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PracticalESG

PracticalESG.com

Keeping you in-the-know on environmental, social and governance developments

As if cryptocurrency didn’t have enough associated controversy and risk, the European Central Bank (ECB) reminded us that:

The functioning of certain crypto-assets (like bitcoin) uses a disproportionate amount of energy that clashes with public and private environmental policies and environmental, social and governance (ESG) objectives. Government intervention is likely. Markets and investors may not correctly price in such an intervention. As a result, climate transition risks are expected to increase in line with the increasing exposure of the financial sector to crypto-assets.

… Public authorities will have to evaluate whether the outsized carbon footprint of certain crypto-assets undermines their green transition commitments. Investors will have to assess whether investing in certain crypto-assets is in line with their ESG objectives. Financial institutions will have to incorporate the climate-related financial risks of crypto-assets into their climate strategy. For prudential standard-setters, several regulatory options exist to define capitalisation requirements. These range from a risk-sensitive approach in the form of risk-weighted add-ons to a capital deduction approach for all new exposures to crypto-assets with a significant carbon footprint.

In one sense, this isn’t really news – we’ve written about this intersection of climate risk and cryptocurrency before. At the same time, the ECB made some pretty strong statements about future regulatory development – adding to the list of potential concern and risk for the investment class.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for more than 35 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of regulatory development, working across a range of disciplines. He was one… View Profile