How Ethereum’s ESP Properties Could Revolutionize ETF Success

The United States Securities and Exchange Commission recently approved multiple spot Bitcoin exchange-traded fund (ETF) applications, marking a significant shift after years of rejections.

Since their launch, these new Bitcoin (BTC) ETFs have attracted billions of dollars in investments.

Now, with seven final approval deadlines for spot Ether (ETH) ETFs approaching between May and August, many are eagerly anticipating their arrival. Just like Bitcoin, a spot Ether ETF has the potential to bridge the gap between traditional investors and the crypto market.

Prior to this, institutional investors had limited options for exposure to crypto assets, such as through proxies like MicroStrategy stock. However, an ETF provides a regulated and SEC-approved means for institutional investors to allocate funds into the crypto market.

Institutional interest in cryptocurrencies has been steadily increasing, with continued growth following the launch of the first spot Bitcoin ETF.

Recent developments have also seen a convergence of AI and DeFi, which could have mutual benefits for both industries.

“There has been a noticeable increase in interest from various financial institutions,” noted Manuel Villegas, digital assets specialist at private bank Julius Baer.

As institutional adoption of cryptocurrencies continues to rise, there is also a growing focus on the environmental, social, and governance (ESG) aspects of investments. In recent years, billions of dollars have been invested in ESG-focused assets.

Could the introduction of spot Ether ETFs further drive demand for ETH due to its favorable ESG properties?

According to Christian Stoll, co-founder of the Crypto Carbon Ratings Institute (CCRI), Ethereum has consistently outperformed other crypto assets in terms of ESG benchmarks. Additionally, a spot Ether ETF could establish ETH as the only ESG-compliant crypto asset available in the US market.

What is ESG investing, and why is it crucial for Ethereum?

As climate change continues to worsen, major investors are facing increased scrutiny regarding their investment choices.

In an effort to promote more sustainable financial networks, a coalition of banks and investment firms, in response to a United Nations invitation, released a 2004 report titled “Who Cares Wins,” which popularized the term ESG.

ESG investing involves using a set of standards to evaluate a company’s behavior, used by socially responsible investors to screen potential investments.

The potential for new ESG-compliant projects is immense, as Larry Fink, CEO of $10 trillion asset management company BlackRock, stated in his 2022 letter to CEOs:

According to Thomson Reuters Institute ESG strategist Natalie Runyon, by 2024, ESG will shift from being a peripheral element to a pivotal aspect of corporate business strategies. It is estimated that global ESG assets will reach $53 trillion by 2025.

Ether has the potential to attract a portion of this investment sector if it is widely considered an ESG asset. A spot Ether ETF would position ETH as the only SEC-approved financial instrument for ESG cryptocurrency.

The argument for Ether as an ESG asset

A new scoring system developed by CCData and CCRI, using advanced AI technology, evaluates the ESG characteristics of digital assets.

The data ranks Ether as the top performer, followed by Solana (SOL) and Polkadot (DOT).

Environmental

Ether’s high ranking for ESG potential is largely due to Ethereum’s transition from a energy-intensive proof-of-work (PoW) protocol to a more efficient proof-of-stake (PoS) one. This change was implemented on September 15, 2022, resulting in a significant decrease in energy consumption on the network.

Mohammed AlKaff AlHashmi, co-founder of Islamic Coin and halal-compliant PoS blockchain HAQQ, shared with Cointelegraph that “CCRI’s July 2023 benchmark report highlighted the environmental impact of this shift, noting that the differences in electricity consumption between PoW and PoS protocols are striking.”

Despite Bitcoin’s recent achievements in terms of sustainability, the contrast between PoW and PoS is still evident. According to CCRI, PoS protocols consume “10,000 times less electricity than Bitcoin.”

The contrast between these two validation protocols is also evident in CCRI’s carbon ratings index, which shows that cryptocurrencies with lower adoption rates than Ethereum, such as Litecoin (LTC) or Bitcoin Cash (BCH), have significantly higher CO2 emissions and electricity consumption.

A CCRI spokesperson explained to Cointelegraph that PoS emissions and energy consumption are not solely determined by transactions, but also by “node counts and hardware requirements.” For example, Solana’s high emissions are primarily due to its hardware requirements, while Ethereum’s are influenced by its large number of validator nodes.

