Did you know that nearly half of the financial services companies held in blockchain-themed ETFs have experienced significant to severe business ethics controversies? You could argue that these firms might falter in the face of tightening crypto regulations, but you also can’t deny that these controversies often overshadow the success stories in blockchain applications.
This year, Morningstar Sustainalytics decided to look at the risks, and the opportunities, of blockchain integration. This year’s report, titled “An ESG Lens on Blockchain,” looks at environmental, social and governance issues as they relate to blockchain technology at the stock, fund, and fund-of-fund level.
At the stock level, the comprehensive report explores ten applications in ten different businesses, highlighting improvements in operational efficiency, supply chain resilience and product governance that can reduce ESG risks and improve cost savings.
Take mining, for example, where we found seven firms using blockchain to improve carbon emission tracking. Or food retail, where blockchain is used to reduce food recalls and food fraud. Stock investors should explore these technologies in more depth in the report – linked below – to understand how they could be changing entire industries.
ETF investors looking to manage their ESG risks should explore the report’s fund analysis, which groups ten blockchain-themed ETFs together as a hypothetical fund of funds – and then puts it to the test. The findings were significant.
Compared to Morningstar Global Markets Large-Mid Cap index, for example, a lower overall weighted ESG risk score suggests the typical global equity investor is exposed to more unmanaged ESG risk than a typical blockchain ETF investor. Not to mention, only around 10% of the fund’s market value falls into the high to severe ESG risk categories.
Whether they’ve been ESG, profit-oriented, or both, investors flooded blockchain ETFs in 2021 – with inflows of over a billion U.S. dollars in Q1 alone. Don’t feel you’ve missed the bus though. Blockchain applications go beyond funds of funds, and many sectors might still be untapped.
For Morningstar, I’m Andrew Willis.