Collecting reliable metrics surrounding energy use and environmental impact will be crucial for crypto companies. Regulatory institutions ranging from the SEC to the European Commission to the International Sustainability Standards Board (ISSB) are crafting new standards; becoming an early leader in ESG reporting may be a competitive advantage.
Blockchain, Energy Usage, and Climate Impact
The crypto industry’s energy usage is a hot topic for governments worldwide. Critics cite that the annual carbon footprint of crypto mining is approximately 92.3 Terawatt-hours per year, as of fall 2022. The White House Office of Science and Technology Policy published a report in September that noted the significant amount of electricity used by crypto assets and recommended that federal agencies mobilize to help minimize greenhouse gas emissions from the industry.
Blockchain networks foundational to crypto assets are decentralized, so they require consensus mechanisms that validate transactions, such as mining or staking. Crypto mining requires a significant amount of computing power because of competition among miners to validate transactions and obtain related rewards. As for staking, not all proof-of-stake blockchains require the same energy consumption, but even the most energy-intensive proof-of-stake blockchain generally uses less energy than its proof-of-work counterparts.
Opportunities for Sustainability With Crypto and Blockchain
Players in the crypto space are using more sustainable energy sources to power their mining. Some miners use excess power from hydroelectric plants, while others use flared natural gas to power their computing equipment. Miners have also been known to work with solar and wind power producers to consume electricity that would otherwise go unused when demand is low. Overall, bitcoin mining companies cited a 59.5% sustainable energy mix as of the second quarter of 2022, according to the Bitcoin Mining Council.
In addition to those sustainability improvements, some blockchains are exploring ways to achieve carbon neutrality through carbon offset programs and using blockchain to validate the exchange of carbon credits.
Demand for climate and socially conscious investments is ballooning as well. Investors are seeking out ESG offerings for their portfolios, so asset managers are paying attention to these conversations around crypto and climate change. Proposed SEC rules specific to asset managers are some of the many factors increasing the demand for dependable climate data, and crypto companies, both private and public, need to be aware.
Prioritizing Accountability: Approaches to Climate Reporting and Assurance
Crypto companies can differentiate themselves through reliable ESG reporting, but they must be prepared to properly gather, process, and communicate emissions data. Climate-related disclosures can ultimately affect the value of a company. Crypto mining companies representing approximately half of the bitcoin network’s mining activity are choosing to disclose information on bitcoin production or other mining activity, according to the Blockchain Association. This is particularly noteworthy considering many are not publicly traded. More and more, energy consumption transparency is becoming the norm.
Measuring and Reporting Quality Emissions Data
Gathering emissions data can be challenging. Generally, data on greenhouse gas (GHG) emissions comes from varying sources like utility invoices, meter readings or outsourced third parties, so the data can be difficult to track and verify. Additionally, using renewable energy and purchasing renewable energy credits require assessment of the quality of the reductions to emissions. Under the SEC’s proposed climate rule, public companies would need to report their Scope 1 and Scope 2 emissions, which are direct GHG emissions and indirect GHG emissions from acquired forms of energy, respectively. They would also be required to report Scope 3 emissions (indirect GHG emissions from upstream and downstream activities) if they are material or included in stated emissions targets or goals.
Crypto companies should set up internal systems and procedures to collect high-quality, highly comparable emissions data that they can report to stakeholders such as investors or regulators. Organizations can, for example, work with assurance providers to enhance the quality of their reported data, both qualitative and quantitative. Blockchain companies may have an advantage for Scope 3 emissions: with buy-in from suppliers, blockchain ledgers are a potential method to track disparate emissions data across the value chain.
Understanding and Disclosing the Financial Impact of Climate Change
Investors are increasingly looking to companies to report the financial impact of climate-related events on their operations. For example, crypto companies that rely heavily on large data centers could be compromised by a severe weather event curtailing operations. Under the SEC’s proposal, subject to a 1% impact threshold, public companies would need to disclose the financial effect of these types of events, as well as any associated costs, on the consolidated financial statements. Crypto companies that are private and therefore not subject to these proposed regulations should still be thinking about their impact on climate change, and the impact of climate change on their operations. While they may not be subject to the SEC's jurisdiction, potential investors will likely be curious about the information.
Observing the Evolving International Regulatory Environment
While the SEC’s climate proposal is the primary ESG reporting driver in the U.S., the Corporate Sustainability Reporting Directive was recently approved in the European Union, and the ISSB is making significant progress in setting a global benchmark for ESG reporting. Crypto companies that operate or invest outside of the country need to stay aware of international disclosure requirements.
The Role of the Board and Audit Committee
ESG's role in any organization is an ever-evolving concept, and it requires the input of every player including boards, institutional investors, and executives looking to execute a winning strategy in the crypto arena. Directors must clearly define the firm's ESG approach, how it is to be integrated into a company's larger strategy, and implement regular reporting to practice transparency, and in turn, build trust with external influencers. Audit committees need to be reflective and understand the areas their organization is measuring, why those areas are significant, what are the controls over the data the organization reports, and what steps the organization is taking to communicate their metrics to relevant stakeholders.
A commitment to reporting on carbon emissions not only prepares crypto companies for the shift in climate regulations, but also allows them to share their ESG story with investors and other stakeholders in a compelling way. These technologies are fast-developing, and the regulatory environment is catching up. The resulting gap can breed uncertainty among investors, but regular ESG reporting can establish trust between executives and stakeholders.
Crypto companies should also remember that their ESG strategies are not limited to environmental reporting. Cybersecurity risk; consumer protection; diversity, equity, and inclusion — all of these issues make up a company's ESG strategy. Social and governance reporting will continue to be an important part of a company's accountability measures, and as a result, their credibility. Leadership would be wise to take it seriously, regardless of whether it’s mandated.
Robert Sledge is Partner, Audit, Financial Services, KPMG LLP. Maura Hodge is the ESG Audit Leader, KPMG LLP. Caroline Garcia is Partner, Audit, Energy, KPMG LLP and Jodie Yan is Managing Director, Audit, Financial Services, KPMG LLP.