While PoS has significantly reduced the environmental impact of blockchain technology, there is still room for improvement. A September 2023 study, “Post-Merge Carbon Footprint Analysis and Sustainability in the NFT Art Market,” compared the carbon footprint of the Ethereum blockchain to that of Mastercard, a popular digital payment service. The study concluded that as of February 1, 2023, the Ethereum blockchain had a carbon footprint equivalent to that of Mastercard.

Ophelia Snyder, co-founder and president of 21.co, a sponsor and subadvisor for ARK Invest’s Ether ETF, shared with Cointelegraph that many investors and mainstream media outlets only focus on the “E” in ESG analyses.

The Role of Social Values in ESG Investments

When it comes to ESG investments, the “S” stands for social values, which encompass a firm’s relationships with its workforce, society, and political environment.

According to Snyder, these social values should prioritize financial empowerment, liberty, and inclusion, particularly of marginalized groups and financial infrastructure. In this regard, Ethereum has made strides in aligning with these values.

The ESG Benchmark evaluates these social values by focusing on the security, accessibility, and community of each blockchain. The CCRI report notes that security is a top priority for the blockchain industry, as evidenced by the widespread implementation of bug bounty programs.

Furthermore, this emphasis on safeguarding customer funds aligns with ESG principles and demonstrates the industry’s commitment to responsible and secure practices that foster trust and integrity within the blockchain ecosystem.

However, one area where Ethereum and the industry as a whole can improve is in reducing transaction costs to promote inclusivity for all users. The CCRI report acknowledges that Layer2 solutions have been effective in addressing this issue, but their adoption has been slow due to the concentration of transactions on Layer 1 blockchains.

Another pressing issue highlighted in the report is the unequal distribution of wealth and power among blockchain protocols, which undermines fairness and inclusivity within the industry. This is an area that requires improvement for the industry to truly embody ESG principles.

There have also been concerns about centralization arising from Ethereum’s transition to Proof-of-Stake, but according to CCData research lead Joshua de Vos, this is a challenge that can be addressed through proper implementation and governance.

Governance

Governance is a crucial aspect of a thriving blockchain community.

Snyder emphasized the importance of decentralization and transparency in good governance, which are fundamental principles in the blockchain industry.

These principles are evident in activities like staking from home, using community nodes, and participating in EIP proposals, which have contributed to Ethereum’s high ranking in this area.

However, many blockchains struggle with community engagement, leading to the failure of decentralized autonomous organizations that rely on governance interaction.

According to the CCRI report, only 15% of the studied cryptocurrencies have an average voter turnout of over 50%, indicating low participation rates.

The report also uses the Nakamoto Coefficient, which measures a blockchain network’s decentralization by calculating the minimum number of nodes/validators needed to compromise or carry out a 51% attack against the network.

Unfortunately, the overall lack of decentralization is evident, with only 22.5% of the studied cryptocurrencies having a Nakamoto Coefficient of over 50.

Interestingly, 55% of the blockchains with a high Nakamoto Coefficient use Proof-of-Work, highlighting the differences in decentralization between this consensus mechanism and Proof-of-Stake.

For ESG ratings, decentralization is a critical metric as it can outweigh the potential climate impacts of a blockchain network, according to the CCRI spokesperson.

Currently, Polkadot leads the pack, with Ethereum in second place, thanks to its nominated proof-of-stake consensus mechanism.

However, Solana is not among the top five, as one significant metric considers the historical governance activity of a blockchain network, giving Ethereum an advantage due to its longer history.

The Potential Impact of an Ether ETF on ESG Markets

Despite the lofty promises made by companies about their ESG goals, the ESG market is currently facing an identity crisis and outflows due to market conditions.

According to BlackRock’s Fink, the term “ESG” has become politicized and is often used for “greenwashing,” or misrepresenting one’s true ESG commitments.

In recent news, the approval of Bitcoin ETFs may spark a bull run for memecoins.

Ultimately, investors are driven by financial gains, which may be the main issue with the ESG market. In the US, there has been a decline in inflows into ESG-labeled funds due to poor performance.

Despite Fink’s 2020 promise to prioritize sustainability in their investment approach, market forces have caused a decrease in interest in ESG investments.

An alternative solution to renewing interest in the ESG market could be the introduction of a spot Ether ETF. This would provide ESG investors with access to an asset with promising future performance, as British bank Standard Chartered predicts ETH to reach $4,000 by the expected ETF approval date of May 23.