Who Wins When ESG Investing Principles and Crypto Investments Collide? (1/2)

For centuries, philosophy students have wrestled with the age-old question from their instructors,

“What happens when an irresistible force meets an immovable object?” It’s an interesting theoretical discussion, which we may soon see manifest in financial markets.

Let’s consider Bitcoin/cryptocurrencies as the irresistible force and ESG investment principles as the immovable object. For clarity, ESG stands for environmental, social, and governance guidelines established under the U.N. Principles for Responsible Investment (PRI).

The PRI, is an independent body that was established in 2006. Its website provides this description:

The PRI is truly independent. It encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations. To achieve this objective, the PRI collaborated with investors around the world to develop its six overarching principles. The principles are

“…a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.” PRI encourages adopters of the principles to sign an e-document in agreement toward developing “…a more sustainable global financial system.” PRI has accumulated signatories from around the world who represent a majority of all globally managed investments.

Their guiding principles are:

• Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
• Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
• Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
• Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
• Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
• Principle 6: We will each report on our activities and progress towards implementing the Principles.

Since their inception, these principles have gained significant traction among institutional investors and fund managers. For instance, ESG investing has tripled over the past eight years to more than $35 trillion in 2020, according to research firm Opimas. That is a significant “immovable object.”

Conversely, Bitcoin was created in 2009. During the years since the BTC market cap has grown to more than $600 million globally. Furthermore, Bitcoin alone has produced a staggering 8,990,000% in gains since its creation, clearly establishing it as an “irresistible force” and institutional investors are taking notice.

Those types of eye-popping results have attracted major institutional investors, which has accelerated over the past 24 months, with billions in “smart money” pouring into Bitcoin. A recent survey conducted by European-based Nickel Digital Asset Management (Nickel), found that institutional investors and wealth managers from the US, UK, France, Germany, and the UAE with current exposure to cryptocurrencies and digital assets, reveals that 82% of those investors expect to increase their exposure over the next two years.

The study went on to state that institutional investors have a long-term perspective on Bitcoin and cryptocurrencies:

The main reason given for investing more in digital assets is the long-term capital growth prospects of cryptocurrencies and digital assets – the view cited by 58% of respondents. This is followed by 38% who said it is because having some exposure to crypto-assets means they have become more comfortable and confident in holding the asset class. Some 37% cited more leading corporates and fund managers investing in crypto assets as a reason as this too is giving them more confidence. Some of the largest corporate investments in Bitcoin have occurred this year, with billions flowing from MicroStrategy under the leadership of CEO, Michael Saylor, and Tesla (NASDAQ:TSLA), led by CEO Elon Musk.

Musk upped the ante when he then stated in April 2021 that Tesla would also start accepting Bitcoin as payment for his company’s electric vehicles to consumers.

However, since that announcement both MicroStrategy and Tesla have lost hundreds of millions in U.S. dollars beginning on May 12th, 2021. That’s the day Musk reversed the digital BTC payment deal for his Tesla e-automobiles, triggering the cryptocurrency market to crater 50% since.

Musk’s reasoning for the Bitcoin ban on Tesla car buys was due to his concerns around alleged “…increasing use of fossil fuels for Bitcoin mining.” This represented the most public collision between ESG investment principles and Bitcoin to date.

The reason being that Bitcoin produces new coins using an energy-intensive process called “Proof of Work.” This consensus model requires a significant amount of electricity to run massive computer servers. The servers work to solve a large series of sequential computations, as the miners who run the servers strive to be the first to validate transactions and score new Bitcoins.

Apparently, Musk decided he didn’t like that eco-arrangement for Bitcoin and let the world know in this tweet.

Whether intentional or not, Musk’s tweet embodies PRI’s first two principles, costing him and Saylor hundreds of millions of dollars.

This is the first part of a two-part article. You can read the second part tomorrow.

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