What’s an ESG Fund to Do? Bitcoin’s “Dirty” Secret

What’s an ESG Fund to Do? Bitcoin’s “Dirty” Secret

Bitcoin has a dirty little secret says business channel CNBC.  Apparently, “mining” bitcoins takes up huge amounts of energy.

Bitcoins are “mined” or created by people all over the world using their computers to solve complicated math problems. Every 10 minutes, someone, somewhere, solves a problem and is rewarded with bitcoins. Then a new math problem is generated and the “mining” starts all over again. Why does this gobble up energy? Like any finite resource, the rarer it gets, the harder (therefore more energy) it is to find. In the case of bitcoin miners, they’re now having to dig deep.

When bitcoins first came to the scene in 2009, the average computer could mine a bitcoin.  But the developers, whoever they are (no one knows for sure), set the finite number of bitcoins to 21 million. There are now approximately 18.5 million bitcoins in “circulation”, but the math problems to acquire the remaining bitcoins have become so difficult that miners need high-end computers with huge processing power.

Danny Bradbury of The Balance, a personal finance website explains: “Although the time taken to produce a bitcoin doesn’t vary, the computing power used to produce it does. As more people join the bitcoin network and try to mine bitcoins, the puzzles become harder, and more computing power and electricity are used for each bitcoin produced.”

According to the Cambridge Bitcoin Electricity Consumption Index, the energy it takes to create bitcoins has soared, climbing to the equivalent annual carbon footprint of Argentina. Power Compare, a UK firm, reported in 2018 that bitcoin mining consumed more electricity than 173 countries.

This puts ESG (environmental, social, and governance) fund managers and institutional investors in a conundrum.  While bitcoin’s price has soared, its green credentials have plummeted. Companies holding bitcoins on their balance sheet such as Tesla, Square, and PayPal may soon find their “socially responsible” credentials sullied.  Are these companies truly green?

The fact is, ESG funds are all over the map when it comes to applying the ESG criteria.  PRI senior fellow Wayne Winegarden, in his study, Environmental, Social, and Governance (ESG) Investing: An Evaluation of the Evidence writes, “Some ESG funds are, for all intents and purposes, broad-based index funds that simply exclude certain industries (e.g. gun or tobacco manufacturers). Other ESG funds will actively invest their money into companies that are pursuing specific ESG goals such as alternative clean energy.”

The bottom line is that the ESG criteria is so subjective that it’s impossible to attribute what’s driving ESG funds’ performance.  Is it companies with balance sheets stacked with bitcoins? A digital transformation wave due to the pandemic?  The Biden administration’s partiality to “green” industries? As Winegarden shows in the PRI study, ESG funds over the long term have not outperformed plain vanilla S&P 500 Index funds, proving that over time, companies with strong earnings and balance sheets manage to find their way to investors’ portfolios, whether they are ESG or not.

Rowena Itchon is senior vice president of the Pacific Research Institute.   

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