Technology
The FTX Collapse: When Mistruths Over Rules, Risk And Impact Spread
ESG investors and boosters should learn from the FTX collapse, for instance what happens if certain mistruths proliferate, and how an anti-regulation sphere such as crypto assets avoid scrutiny.
An occasional contributor to these pages is Patrick Wood
Uribe, CEO of Util, a fintech company which gathers data using
machine learning and the UN's sustainable development goals to
help investors make more sustainable investment decisions. He
writes here about how the collapse of crypto exchange FTX has
coloured arguments about ESG investment and finance. Sam
Bankman-Fried, CEO of FTX,
liked to comment about “effective altruism” and hang out with
thought leaders and the like. ESG has already been through a
difficult period because of skyrocketing energy prices and claims
about “greenwashing” investments.
The author of this article argues that it is unwise to assume
that the ESG agenda is somehow weakened or tarnished by FTX’s
demise. Instead, he says it is important to be clear about what
ESG is about, and to recognise how some of it boils down to
PR.
The editors of this news service are pleased to share these views
and invite replies. The usual caveats apply to comments from
guest writers. Email tom.burroughes@wealthbriefing.com
General rule of thumb: Don’t lie about financial products.
To an extent, the substance of the product doesn’t matter.
Neither Crispin Odey nor any one of the BAD- or vce-like funds,
explicit in their anti-ESG objectives, suffers the vitriol faced
by funds claiming goodness or greenness, only to be unmasked.
Just be honest about it.
The colossal consequences of deception are, unsurprisingly,
commensurate with its financial value. In 2008, it wasn’t credit
ratings that sunk the reputation of banks: It was credit ratings
squared, backed and collateralised. The subsequent crisis of
faith rivalled the immediate financial impact, shaping a decade
of political polarisation and generational psychology.
Back in May, we talked about the distrust in the context of
crypto. Humans don’t need a good reason to bet on speculative
assets, nor a charitable ex-post justification, but here it
comes: One of the core tenets underpinning crypto culture
(anti-regulation, anti-risk management) is symptomatic of
distrust in the financial establishment, which is, to some
degree, a hangover from 2008.
Takeaway #1: For an ESG industry in the throes of a
still-resolvable trust crisis, the crypto complex – generally
speaking – is an example of what could happen if certain
mistruths are allowed to proliferate.
There’s an existential risk in selling ESG (risk management) as something it’s not (impact). It’s bad for impact providers, it’s bad for ESG providers, and, by extension, it’s bad for the people, companies, and countries who would, otherwise, benefit from genuine ESG or genuine impact. As we wrote then:
Today’s [crypto] market is very different from the decentralised,
democratised image it projects. With just a handful of people and
centralised exchanges pulling the strings and evading
accountability, it’s the type of market begging for risk
oversight.
And:
Crypto culture is vehemently anti-regulation and anti risk
management. Unfortunately, one result is that there’s little by
way of a) scrutiny to prevent the type of apocalyptic crash that
hit Terra Luna this month, and b) a safety net to protect those
left holding the bag.
If there are more Terra Lunas – and judging by the transparency
of certain exchanges and their supposed reserves, it’s only a
matter of time – [the distrust death spiral] could have
multi-billion dollar ramifications.
Which brings us to Takeway #2: The crypto crash is an example of
what is happening because certain mistruths are allowed to
proliferate.
Affected altruism
There is such a thing as too much honesty. Still, it makes for
great entertainment.
Having brought down the crypto house of cards last week, FTX CEO
Sam Bankman-Fried (SBF) decided, belatedly and against all
possible legal counsel, to share his reflections in the public
square. In a Twitter interview with Vox, the self-described
“effective altruist” (and de facto flag-flyer for both social
impact and crypto regulation) aired his real feelings about ESG
(“perverted beyond recognition”), regulation, and ethics and
PR.
On regulation (specifically, his own, prior, pro-regulation
statements): “[It’s] just PR. There’s nobody out there making
sure good things happen and bad things don’t. F-k regulators.
They make everything worse. They don’t protect customers at all.
[Consumer protection would be good], but regulators can’t do
it.”
On ethics and PR (specifically, his own, prior, pro-ethics
statements): “All the dumb s-t I said. It’s not true, not really.
Everyone goes around pretending perception reflects reality. It
doesn’t. I had to be [good at talking about ethics]. It’s what
reputations are made of. [It’s] this dumb game we woke Westerners
play where we say the right [things] and so everyone likes
us.”
Radical honesty might not save SBF (or the lawyers representing
him), but for sustainable investors to have on record what so
many business leaders think and yet would never say out loud?
Invaluable.
Statements about company purpose or ethics are PR. PR is an unreliable proxy for ESG-as-risk and ESG-as-impact. If there were ever a moment to re-evaluate its place in traditional sustainability ratings and analysis, this is it.
Regulation will make certain disclosures easier to digest but not
necessarily to trust, particularly where metric- or data-free.
Both regulators and companies are responding to growing financial
interest in sustainability. The difference is that one is
reactive, the other, proactive. The more material [is available
on] a corporate disclosure, the greater the pressure on
regulators to respond, sure – but equally, the greater the
incentive for company management to pre-empt perceptions of any
disclosure. Regulatory frameworks are broad and developments
slow. Investor relations have the upper hand.
One misinformed rating is a funny meme. Lots of misinformed
ratings – bundled and sold as a financial product, let alone
bundled and sold as an index on top of which other products are
bundled and sold – is an existential risk to sustainable
finance.
Even as it highlights flaws in traditional measurement methods,
the failure of FTX and the broader crypto ecosystem underscores
why sustainability matters. In 2008, credit ratings were accused
of lacking rigour, accountability and transparency. ESG ratings
need not provoke a similar crisis of confidence today.