Whether you believe Bitcoin is inherently worthless or could eventually head for $650,000, there is little doubt that it has become an asset class of great interest to investors (though perhaps for different reasons than the financial world’s latest obsession: GameStop).
Last month a leading asset manager featured in Investors’ Chronicle magazine even recommended that a reader include a small allocation to the cryptocurrency as part of their retirement savings. Bloomberg Wealth has also written a couple of “how to” guides on Bitcoininvesting.
But if Bitcoin really has gone mainstream, what does that mean for your personal finances and investments?
On the face of it, Bitcoin is neither intrinsically valuable, nor is it a reliable store of wealth. It certainly does not produce an income. It does, however, possess two characteristics that could make it a good fit for even the most conservative portfolio.
The first is its volatility. Many view Bitcoin’s volatility with horror. Indeed, the U.K.’s Financial Conduct Authority has repeatedly warned investors off cryptocurrencies for precisely that reason. Between Dec. 2017 and Dec. 2018 the price of Bitcoin fell by almost 85%. But since that nadir it has risen more than tenfold, demonstrating that volatility can cut both ways. The greater an investment’s volatility, the larger the losses but the larger the potential returns.
If I had invested one percent of my retirement savings in a company in the FTSE 100 a year ago, I would pretty much have been wasting my time. My investment would have been too small to add much upside, even had the stock risen 20% or 30%. Indeed, the FTSE actually fell last year. However, had the worst happened and the company declared bankruptcy, I would have only had one percent at stake.
Bitcoin’s volatility offers a greater possibility of meaningful gains, while still only committing the same small, manageable sum. Over the past year, its price has more than quadrupled. Had I invested the same one percent of my retirement (full disclosure: I don’t currently hold any Bitcoin), it would have contributed much more to my portfolio. Thanks to Bitcoin’s volatility, as long as you don’t bet the ranch, there is still the possibility of making a real gain without too much loss.
Its other key characteristic is that it is not a leveraged investment. Unlike the foreign exchange trading programs, which allow inexperienced investors to apply large leverage to trading currencies, your losses with Bitcoin are limited to your initial stake. Most other get-rich-quick schemes, including contract for differences or CFDs, rely on debt to some degree.
With leveraged investments you lose borrowed money almost the instant your investment falls in value. With Bitcoin you generally stand, at worst, to only lose your initial stake — unless, of course, you’ve borrowed to trade in the cryptocurrency too.
It was a relative absence of leverage that was the difference between the bursting of the dot-com bubble in 2001, which resulted in a mild recession, and the 2008 financial crisis, which almost wiped out the entire banking sector. Although some debt was involved in 2001, most of the losses were made by “real money” investors. During the 2008 crisis, many banks and professional investors were unable to refinance the borrowing behind supposedly safe AAA assets, forcing them to sell those assets to avoid escalating losses.
Where investments are unleveraged you live to fight another day after even the most severe losses. For example, people often bemoan missing out on buying shares in tech giants such as Amazon.com Inc. when they were at bargain basement prices. At the turn of the century, Amazon’s share price was $113. Today those same shares are worth more than $3,300 apiece.
But what is commonly forgotten is that between 2000 and October 2001, you would have lost 95% of your money as the price plummeted to $5.51. Only by continuing to hold through the dot-com downturn and to now would you have reaped your 2,740% reward. And you wouldn’t have been able to do that had you held shares using leverage.
Of course, routinely losing 95% of your initial stake is not a sustainable investment strategy. Nor is Bitcoin for everyone, as underlined by its $10,000 fall since Jan. 8. Most financial advisers are certainly far from keen.
But to point out, as some are doing, that crypto assets are unlikely to be able to access protection like the U.K.’s Financial Services Compensation Scheme — which pays consumers in the event of a financial services firm going under — is something of a red herring. You wouldn’t have that protection if you invest in any FTSE 100-listed company or GameStop and either fail.
So, if you have a couple of pounds that you can afford to lose, there are probably worse things to buy right now than the world’s most popular cryptocurrency.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Instead, mineral explorers and developers often see substantial projects halted in their tracks by staunch community-level opposition, even when projects had passed regulatory muster, says mining sector researcher, analyst and reporter Paul Harris, in an interview.
Legacy CSR programs are simply no longer adequate. The analyst suggests those wishing to do business in these jurisdictions take a more holistic approach toward meaningful engagement with host communities before engaging governmental authorities about their respective projects.
The solution, according to Harris, is companies today have to be willing to give up an ownership stake in their projects so that local communities and local and federal governments have more skin in the game.
China still holds the cards for global supply chains, whether or not Covid lockdowns frustrate businesses in the near term. An employee works on the production line of the screens for 5G smartphones at a factory on May 13, 2022 in Ganzhou, Jiangxi Province of China.
Standardizing ESG reporting, and making it mandatory, would be a start toward reliable ESG investing
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“Scam” or “dangerous placebo” are some of the terms used by critics to denounce Environmental, Social and Governance (ESG) investing. Yet others see it as one of our last chances to pivot our financial world to a more sustainable and environmentally-friendly model.
ESG, a form of sustainable investing, is increasingly being used as a measure of how well a company is using its investment money. For investors looking to instigate change, ESG scores help them decide if a company is worth their money.
This is despite ESG dating back to 2006, when the U.N. launched the Principles for Responsible Investment at the New York Stock Exchange. The initiative was backed by leading institutions from 16 countries, representing more than $2 trillion in assets owned at the time.
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ESG critics and optimists have called on the government to use its power to fine tune ESG metrics and finally standardize it, in order to give it more credibility.
ESG not what it seems?
