December 5, 2023 Applying environmental, social and governance principles to cryptocurrencies and Web3 tech can help promote responsible and sustainable investing – report Author(s): Minderoo Centre for Technology and Democracy Researchers demonstrate how ESG principles can ultimately help guide the crypto industry towards governance structures that work better for society. A new report from VentureESG and the Minderoo Centre for Technology and Democracy, University of Cambridge has examined how investors can integrate environmental, social and governance (‘ESG’) principles into their investment processes for crypto and web3 tech. The report is authored by Cessiah Lopez and Johannes Lenhard. Despite the recent period of decline in the crypto market, the report warns that crypto and Web3 technologies may have profound and enduring impacts on our digital ecosystems. The researchers interviewed more than two dozen VCs, Web3 founders and operators, lawyers, and other policy makers and regulators, to understand the current landscape of crypto and Web3 and ESG’s potential place in it. They found that few of the existing frameworks or regulations are fit-for-purpose for (early-stage) technology investors and their underlying companies, not least when it comes to technologies such as Web3, crypto or biotech. Therefore, the researchers found that integrating ESG principles into the VC process for investing in the crypto/Web3 space can play a pivotal role in building more resilient and socially responsible companies within the sector. ESG is a set of principles guiding a firm or a fund’s management, processes and practices, guiding how corporations and investors integrate environmental, social and governance concerns’ into their business models. While the researchers first ask investors to question the necessity of blockchain technology in start-up projects, where investors still choose to invest in cryptocurrencies and Web3 tech, the researchers present a series of recommendations for the sector, including encouraging them to use a new due diligence ESG framework that the researchers have developed. The framework enables VCs to make responsible investments in the ecosystem. The report suggests that by fostering responsible product design and practices, ESG principles can ultimately help guide the industry towards governance structures that work better for society. Report author, Cessiah Lopez said: ‘Governance can bring stability to emerging technologies, but in a sector dominated by discourse that opposes traditional forms of governance, other approaches can help. Integrating ESG principles into the investing process could be one way to build more resilient and socially responsible companies.’ Applying ESG principles can help make the crypto and Web3 landscape more robust, aligning successful company and project building with risk management and value creation for investors. Prof Gina Neff, Executive Director of the Minderoo Centre for Technology and Democracy, University of Cambridge said: ‘Both a provocation and a call to action, this new report examines whether existing environmental, social, and governance principles used in the financial sector could help get to better solutions in a space that has been fraught with problems. ‘Thanks to Cessiah and Johannes’ extensive research with over 50+ interviews with industry participants, this new framework helps people understand what responsible investing could look like for crypto and web3.’ The report will be launched on 5 December online – register now Recommendations: The researchers present five key recommendations for VCs to ensure responsible investing in the crypto and Web3 industries. They also present a fit-for-purpose ESG framework that VCs can use. The recommendations are: 1. Question the need for blockchain: VCs should prioritise evaluating the necessity of blockchain technology in start-up projects, indirectly scrutinising environmental impact, societal and governance implications. 2. Conduct comprehensive due diligence: Investors should engage in active dialogue with Web3 founders, operators and community members, moving beyond traditional due diligence methods in order to seek tangible evidence (e.g., that ESG principles are being followed by potential Web3 investments before making a decision to invest). 3. Standardise crypto-ESG terminology: While the authors strongly suggest sticking to the widespread concept of ESG, the application of its principles are more important than the nomenclature. An alternative could be ‘responsible investing’ which has become more popular, e.g., among LPs in VCs more generally. 4. Foster collaboration among key stakeholders: This includes policymakers and regulators, to create a comprehensive approach to ESG integration and involve the entire ecosystem for a holistic solution. 5. Use the tailored framework: VCs are encouraged to use the fit-for-purpose due diligence ESG framework, specifically designed for assessing crypto and Web3 ESG issues. The framework enables VCs to make responsible investments in the ecosystem. The report will be launched on 5 December online – register now About the Minderoo Centre for Technology and Democracy The Minderoo Centre for Technology and Democracy is an independent team of academic researchers at the University of Cambridge, who are radically rethinking the power relationships between digital technologies, society and our planet. More information: https://www.mctd.ac.uk/ About VentureESG VentureESG is a community-based non-profit organisation by VCs for VCs to support the ecosystem with meaningful ESG integration. Together with a growing group of 450+ VC funds and 110+ LPs from across the globe, VentureESG are working to make ESG a fixture across the VC value chain, from due diligence and portfolio management to internal fund management and reporting. More information: https://www.ventureesg.com/xa Press contact: Jeremy Hughes, External Affairs Manager, Minderoo Centre for Technology and Democracy, minderoo@crassh.cam.ac.uk