This essay summarizes new research findings regarding cryptocurrency-exposed companies (companies that hold cryptocurrencies) and why they should be excluded from Environmental, Social, and Governance (ESG) investment funds. ESG is an amorphous term with no universally agreed-upon definition. The environmental factor includes considerations like a company’s pollution, water usage, and effects on biodiversity. Social factors include pay equity, diversity, customer privacy, and access to healthcare. Governance factors include political contributions, reporting transparency, internal controls, and lobbying efforts. By 2026, ESG investment funds are expected to more than double in the United States to $10.5 trillion, from just $4.5 trillion in 2021.
While currently less than a third of its late 2021 market cap peak, cryptocurrencies like Bitcoin and Ethereum have nevertheless experienced a similar surge in popularity. Modern companies have not ignored the meteoric rise of cryptocurrencies. Many companies accept cryptocurrencies as payment, hold cryptocurrencies on their balance sheet, or otherwise promote the use of cryptocurrencies. Major corporations such as Microsoft, AT&T, and Starbucks accept Bitcoin payments. At one point in 2021, 52 companies that represented $7 trillion worth of stock were exposed to cryptocurrencies. Virgin Galactic allows customers to pay for space travel using Bitcoin. Sports franchises such as the Miami Dolphins and Dallas Mavericks accept Bitcoin to purchase tickets. KFC Canada created a “Bitcoin Bucket” product that could be purchased with Bitcoin.
The case for removing cryptocurrency-exposed companies from ESG funds is straightforward: Cryptocurrencies do far more environmental and societal harm than good, and companies that promote the practice by holding them—often from accepting them as payment—are not behaving consistently with ESG principles. The environmental harm directly resulting from cryptocurrency mining alone justifies this position. Bitcoin mining alone generates over sixty million tons of CO2 annually. This is the equivalent of burning 66 billion pounds of coal. Additionally, because cryptocurrency mining requires the latest specialized computer hardware to be efficient, this hardware is frequently replaced and not easily repurposed. As a result, Bitcoin mining creates 11,500 tons of hazardous electronic waste annually. Cryptocurrencies also help facilitate illegal transactions such as human trafficking, murder for hire, illegal drugs, illegal weapons, terrorism, and identity theft. Investing in cryptocurrencies diverts money away from traditional investments in stocks and bonds and therefore diminishes the positive externalities, like hiring more workers and producing vaccines, safer cars, less expensive food, and crime prevention tools. The largely unregulated nature of cryptocurrencies makes them ideal for fraud, such as the over $1 billion in customer funds missing from the November 2022 collapse of Sam Bankman-Fried’s FTX. Finally, cryptocurrency’s popularity undermines the U.S. dollar’s current position as the standard for international transactions, which risks transitioning U.S. authority to other, more dubious countries.
Perhaps the worst part of these environmental and societal harms is that there are little to no benefits that would justify them. For example, Exxon Mobile is sometimes excluded from ESG funds because its fossil fuel production contributes to global warming. While true, this harm must be balanced against the benefits created, such as low-cost air travel, life-saving backup generators, and large-scale heating and air conditioning. But as we see with cryptocurrencies, the alleged benefits, are largely illusory. Due to a limited ability to scale, cryptocurrencies would be inefficient as a widespread currency. The decentralized nature of cryptocurrencies potentially benefits those living under oppressive regimes, but limited access to secure internet and vendors who accept cryptocurrencies in these countries severely limits this potential benefit. Cryptocurrencies are not an attractive alternative to avoiding currency conversion fees due to their volatile nature, fee structure, and the fact that there are multiple different cryptocurrencies. Cryptocurrencies are also not an attractive method for investment portfolio diversification. Finally, the decentralized nature of cryptocurrencies is more of a negative than a positive as that allows for 51% attacks and hyperinflation of the cryptocurrency.
Weighing the benefits against the harms leads to the clear conclusion that cryptocurrencies produce far more harm than benefits. When comparing the cryptocurrency industry to other companies that have been excluded from ESG funds, it becomes even clearer that their exclusion is not only justified but necessary to avoid unjustifiable inconsistency in who should be allowed to be included in ESG funds.
Adding cryptocurrency exclusions to ESG standards is not only justified by existing ESG criteria; it has the added benefit of being easily applied. Determining whether a publicly traded company owns cryptocurrencies on its balance sheet and accepts cryptocurrencies as payment is easily ascertainable. It is also a binary determination not dependent upon subjective personal opinion. Another benefit to adding cryptocurrency exclusions to ESG standards is that compliance would be relatively easy and, therefore, would result in more acquiescence on behalf of companies. And unlike other ESG standards, such as corporate statements on diversity and inclusion, cryptocurrency divestiture is not just a statement regarding positive change––it is a positive change.
The timing of this issue is highly significant as recent converging events have created a potential turning point regarding the future of ESG investing and mitigating harm from cryptocurrencies. Key investing demographics have shown an increasing interest in ESG investments. Legislators have demonstrated an interest in new regulations for cryptocurrencies and ESG funds, which has sparked a powerful lobbying effort from cryptocurrency advocates. States such as Florida, Louisiana, and West Virginia have divested from all ESG funds. Newly elected legislators have vowed to investigate ESG funds, attacking them as “a cancer within the U.S. economy.” Finally, the legitimacy of ESG investing criteria has been called into question by recent, seemingly inconsistent decisions such as the S&P Sustainability Index in 2022, excluding Tesla but allowing Exxon Mobile.
Michael Conklin is the Powell Endowed Professor of Law in the Department of Accounting, Economics, and Finance at Angelo State University.
Jason Malone is an Associate Professor of Practice at Virginia Tech University.
This post is adapted from their paper, “Putting Cryptocurrency in Its Place: The Case for Why ESG Funds Should Exclude Cryptocurrency-Exposed Companies,” available on SSRN.