We recently added gold to our managed portfolios, including our socially responsible portfolios. As an investable asset gold is unique in being able to provide a “safe haven” during times of turbulence in the equity markets, while also being seen as an inflation hedge and as a potential alternative to bonds during low yields. However, as a mined commodity, it is naturally exposed to environmental, social and governance (ESG) risks. This is particularly true in regions of conflict and exploitation, where regulation and scrutiny have little traction.
So where do we stand now? Thankfully, it is both possible and practical to own gold that is responsibly sourced: science, technology, and public and regulatory focus are improving the industry and standards of sourcing and production are recognised as paramount when buying any form of gold asset in order to ensure adherence to socially and environmentally responsible values.
Concerns and developments
In the past, gold has been linked with the financing of unlawful armed conflicts such as civil wars, alongside human rights abuses. When undertaken in a responsible manner however, gold mining can have transformational effects on social and economic development in countries where the resource is found. Extracted in line with high social, environmental and safety standards, the metal provides employment opportunities, improved infrastructure and tax revenues, as well as driving direct investment and generating foreign exchange.
But challenges remain. Mining, by its nature, is physically disruptive: the energy intensive extraction of gold can lead to water pollution, loss of biodiversity, and highly toxic emissions. Regulatory developments in this space are evolving fast to address these issues and to bring further transparency to the supply chain. Organisations such as the World Gold Council and the OECD (Organisation for Economic Co-operation and Development) have sought to establish best practice, providing guidelines for extraction companies addressing worker safety, human rights, the environment and corporate governance; extending to mining operations, supply chains and other business relationships. These standards seek to improve the behaviour of gold mining companies and drive positive change.
The case for gold
Around two-thirds of gold supply comes from mines in South Africa, China and the US, while the other third comes from recycled gold (World Gold Council). The bulk of key ESG issues in the gold supply chain occur at the mining stage. Having said that, recent findings by the World Gold Council show that the total volume of carbon emissions for global gold production is significantly smaller than for most other major mined products, including steel, aluminium and coal. This is because gold is scarce and produced in significantly smaller quantities relative to other minerals. Effectively, gold has among the lowest Greenhouse Gas (GHG) emissions per dollar out of the major mined products. Furthermore, due to a retained high value, the carbon footprint per dollar of gold is low.
The World Gold Council’s findings also show that leading responsible gold miners are actively making operational changes to reduce emissions and improve energy efficiency. Alongside this, gold itself may play an important role in technologies that help facilitate the transition to a low carbon economy, in particular in the development of catalysts that help to convert CO2 into useful fuels. Precious metals such as gold are already used extensively in catalytic convertors for vehicles, removing large amounts of pollutants generated by diesel and petrol engines. The availability of efficient catalysts is becoming increasingly important in an emerging area of science and technology known as carbon capture and use (CCU).
According to recent research by McKinsey, CCU could reduce annual GHG emissions by as much as one billion metric tonnes in 2030 if a handful of key technologies are successfully and rapidly developed. In finance, gold can also play a positive role in enhancing the sustainability profile, and reducing the carbon footprint, of investment portfolios over time. Academic research by Baur and Oll estimates that if an investor holds a stake in newly-mined gold for three years or more, the annualised carbon footprint of the investment is lower than the annual carbon footprint of an equivalent-value investment in the S&P 500. The fact that gold has such a high rate of recycle for a commodity and that once extracted its high storage rate is relatively low cost in terms of carbon are also worth noting.
How we added gold
It is important to us that any investment we make in gold is rigorously audited and is not linked to the funding of conflict or the abuse of governance, society or the environment. To achieve this, we use the Invesco Gold ETF, which provides physical exposure to gold bars, of which 100% of the underlying gold bars is compliant with the London Bullion Market’s (LBMA) responsible gold guidance.
This set of guidelines represent the highest global standard for sourcing gold and is intended to combat money laundering, terrorist financing, and human rights abuses, including child labour. This guidance follows a framework for risk-based due diligence to ensure responsible supply chains of minerals from conflict-affected areas. The LBMA also maintains monitoring procedures to ensure responsible sourcing of gold and silver by the accredited refiners with annual testing by independent auditors, in line with the best practice outlined by the OECD.
Ultimately this framework is intended to ensure that all London gold stocks are conflict-free due to compliance with an audited, conflict-free process. While the environmental impact of gold bar production is not yet covered in the LBMA sourcing program, the framework is developing, and the next iteration of the guidance will relate to sustainability and the environment.
Alongside wider extractive industries, gold is facing the same pressures to become more sustainable, less energy intensive and more socially conscientious. This is a very positive trend though much work remains to be done to gain a clearer, more consistent and comprehensive view of the climate change impacts of the gold sector. The standards in place that extractors adhere to on transparency and environmental protection are developing and improving. In turn, this will enable investors to perform more detailed ESG analysis on this mining subsector.
As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest.