Today’s guest columnist is Aidan O’Connor, an associate vice president at the strategic communications firm Prosek Partners.
The recent surge of profitable non-fungible token issuances tied to art, music, memorabilia and other intellectual property has put the NFT market firmly in vogue.
The sports economy is at the forefront of this explosion of mainstream interest in NFTs, and the rationale is clear. With live-event revenue down and the collectibles market booming (1 in 3 U.S. adults collect some sort of physical item as a hobby or investment), sports organizations willing to embrace this trend can monetize a growing market and use NFTs to engage a new, tech-savvy generation of fans.
The scarcity and built-in verification of NFTs recorded on a tamper-resistant blockchain make them attractive for digitally native sports memorabilia and collectibles. Dallas Mavericks owner Mark Cuban, for example, recently unveiled Lazy.com as an online gallery for digital art and collectibles displays.
As popular and lucrative as this trend appears, there is a downside to some NFTs that sports organizations must recognize and navigate: their carbon inefficiency.
The Ethereum blockchain, on which most NFTs are minted and transferred, carries a sizable carbon footprint. Digiconomist’s Ethereum Energy Consumption Index estimates the network’s total electricity consumption by measuring average price per kilowatt-hour. At its current rate, Ethereum consumes roughly the same amount of electrical energy over a calendar year as Belarus, and a single transaction on Ethereum requires more power than the average U.S. household does over 2.48 days—that’s the equivalent of 77,300 VISA transactions or 5,800-plus hours of watching YouTube.
This massive energy inefficiency derives from the Ethereum network’s “proof-of-work” consensus mechanism. In lieu of having a centralized third party approve transactions, proof of work assigns an arbitrary, complex puzzle that must be completed so transactions can be authenticated, a process often referred to as “mining.” Solving this puzzle adds a new “block” of verified transactions to the blockchain, with the first machine or “miner” that completes it receiving Ether (ETH), Ethereum’s native token, as a reward.
The computations to solve these puzzles require increasing amounts of electrical power, supplied in part by coal-powered facilities in China, where Ripple CEO Brad Garlinghouse claims 80% of mining capacity for Bitcoin and Ether resides. China’s fossil fuel consumption increased by 0.6% in 2020.
How much responsibility should sports organizations take for their affiliation with some of these energy-guzzling NFT types? That’s up for debate. As Ethereum’s popularity grows, so too does the profitability of mining. As more miners are incentivized to work, the vicious cycle continues. The collective energy consumption and carbon emissions required to maintain this network can put NFTs at odds with a sports organization’s Corporate Social Responsibility (CSR) obligations and Environmental, Social and Governance (ESG) commitments.
CSR accountability and ESG measurement are becoming a basic expectation among investors, consumers, and employees. Deloitte research suggests that ESG-mandated investments could make up half of all managed assets in the U.S. by 2025. A separate study from IBM and NRF found that 57% of consumers are willing to change their buying habits and brand allegiance to reduce environmental impact. Climate risk and sustainability reporting were also key elements of BlackRock chairman Larry Fink’s letter to fellow CEOs this year.
As more private equity and other institutional capital enters the sports economy, several organizations have implemented strategies toward sustainability. Many are participating in the UN’s Sports for Climate Action Framework, while the likes of FIFA, the IOC and Formula One have set their own target dates for carbon neutrality. And let’s not forget domestic league initiatives such as NHL Green, NFL Green, MLB’s partnership with the Council for Responsible Sport, and MLS’ Greener Goals platform.
Not all blockchains are equally culpable for energy guzzling, however. To its credit, NBA’s Top Shot uses the Flow blockchain. Separate from Ethereum, where marketplaces like MakersPlace and Rarible reside, Flow is purpose-built for NFT collectibles. It uses a “proof-of-stake” model where miners enforce consensus and verify transactions according to how many tokens they lock up as collateral. This alternative consumes less electricity and produces fewer carbon emissions than proof-of-work blockchains like Ethereum and Bitcoin.
As CSR and ESG criteria grow more important among investors and consumers, how can a business reconcile the large carbon footprint of blockchain-based products and services with a commitment to sustainability? As a first step, sports economy operators entering the NFT space must ask themselves the following questions:
- Is the organization lobbying its NFT marketplace to embrace a proof-of-stake model? Ethereum researchers have long supported a move to proof-of-stake. Whether this happens in 2021 remains to be seen.
- Are stakeholders being educated on proof-of-stake’s sustainability advantage over proof-of-work?
- Is the internal reporting around NFT adoption sufficiently transparent, especially for those working on CSR and ESG initiatives?
- Is the organization pursuing other sustainability measures to offset NFTs, such as purchasing carbon credits? If so, are these credits independently verified? (Trove Research CEO Guy Turner has argued that over 60% of carbon credits have “questionable additionality claims.”)
- Has the organization’s communications team prepared counter messaging, contingency plans, and a playbook of crisis scenarios, in the event of a conflict between chasing returns and environmental accountability?
Taking precautions like these will help sports organizations preempt reputation risk and recoup more value from investments already made towards CSR and ESG initiatives. They must find the balance between honoring sustainability commitments and embracing dynamic, potentially lucrative ideas that also foster new fan engagement.
In addition to his position with Prosek, where he works with private equity, enterprise technology and sports economy clients, O’Connor is also a strategic adviser to Zone7, an AI-based injury prevention platform.