greener ether

ESG investors aren't all sold on Ethereum's merge

The cryptocurrency's upcoming transition to lower energy use could make it more attractive as a green asset.
The trading volume and price of the cryptocurrency ether have increased in anticipation of its switch to a more energy-efficient validation system.
The trading volume and price of the cryptocurrency ether have increased in anticipation of its switch to a more energy-efficient validation system.
Photo: Dado Ruvic (Reuters)
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Ethereum, the blockchain that hosts ether, the world’s second-most-traded cryptocurrency after bitcoin, is undergoing a major overhaul. Starting Sep. 6, the network is being upgraded to switch the process of validating digital coins from “proof of work” to “proof of stake,” which should almost eliminate Ethereum’s large carbon footprint.

The transition could make ether more palatable to climate-minded investors who have shunned cryptocurrency. These includes pension funds and other institutional investors that are under mounting pressure from their members and from regulators to account for and curb their financed emissions.

Proof-of-work cryptocurrency “mining” entails a huge amount of energy use—producing as much carbon emissions as the London metropolitan area, in the case of bitcoin—because it requires banks of computers to continuously crack math problems. Proof of stake, in contrast, uses very little computing power because it only asks users to put up a “stake” of existing coins to earn the right to mine new coins.

Greener cryptocurrencies have a brighter future

If the technical details seem murky to non-experts, the reputation risk of the bitcoin model is clear-cut, said Larry Newhook, CEO of Alpha Innovations, an asset management firm.

“Most institutional investors don’t understand [crypto] technology, but they do understand the sound bites,” he said. “They use ‘proof of work’ as another reason to say no to crypto. When ether moves to proof of stake, there will be one less reason for institutional investors to say no.”

Already, trading activity in ether and the coin’s value are shooting up in anticipation of the switch, according to the intelligence firm Digital Asset Research (DAR). Since mid-June, the price of ether has increased 73%, from $917.20 to $1,587.50. Other coins that already operate under proof of stake, such as Solana and Cardano, are also getting a boost from investors’ ESG concerns, said Marco Manoppo, DAR’s research director.

“There is this ecosystem of other proof-of-stake blockchains, and it’s been working well so far,” Manoppo said. “So the ethereum team is thinking this will help them with the investment narrative.”

Some investors are still skeptical of any cryptocurrency

But not all investors are convinced. John Quealy is the chief investment officer at Trillium, a $5.4 billion asset manager that prioritizes ESG investing and has so far not touched cryptocurrency. Quealy said that, while the giant carbon footprint doesn’t help, his biggest problem with crypto isn’t about ESG, but about its core value as an asset. “We haven’t identified what we think is a viable use case,” Quealy said. “We’re not there, and we won’t be there for some time.”

Even setting aside other financial considerations, Quealy said he wouldn’t be ready to dive into ether overnight. It will take time to verify that the new system is as green as it claims to be, he said. He compared it to the market for carbon offset credits, another nascent asset that Trillium has avoided because offset credits remain mired in greenwashing.

“We tend to be very cautious,” he said. “For us and other long-time ESG managers, [the proof-of-stake switch] is still not a major move from that perspective.”