This year was like no other. A global health pandemic, several stock market shocks, the destabilization of the workforce and many branches of the economy. After a year of living with COVID-19, consumer and investor behavior has taken on new characteristics as digital and sustainable business and finance have evolved in parallel.
At such a moment, emerging technologies like tokenization and blockchain technology are more relevant than ever – and have been given a profound opportunity. With traditional markets in crisis, investors seek refuge in cryptographically flawless currencies, driving Bitcoin to all-time highs. Meanwhile, alternative asset classes such as environmental, social and corporate governance (ESG) investments have gained ground with investors, surpassing $ 1 trillion in funds for the first time in their history.
This post is part of CoinDesk’s 2020 Year in Review – a collection of posts, essays, and interviews about the year in Crypto and beyond. Mohammad Raafi Hossain is the co-founder and CEO of Fasset, a crypto exchange in the Middle East.
As we continue to see new highs in the digital asset and ESG markets, it is time to examine whether these two growing sectors have the potential to benefit and support one another.
As impact investing and ESG-friendly funds grow in popularity, the cryptocurrency community has the opportunity to capture some of this momentum through the use of tokenization technology. Harnessing investor appetite for these asset classes may potentially accelerate the maturation of the digital asset sector, along with the adoption of asset-backed tokens and other digital assets in more traditional financial circles.
ESG investing, arguably one of the fastest growing asset classes, is expected to reach half of all investor portfolios by 2025, totaling $ 35 trillion. This is partly because more investors are starting to see ESG-friendly assets as an effective hedge against volatility and downside risk. According to a State Street survey, 69% of investors attribute this as such.
While ESG funds saw record flows in 2019, investor activity was accelerated by the COVID-19 pandemic. This effect has been compounded by climate crises, socio-economic searches and protest movements in numerous large economies, leading to greater consideration of the way companies do business and where capital is placed.
The newfound appetite for ESG investing is good news for society at large. Given the widening socioeconomic divide and unemployment around the world, impact investing could play a prominent role in addressing these challenges. For example, investments in transportation infrastructure can create over 21,000 jobs for every $ 1 billion invested. Given these significant socio-economic externalities, this asset class could play a critical role in shaping the recovery and future of the global economy.
A tough battle
Unlocking these potential benefits is not without its challenges. On average, between 2016 and 2030 there is an annual investment requirement of US $ 6.9 trillion in sustainable infrastructure to achieve the United Nations Sustainable Development Goals (SDGs). With public agencies and governments struggling to fund this development, the funding gap for these projects is projected to reach $ 15 trillion by 2040. This means that increasing private capital is needed to fill this void.
With private investments, however, there are numerous barriers to entry into the sustainable development investment market, from low liquidity, large ticket sizes, and a lack of optionality to high overhead and entry costs and limited transparency. Given these significant market imperfections, investors could benefit from the provision of digital assets and tokenization as promising solutions to the problems facing the ESG sector.
The world is facing growing socio-economic gaps and unemployment around the world, and impact investing could play a prominent role in addressing these challenges
Tokenized ESG investments such as wind or solar parks that span the physical, financial and digital worlds could provide new opportunities for sustainable infrastructure owners to accumulate capital to fund the development of such projects. Similarly, tokenizing ESG-friendly assets would seamlessly overcome issues related to market access, lack of liquidity, and prohibitively high costs and fees for investors.
As those assets become more liquid, accessible, and tradable. Investors looking to diversify their portfolios with low-risk, highly resilient assets are being drawn into the digital asset space, potentially turning traditional financial players into cryptocurrency market participants.
A mutual benefit
Decentralized financing (DeFi) is currently the fastest growing pocket in the crypto space and creates enormous incentives and pulling power for private and institutional investors. While DeFi has often been characterized by innovative on-chain solutions, some critics have pointed out that limited “real world value” was achieved through ongoing experimentation.
While tokenization technologies can greatly benefit the ESG community, they could also serve the purpose of adding real, out-of-chain tangible value to the digital asset market in the form of tokenized sustainable infrastructure. As ESG-friendly investments grow in popularity and prove extremely attractive for traditional funding, tokenized impact investments could serve as a vehicle for greater crypto and digital asset adoption in institutional and political circles.
See also: Company uses Ethereum to mark sustainable infrastructure in the fight against climate change
We are currently facing the profound opportunity to make digital assets available to established financial players. The crypto sector has the opportunity to take advantage of the rise of ESG, both to add value to the ESG sector and to accelerate the maturation of the crypto space.
Looking ahead, it cannot be denied that digital assets and the impact on investment spaces will play a role in shaping jobs, industries and the economy after the pandemic. It remains to be seen whether or not both industries can contribute to promoting mutual growth.