ETF success could be enhanced by Ethereum’s ESG characteristics.

The United States Securities and Exchange Commission (SEC) has finally approved several spot Bitcoin exchange-traded fund (ETF) applications after years of rejections. Since their launch, these Bitcoin ETFs have attracted billions of dollars in investments. Now, attention is turning to the potential approval of spot Ether (ETH) ETFs, with seven final approval deadlines scheduled between May and August. Similar to Bitcoin, a spot Ether ETF is expected to bridge the gap between traditional investors and the crypto market. Previously, institutional investors had limited options for exposure to the crypto market, such as through proxies like MicroStrategy stock. With an ETF, institutional investors can now allocate investments in a regulated and SEC-approved fund. Institutional demand for cryptocurrencies has been on the rise since the launch of the first spot Bitcoin ETF. This increased interest has coincided with a growing focus on the environmental, social, and governance (ESG) characteristics of investments. Many firms have invested billions of dollars in ESG investments in recent years. The approval of spot Ether ETFs could potentially drive demand for ETH due to its favorable ESG properties. According to Christian Stoll, co-founder of the Crypto Carbon Ratings Institute (CCRI), Ethereum’s ESG outperforms other crypto assets in the same asset class. A spot Ether ETF could position ETH as the only ESG-compliant crypto asset in the US market. ESG investing refers to a set of standards used by socially conscious investors to assess a company’s behavior and screen potential investments. The potential for ESG-compliant projects is significant, with global ESG assets expected to reach $53 trillion by 2025. Ether could tap into this investment branch if it is widely considered an ESG asset. One of the reasons Ether ranks high in terms of ESG potential is its transition from a proof-of-work (PoW) protocol to a more energy-efficient proof-of-stake (PoS) protocol. This shift, which occurred on September 15, 2022, significantly reduced Ethereum’s energy consumption. Compared to Bitcoin, PoS protocols consume significantly less electricity. CCRI’s carbon ratings index reflects this contrast, showing that cryptocurrencies with less adoption than ETH, such as Litecoin (LTC) or Bitcoin Cash (BCH), have higher CO2 emissions and electricity consumption. However, there is still room for improvement in terms of energy consumption and carbon footprint, as highlighted in a study comparing the Ethereum blockchain to Mastercard’s digital payment service. The social element of ESG investing focuses on a company’s relationships with its workforce, society, and the political environment. Ethereum’s response to values such as financial empowerment, liberty, inclusion, and financial infrastructure positions it favorably in the social aspect of ESG analysis. The ESG Benchmark evaluates blockchain social values based on security, accessibility, and community. Ethereum’s network ranks high in terms of security, with bug bounty programs implemented in 80% of projects. However, transaction costs need to be reduced to provide more inclusive entry for all users. Decentralization and transparency are crucial elements of good governance in the blockchain industry. Ethereum’s network rates high in terms of decentralization and transparency due to factors such as staking from home, participation in EIP proposals, and community nodes. However, many blockchains lack an engaged community, resulting in low participation rates. The lack of decentralization among cryptocurrencies poses a significant challenge to achieving favorable ESG ratings. Ether ranks second in terms of governance, with Polkadot leading the pack due to its nominated proof-of-stake consensus mechanism. Solana, on the other hand, is not among the top five due to its shorter history compared to Ethereum. Despite the claims made by firms about their ESG goals, ESG markets are currently facing an identity crisis and outflows due to market conditions. The term “greenwashing” has turned ESG into a politicized term, causing a decline in interest. However, the approval of a spot Ether ETF could potentially renew interest in ESG investing. ESG investors would have access to an asset with promising future performance, with projections of ETH reaching $4,000 by the expected ETF approval date in May.