Any financial institution worth its salt will have a solid ESG strategy in place and will understand the risks and opportunities it presents. But one risk is proving something of a fly in the ointment.
A study from Zumo, a provider of digital assets as a service, and the Crypto Carbon Ratings Institute (CCRI) found that, as of March 2024, the annualised carbon footprint of all physically backed Bitcoin fund products was 4487.93 kilotonnes of carbon dioxide. Almost half of this number (2056.86) could be linked back to the launch of spot Bitcoin ETFs (exchange-traded funds) in the US in January, where the investment is based on the price of bitcoin directly, rather than contracts which speculate on the future price.
The full total is the equivalent of someone flying from London to New York and back more than 1.5 million times. So how does that correlate with organisations’ environmental goals?
Zumo is looking to help financial institutions square the circle, with a mission of ‘bring[ing] the benefits of blockchain to everyone whilst protecting the future of our planet’. In 2022, the company published details of a pilot project (PDF) aimed at helping their customers compensate for their Bitcoin purchases. The pilot, called Zero Hero, had four steps. The customer bought Bitcoin in the Zumo app; Zumo calculated the electricity consumption; renewable energy certificates (RECs) were purchased, leading to greater renewable energy demand.
The results showed that, over 435 transactions and £1.5 million in Bitcoin value covered, a total of 850 MWh had been compensated via purchasing RECs. In 2023, the company productised this in the form of Oxygen, described as the first of its kind, though the methodology had been tweaked since the pilot.
That alteration saw CCRI data be added, which is claimed to be the most comprehensive of its kind. The institute was founded in 2021, two years after co-founders Christian Stoll, Lena Klaaßen, and Uli Gallersdörfer wrote an influential paper on the carbon footprint of Bitcoin. The organisation came into being after financial market players approached them for up-to-date data on the climate impact of Bitcoin among other crypto assets.
Today, more than 30 crypto assets are covered representing what CCRI calls the largest dataset of environmental aspects: from energy, to greenhouse gas (GHG) emissions, to waste production, and natural resources. The institute has made its own contribution to the business of ESG in the form of a joint ESG benchmark (PDF) with CCData, another industry first which offers digital asset ESG ratings for 40 of the largest and most liquid crypto assets.
“Conventional ESG frameworks focus on assessing companies and can thus not be directly transferred to digital assets as some metrics tailored to the corporate context do not fit,” CCRI chief operating officer Klaaßen tells Sustainability News via email. “Since the financial sector needs to increasingly incorporate ESG aspects into their practices also driven by regulatory requirements, such as the SFDR in the EU, index providers, investors, and other financial market actors profit from the ESG framework.”
Read more: SFDR: What it is and what it means for the financial markets
Oxygen, while also available as a standalone product, is intended to be a natural add-on to Zumo’s Crypto Invest trading platform, as Kirsteen Harrison, sustainability director at Zumo, explains. “The idea is that Oxygen is a solution that can bolt onto Crypto Invest, so we can offer it to our clients in terms of an added benefit solution that they can have if they have their own ESG or net zero strategy, which most of our clients do,” Harrison tells Sustainability News.
Zumo has its own net zero strategy, and the commitments are sincere; the company calls them unshakeable, and is a ‘proud’ signatory to the Paris Agreement-inspired Crypto Climate Accord. Harrison has been on the side of sustainability her entire career, and combines her work at Zumo with other consulting and director roles, which means she is able to take in the view from all sides.
“We made a commitment from inception that we would be quantifying our own carbon footprint,” explains Harrison. “Because we got into this fairly early, in terms of crypto years, we’ve been involved in the development of various guidance, working groups, collaborations, to try and move the sector forwards.
“I don’t think we’re where we want to be yet, but the sector has moved forward a lot, even in the last two years in terms of innovations, renewable energy use, [and] curtailed energy use.”
RECs, which form the basis of the Oxygen product, are a case in point. Given Morgan Stanley estimated in 2022 that powering Bitcoin’s energy requirement through green energy would require the equivalent infrastructure of the entire US solar fleet, simply matching the output of digital assets with renewable energy may feel a little insufficient.
Zumo points out in its Oxygen FAQs that RECs are not the answer by themselves, and advises companies to use them proportionally, as part of a wider net zero strategy that focuses on emissions reductions. “RECs are not a silver bullet, [carbon] offsets are not a silver bullet, and I think there’s a danger for any company that leans heavily on either,” notes Harrison.
The truth is therefore a little more complicated, particularly when it comes to the wider ecosystem and decarbonisation of the supply chain. “[With] decarbonising a traditional supply chain, what you do is engage with those suppliers – you might choose the biggest 10 for environmental impact [or] spend – you engage directly with them, and then you try and get data, and you try and incentivise and encourage them to do more,” explains Harrison.
“What we’re dealing with [for] Bitcoin is a completely decentralised network and a completely fungible currency, so there is nothing to tie any one Bitcoin to any one miner,” Harrison adds. “So it presents a different set of circumstances that we need to deal with – and this is the subject of much of the work that we’re doing within the wider sector.”
The key, therefore, is clarity and transparency. Klaaßen, like Harrison, observes the relative youth of the digital asset industry as a challenge, but also notes a legislative weapon in the pipeline. The Markets in Crypto-Assets (MiCA) EU regulation is set to come into force later in 2024 and covers assets not currently regulated by existing financial services legislation. “There will be a boost in data availability as token issuers as well as crypto assets service providers will need to disclose sustainability indicators for each crypto asset they offer,” says Klaaßen.
“At the same time, it is still difficult to verify renewable energy usage claims and decarbonisation strategy on the individual miner level – which are mainly based outside of Europe – since commonly used carbon accounting standards, such as the GHG protocol, are rarely used,” she adds. “Thus, it would be an opportunity for large miners to incorporate such practices in their reporting to make the verification of their decarbonisation claims possible.”
Partnerships are another way forward, such as that between Zumo and CCRI. Alongside CCRI data underpinning Oxygen, the two companies announced a new strategic partnership last month. “When CCRI came along, they were producing exactly the data that we knew we needed to be able to provide the service that we wanted to our clients,” explains Harrison.
Not everyone is quite playing ball, however. If one compares the quarterly data released by the Bitcoin Mining Council to that of the Cambridge Bitcoin Electricity Consumption Index, the latter is a lot more conservative. This is something which concerns Harrison. “We see good case studies all the time, about methane being used from landfills, about curtailed renewable energy that can’t be used elsewhere being used…we see all those and we know good things are happening,” she says. “But what we don’t know is how much cherry picking is going on when those stories are being told.”
Bringing together a provider like Zumo and a ‘hugely credible’ body like CCRI, in Harrison’s words, appears to be a win-win, certainly for the financial sector. “Understanding the carbon exposure of investment is indispensable for financial institutions,” says Klaaßen. “This is true for all kinds of investments including those in digital assets.
“Thus, we are very proud that organisations such as Zumo build on our data to raise awareness of crypto-related carbon exposures to financial institutions and thereby help to bridge the transparency gap.”
