• Institutional traders could also be experiencing a “creeping” publicity to cryptocurrency, as new firms constructed across the asset class are added to indexes and older, established firms put money into cryptocurrency.
• At the very least 52 public firms lined by MSCI ESG Analysis have publicity to cryptocurrencies together with 26 constituents of the MSCI ACWI Index.
• Most of the ESG dangers related to cryptocurrency will likely be comparatively acquainted, however others — such because the governance of cryptocurrencies themselves — are more likely to be new for boards and traders alike.

Institutional traders might have extra publicity to cryptocurrency threat than they understand. Twelve years since Bitcoin’s creation, cryptocurrencies right this moment are part of enterprise for a minimum of 52 firms lined by MSCI ESG Analysis, as of September 2021. These cryptocurrency-exposed firms embrace 26 constituents of the MSCI ACWI Index.

An illustrative pattern of those firms is about out within the exhibit beneath:

Cryptocurrency-Uncovered Firms

This interactive chart units out an illustrative, non-exhaustive pattern of 23 firms in our protection with direct or oblique cryptocurrency publicity, together with these with exploratory involvement in cryptocurrency. Place on the y-axis signifies the percentile rank of every firm’s company governance rating, assessed underneath the MSCI ESG Rankings methodology and relative to our world protection, with larger numbers indicating a greater rating. Place on the x-axis signifies every firm’s market capitalization, set out on a logarithmic scale. Coloration signifies every firm’s World Business Classification Normal (GICS®) sector. GICS is the worldwide business classification normal collectively developed by MSCI and S&P World Market Intelligence. Hover over or faucet a circle to see extra particulars about every firm. Further cryptocurrency-exposed firms are identifiable by way of our customized screening options. Knowledge as of Sept. 29, 2021. Supply: MSCI ESG Analysis LLC

Whereas Bitcoin stays a spotlight for a lot of of those firms, the variety of cash has exploded lately. Coinbase — a cryptocurrency trade, and one of many uncovered firms recognized in our protection — tracks over 5,000 cash and facilitates trades within the largest cash by market capitalization. Whereas most cryptocurrencies are speculative investments with little evident utility, some have seen restricted success as real currencies, and plenty of have posted eye-popping returns. This development has contributed each to the rise of cryptocurrency-exposed firms and efforts by established firms to achieve cryptocurrency publicity.

How ‘Creeping’ Cryptocurrency Publicity Works

This diagram illustrates how fairness traders may passively and unintentionally acquire cryptocurrency publicity. Supply: MSCI ESG Analysis LLC

Fairness traders — even these with important reservations in regards to the extremely unstable asset class — could also be confronted with “creeping” cryptocurrency publicity. This will happen when newly listed cryptocurrency firms get added to the indexes that information their investments, or when firms wherein they’re already invested, immediately or by indexes, announce methods that embrace Bitcoin or different cryptocurrencies.

The ESG Dangers of Cryptocurrency

What are the important thing environmental, social and governance (ESG) dangers related to cryptocurrency publicity? What are among the issues for traders when assessing the ESG practices of cryptocurrency-exposed firms? We recognized a variety of potential dangers, together with:

• Environmental: The important thing environmental dangers from cryptocurrency publicity embrace greenhouse-gas emissions from power utilization and digital waste (e-waste). Completely different cash have completely different environmental impacts, with Bitcoin (and different proof-of-work cryptocurrencies) displaying proof of upper influence. Figuring out the place mining happens and what power sources are used is essential to assessing a coin’s emissions profile.
• Social: The character and scope of cryptocurrency’s social influence stay unsure. Investor safety and training are necessary dangers for firms that facilitate direct cryptocurrency funding. Transaction disputes might also pose a threat for firms that settle for cryptocurrencies as cost.
• Governance: Boards of cryptocurrency-exposed firms might have to adapt present threat administration insurance policies and practices to the precise dangers arising from cryptocurrencies. Many of those subjects will likely be comparatively acquainted (for instance, finance, cybersecurity and anti-money-laundering insurance policies), however new and important dangers might come up from how the cash themselves are ruled.

Understanding Cryptocurrency Governance

Specifically, the governance of cryptocurrencies might current some new challenges for boards and traders alike. By design, most cryptocurrencies are decentralized; no single decision-making physique oversees a cryptocurrency’s technique and path. The absence of a standard governance construction doesn’t, nonetheless, imply the absence of governance. Decentralized cryptocurrencies are supported and promoted by casual and dynamic communities of software program builders, cryptocurrency miners and different actors. Whereas the problems these actors deliberate are sometimes technical, their choices can culminate in important adjustments to cryptocurrency economies.

At a minimal, traders might profit from understanding how managers and administrators of cryptocurrency-exposed firms are monitoring developments in these casual governance frameworks. For firms with extra important publicity, investor pursuits could also be higher served by being extra actively concerned. This might embrace participating in actions reminiscent of:

• Encouraging or funding the event of cryptocurrency protocols
• Supporting decentralization inside the cryptocurrency’s monetary ecosystem
• Participating with different actors inside the cryptocurrency’s governance framework

No matter whether or not a cryptocurrency-exposed firm passively screens or actively engages within the governance of cryptocurrencies, understanding the way it approaches the intersection of its strategic plan and the long-term growth of cryptocurrencies might assist traders make extra knowledgeable threat choices.

The authors thank Yu Ishihara for his contributions to this submit.

Additional Studying

Our Solely Cryptocurrency Episode (ESG now podcast)

Creeping Crypto: The ESG Dangers of Cryptocurrency (obtainable to ESG purchasers solely)

Bitcoin: Good as Gold?

MSCI Views Podcast: NFTs and Players and Bitcoin? Oh My!