In 2021, ESG investment saw issuance exceeding US$1.6 trillion, bringing its total market to more than US$4 trillion. Not only that, but Bloomberg expects ESG assets to exceed US$53 trillion by 2025.
Fierce critics like Tariq Fancy — who worked as the chief investment officer for investment management firm BlackRock before leaving in late 2019 — made headlines with his disillusionment over ESG’s true impact.
“That $4 trillion isn’t really $4 trillion,” Fancy said, in reference to the widely-circulated figure.
For Fancy, the “vast majority” of what’s happening is that companies are “recategorizing existing funds and moving money and shares around from one basket to another…
“They’ve figured out that socially conscious investors will gladly pay more in fees for something with a ‘green’ label,” he said, adding that ESG funds have 43 per cent higher fees on average.
“Also, they don’t fund carbon capture and new innovations, for the most part they publicly overweight tech companies (Microsoft) and underweight oil companies (Exxon),” he added.
Also, regular investors mainly have access to secondary shares that are sold and purchased on a daily basis, which have little impact, argued Fancy.
“The changes we need immediately to flatten the [greenhouse gas] curve are collective actions led by the government — experts have been telling us this for decades,” he said.
As ESG investing rises, so do emissions
Like elsewhere, Canadian ESG investment is increasing, but, again like elsewhere, the nation hasn’t reduced its emissions in the past year.
A March, 2022 report from the International Energy Agency said that global energy-related carbon dioxide emissions rose by six per cent in 2021 to 36.3 billion tonnes — a new record — as the world bounced back from the pandemic.
ESG does make a difference
Art Lightstone, climate activist and host of the Green Neighbour Podcast, acknowledges ESG has its critics. But for him, this class of investing is still making a difference.
“The fact that ESG investing has not only helped to launch several green tech companies, but also encouraged less socially-minded companies to compete in ESG spaces is now pretty much undeniable,” Lightstone said. “Tesla is invariably the best case in point. The amount of investment directed toward Tesla and other EV startups has been mind boggling.”
While money can be moved from one shareholder to another, “that’s not where the story ends.” He cited the example of Tesla when it was “able to raise large amounts of capital [at market prices] with rather little dilution to its stock.”
“Tesla did this three times in 2020, and with that money they were able to build more factories, scale up their production, lower their per-unit costs, increase their profit margins, and therefore increase the economic viability of their entire operation,” he explained.
This expansion created a domino effect for legacy automakers such as GM and Ford, who are investing more in their electric vehicle programs.
Investing intentionally and collectively
Tim Nash, founder of Good Investing, a company with a goal to help at least one million Canadians invest intentionally, argues that informed decision-making can make the impact needed.
“People spend more time choosing an avocado in the grocery store than they spend when choosing a mutual fund for their RRSP,” Nash said.
Instead, he urged people to think more about their portfolios and ways to diversify, including carving out part of their portfolios for investment just “for doing more good.”
“This is where we can invest part of our money into things like community bonds and impact investments,” he explained.
Community bonds, a debt financing tool, are issued by non-profit, charity or co-operative organizations. They allow these groups to take loans from community backers. The backers will eventually get paid interest for investing in an impactful project, while the organization enjoys access to capital.
During the interview, Nash noted that he was located at the Centre for Social Innovation, a non-profit that owns two buildings in downtown Toronto.
“How does a non-profit own two buildings in downtown Toronto?” he asked. “Community bonds. That’s how they were able to access capital.”
Then there is also shareholder activism, and this is where Nash highlighted how shares that are publicly traded on a secondary market can be used as a powerful tool if used collectively.
“If I sell my shares, someone else is going to buy them. However, if enough people sell their shares that will impact a company’s cost of capital,” he said. “This is a very important metric when it comes to how a company operates.”
One example Nash cited as proof of effective shareholder activism is the increased cost of capital for fossil fuel companies. At the same time, there has been an unprecedented shifting of investment capital into greener energy.
Better knowledge needed
The financial industry needs to delve into the environmental sciences, sustainability, and systems thinking to have a more well-rounded view on how to make a full impact, Nash says.
“I do think that a lot of the criticisms come from the financial industry, people who don’t have a background (in these topics),” he said. “ESG is a very broad concept… We need everybody rowing together in the same direction.”
While the government is in a position to lead, it’s still caught up in a four-year election cycle, he added.
“It’s even shorter if it’s a minority government, which we’re in right now,” he noted.
Time to start mandating metrics on ESG
Nash put the onus on the Ontario Securities Commission, which regulates companies listed on the Toronto Stock Exchange, to start mandating disclosures of ESG issues, as other regulators have done.
For example, the SEC in the U.S. is focused on the climate aspect of ESG. It mandates that all publicly traded corporations publish their environmental compliance costs, and proposed new rules in March to standardize climate-related disclosures to investors. The rules would require businesses to disclose information about their direct greenhouse gas emissions, as well as the indirect emissions from the energy the business consumes.
In Europe, the trend tends to lean more toward the corporate governance aspect of ESG. Under the 2018 Non-Financial Reporting Directive of the European Union, companies are expected to disclose information on environmental, social, and employee-related problems, such as anti-bribery, corruption, and human rights performance.
In Nash’s view, Japan is ahead of the curve with its Financial Services Agency actually mandating climate risk disclosure.
“Investors, I think, to some degree are demanding more data and information and disclosure than what governments are requiring,” he said. “This is an area where investors are asking tough questions and pushing that forward. That said, investors can ask, and companies get to decide how they respond. Many of them are responding in different ways.”
ESG optimists and critics alike want to see those regular investors emboldened to make the difference the world is waiting for.
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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