from 41.6% to 25.1%. When miners were still in China, they had access to many renewable energy sources (i.e., hydropower during the wet season during the summer months). Still, when they were forced to move to countries like the U.S. and Kazakhstan, they lost access to renewable energy sources. In addition to raising the carbon intensity of the electricity used for Bitcoin mining, these locations now primarily provide coal-or gas-based electricity to Bitcoin miners.

In August 2021, the average carbon intensity of electricity consumed by the Bitcoin network could have increased from 478.27 gCO2/kWh in 2020 to 557.76 gCO2/kWh. The Bitcoin Energy Consumption Index provides a carbon footprint based on this carbon intensity.

**The electricity mix of the Bitcoin network over time**

Some experts believe that there are other options too. For example, some of them:

The energy efficiency of miners can be reduced by optimizing existing infrastructure or sourcing more-efficient hardware, which will reduce Scope 2 emissions. Investing in energy efficiency usually has a short payback period, after which they save money through reduced energy costs.
Changing the timing of electricity use. It is possible to reduce greenhouse gas emissions and electricity costs by shifting electricity demand to off-peak times (usually when electricity generation on the grid has low emissions).
A significant change in the location of mining operations. A new location means new electricity suppliers, renewable attribute purchasing opportunities, market actors, etc.
Incorporating on-site renewables will result in low or zero emissions under Scope 1 and reduced emissions under Scope 2. For example, solar PV on-site would not contribute to Scope 1 emissions for a mining operator. In addition, on-site clean electricity production reduces the amount of electricity that would otherwise be sourced from the power grid, resulting in Scope 2 emissions.
In addition to the green attributes of renewable-generated electricity, unbundled energy attribute certificates (EACs) such as RECs, GOs, and I-RECs allow actors to offset Scope 2 emissions with actual fossil-fueled “brown” electricity they consume. The mining industry will enable miners to achieve and claim 100% renewable energy sourcing by procuring EACs that equal the number of megawatt-hours (MWh) of electricity consumed by their mining operations. Stakeholders can obtain EACs similar to the estimated MWh of electricity use for entire cryptocurrency networks and crypto holdings to claim 100% renewable energy sourcing.

How Hermesnet can help to facilitate crypto-companies to become ESG future-proof

The future is green, and it is essential to transition to a low-carbon environment to increase crypto adoption. And here, ESG reporting and carbon inventory play a vital role in getting back the trust of investors and the general public. In the absence of standards, a lack of a centralized data service and poor market coverage severely limit the existence and availability of sustainability data within private markets, preventing the measurement, monitoring, and comparison of sustainability credentials across companies.

Where non-financial disclosures are provided, they are typically reported separately from the performance numbers related to the company’s operations. In a performance-orientated industry, merging those data sets is vital for investors and regulators to understand the correlation between sustainability credentials and performance.

To directly address these challenges highlighted above, Hermesnet has developed the Green Trusted Reporting tool (“GTR”). This SaaS platform solution will easily integrate with firms’ existing data collection and reporting tools. GTR will provide standardized tools to automate data collection and report ESG performance to investors, customers, regulators, the public, and other stakeholders and utilize encrypted and immutable fact-oriented databases on Blockchain to ensure reliability and trust in reporting.

The GTR data management tool helps clients report on their sustainability metrics. This will allow clients to produce reports and insights to share internally and externally and, by extension, be ESG compliant.

The GTR data management tool creates a circular effect that provides clients to understand, disclose and capture sustainability metrics, such as scope 1, scope 2, and scope 3 carbon footprint, to their stakeholders such as investors and to make bespoke sustainability reports.

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