Should we include Gold in our sustainable portfolios?

Gold can form a useful part of an investment portfolio, particularly for those who are happy to take more risk than most with their capital and who are seeking to diversify their portfolio.

But is gold a sustainable investment? How does it measure up on an Environmental, Social and Governance basis?

There are plenty of reasons why gold might not be appropriate for an ethical investor, and most of those reasons relate to the process of mining itself.

Most of the world’s gold is typically found in ore and sediment that also contains toxins like mercury. Rivers are emptied in order to begin the mining process and, when the mining process begins, the toxins often make their way downstream and enter the water system. This has an adverse impact, not only on the environment, but on the local community too, by reducing access to safe drinking water.

Gold mining usually uses up vast amounts of soil and rock which are extracted from the surrounding area. According the US Environmental Protection Agency, one gold mine proposed in Alaska could destroy more than 24 miles of streams as well as a vast quantity of wetlands and ponds. The impact of such destruction would not be limited to the environment, but it would affect the local community too, given that the streams currently support one of the world’s largest salmon fisheries. Such destruction can also displace local communities, with the indigenous people being among the most affected by mining.

Aside from the destruction caused, the mining process also requires vast amounts of energy, giving rise to the emission of greenhouse gases.

At first glance then, gold shouldn’t belong in an ESG portfolio – it is responsible for the destruction of habitats, the contamination of ecosystems and the emission of greenhouse gases.

But, should gold be excluded from all ESG portfolios?

Well, according to the World Gold Council (WGC), the answer is no. You might think that they would say that, anyway, but do they have a point?

In 2019, the WGC set out the Responsible Gold Mining Principles, a framework that provides an outline for what constitutes responsible gold mining. The alignment of gold mining companies to such a framework, the WGC argues, will contribute positively to job creation, tax revenue, greater investment in local communities and it will minimise the impact of gold mining operations on the environment. Rather than stopping gold mining altogether, they argue that gold could be mined in a sustainable way; gold mining could undergo the same transformation as many other industries.

The Responsible Gold Mining Principles, however, only apply to the 32 mining companies which are members of the WGC. Although many of the largest gold mining companies form part of the WGC, many others, such as Rio Tinto, do not.

It seems, therefore, that although there is some evidence that the gold mining industry may become sustainable in the future, it’s currently far from being so at the moment.

However, there are reasonable arguments, from an ESG perspective, to include gold mining companies which adhere to the principles in a sustainable portfolio.

Nowadays, your portfolio can include direct exposure to gold – so, you can invest in the metal itself, rather than investing in the shares of gold mining companies. Is that different?

This is an ethical question for investors to answer themselves and is more complex than a simple yes or no answer. Any gold you buy will have been mined at some point of its life and it’s unlikely to have been mined in a responsible way, but once it has been mined, the ‘second-hand’ market of gold is stable and doesn’t create harm.

Investing in gold increases demand for the metal, which will increase the price, and, in turn, mean that it is more likely that gold miners will want to extract it – responsibly or not. As the price of gold increases, the risk/reward for miners will make their projects more attractive, increasing mining operations.

While gold doesn’t have the same range of uses as some other products of mining, it is an important component of modern life, being highly sought after for its uses in electronic devices, including computers, mobile phones and medical equipment. It’s unlikely for the demand for gold to reduce in these areas any time soon, so it seems that mining will also continue. Efforts are being made to recycle old devices to recover their precious components, but it still takes time, resources and energy to make these components reusable.

This ethical question does create a dilemma for investors – to what extent do you ignore the history of an investment when considering if it should form part of your portfolio? Investors seeking non-financial returns from their portfolios have difficult questions to consider when they are building their portfolios. Spending some time deciding what is and what isn’t acceptable to you is important, and these are the questions are good adviser can help with.  

Oliver Wise

This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. 

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