Digging large holes in the ground to extract precious minerals, like gold, isn’t necessarily an ethical investment. But there are ways that gold can be sourced more responsibly.
This article isn’t personal advice. If you’re not sure if an investment is right for you, ask for financial advice. Remember, all investments can rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future.
Holding gold in a portfolio
Commodities, particularly gold, are often perceived as an inflation hedge – something that could potentially provide a return, when other investments like shares are struggling, although there’s no guarantees.
While gold has often held its value in uncertain times, it’s far from a perfect hedge. In the past, there have been times where inflation and the price of gold have acted in tandem. But more recently, the opposite’s been true.
While some investors like having some gold, some may also want their portfolios to have more of a positive impact on society and the planet. This can leave investors with a dilemma. While wanting exposure, they also don’t want their investment to have negative environmental and social implications.
Whatever your view on investing in gold, investors should be cautious. Investing in commodities, including gold, isn’t for everyone. Gold, silver and other commodities are volatile, more specialist investments and often should be held for the long term – we think investing anything over 5% of a portfolio in them is pretty adventurous.
Recycling and repurposing
One recent trend for making gold more environmentally friendly is recycling the bars. Most of the gold mined throughout human history (around 205,238 tonnes) is still accounted for. However, comparatively very little of this is repurposed or recycled.
Products like discarded jewellery, laptops, and phones can often be refined and melted down to create recycled gold. This can be more cost effective than mining and help reduce the negative environmental impacts.
Typically, recycled gold only makes up for 25% of global supply each year. But recycling gold could be one of the many key steps in tackling climate change. That’s because recycling bars produces around 90% less greenhouse emissions than mining new gold.
Lots of companies are shifting to recycled gold to help them achieve net zero carbon emissions. For example, the jewellery brand Pandora has committed to use 100% recycled gold by 2025 and Dell uses recycled gold in the motherboards of their laptops. The 2020 Tokyo Olympics even used recycled gold, silver, and bronze for the athlete’s medals.
Mining is one of the main causes of deforestation. In fact, in the Amazon’s Guiana Shield, gold mining is responsible for as much as 90% of the area’s deforestation. This destruction displaces indigenous communities and destroys ecosystems.
These mines can also be the source of ethnic and political conflict. Mines are generally located in underdeveloped regions and the potential financial gain from gold rushes can often escalate to violence or genocide.
By recycling gold, we’re reduce the need to dig up new metals from the ground. And the good news is that gold can be recycled an infinite number of times without losing its quality.
What’s a sustainable way to invest in gold?
While recycling gold might be more sustainable than new gold in terms of carbon emissions, this doesn’t necessarily address the typical ESG issues associated with mining gold. It can be hard to track the origins of recycled gold and the historic environmental and social impacts. To tackle this challenge, investors can look for Exchange Traded Products (ETPs) that comply with the LBMA’s Responsible Sourcing program. This can normally be found in the investment’s Key Information Document.
When investing in individual companies or ETPs that use recycled gold in their end products, you need to be comfortable with the increased risks of investing in these individual shares or funds.
Setting the gold standard – the London Bullion Market Association (LBMA)
The LBMA is an independent authority who set standards for the global precious metals industry. LBMA’s responsible sourcing programme protects the integrity of the global supply chain for the wholesale precious metals markets. They make sure the standard for gold bars is up to scratch and they push for better quality bars sourced from more ethical sources.
All LBMA good delivery gold refiners are required to implement LBMA’s responsible sourcing guidance. This includes the responsible gold guidance, as well as obtaining annual independent assurance on their publicly available compliance reporting.
Mining companies with better ESG metrics
The mining process remains a contentious issue for investors looking to invest responsibly. So, investing in the companies extracting the gold could be an option for those looking for an alternative to directly investing in gold.
As part of broader research, investors can look for companies like those with a net zero target, exceptional safety record, diverse workforce, biodiversity protection policies and companies that don’t produce any coal.
Independent ESG rating agencies like MSCI and Sustainalytics will take into account a range of ESG factors to rate and rank companies. Often these companies publish their headline ESG ratings on their website for free.
Best in class ESG scores can be a good indicator that ESG risks are being managed effectively. This doesn’t necessarily mean the company is not having any negative impacts on the environment or society though.
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Our ETF research is for investors who understand the risks of investing and that investing in ETF’s isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of an ETF before they invest, and make sure any new investment forms part of a diversified portfolio.