How do the ESG requirements apply to crypto?
by Sam Robinson and Laura Houet
Not all crypto is the same. It has been well publicised that some types of cryptocurrency, generally referred to as requiring “proof of work”, use a competitive validation method known as “mining” to achieve goals, such as issuing new crypto currency, and uses a huge amount of computer processing power. Others carry out what is referred to as “proof of stake”, which because they do not require miners to spend electricity on duplicative processes operate with a substantially lower resource consumption. All crypto firms need to consider their ESG position.
Crypto firms will need to consider the new ESG obligations that will apply to their investors and other business partners. For investors such as asset managers, they will be mindful of their reporting obligations and when investing in crypto businesses may assess how that investment will impact their ESG reporting requirements, including the data availability from crypto businesses regarding the climate metrics to be disclosed.
Although many crypto businesses will not initially be caught by the ESG disclosure requirements, the regulatory landscape in this area is dynamic and continually shifting. The regulations will also impact how firms do business – for example, the fact that portfolio companies are also subject to disclosure requirements may limit their use as investment vehicles.
Can ESG disclosures cross-refer to information produced by crypto related businesses?
ESG disclosures can include hyperlinks and cross-references to relevant climate-related financial disclosures contained in a third party’s climate reporting, where such information enables the in-scope firm to make climate-related financial disclosures. As a result, crypto firms could consider making their own ESG disclosures to support with information requests.
Which part of the ESG disclosure is particularly relevant for crypto?
Whilst there is optionality around how to calculate carbon emissions, which the ESG Sourcebook refers to, ultimately the electricity required for crypto businesses and the resulting emissions will be the likely focus point for in-scope firms considering or continuing investment in crypto businesses, however calculated.
What ESG targets are in-scope firms required to have?
There are no prescribed targets, but ESG disclosures must describe any targets the in-scope firm has set to manage climate-related risks and opportunities. In-scope firms within will need to take into account their overall business, including any crypto related activities, when deciding and measuring progress against these targets.
What is happening in Europe?
There are various ESG and crypto related developments taking place in different jurisdictions. In the EU, the Markets in Cryptoassets Regulation has recently been agreed and will apply to crypto firms in the EU. As part of these new measures, the European Securities and Markets Authority has been tasked with developing draft regulatory technical standards on the content, methodologies and presentation of information related to ESG.
Crypto firms should be engaging with their shareholders and advisers to confirm whether parts of their business are subject to disclosure requests for those in-scope firms and ensuring that any necessary data can be provided and verified in the appropriate formats. Firms should also be considering to what extent the documentation governing their portfolio of assets accurately corresponds to any marketing of assets as ESG friendly.
Sam Robinson is a Partner and Laura Houet is a Partner at law firm CMS