RMAU | Responsible Sourcing in Physical Gold ETCs

It's perhaps no surprise that in an age of climate change, resource depletion, plague and conflict that ESG (Environmental, Social and Governance) funds have become one of the highest growth areas of asset management. In 2019, European ESG fund assets grew by an astonishing ~58% to over £560 billion [1] in assets.

There are a huge array of active and passive funds, ETFs, structured products, venture capital firms, and activist companies that face the ESG space and they offer an equally wide range of approaches; including positive screens, negative screens, religious screens, tilts, ESG scores, ‘green’ thematics, social thematics and many others. 

The proliferation of products and assets has been driven by end investor demand to create personalised values-driven portfolios and manage risk associated with climate change, resource depletion and many other issues.

Key ESG issues

Increased choice in ESG equity and fixed income funds has been good news for investors who want to incorporate ethical goals to their portfolio but there has been far less ESG choice when it comes to one of the world’s oldest and most beloved assets – gold. 

Gold goes Green

Gold is found in almost every mainstream multi-asset portfolio due to its important and valuable characteristics – diversification against equity and fixed income risk, a store of value, a hedge against inflation and a source of returns. Given the critical role gold has to play, how can ESG investors include gold in their portfolios? 

A company incurs ESG risk because of what it makes, how it operates and how it behaves – active decisions on the part of their management teams, boards and shareholders. But gold is not a company and does not make these decisions. If gold has no moral agency, how can it be ESG?

A new concept has been developed - responsible sourcing: which focuses on the main point of ESG risk in the gold supply chain. This focuses on how the gold was extracted, who profited, the treatment of miners and supply chain labourers and whether there is a risk that the gold has been used for money laundering, terrorist financing or supporting war. This process is made more difficult as gold doesn’t have a limited shelf life and once a bar is produced it can stay in the gold ecosystem for good, no matter how it was mined, produced, owned or stored. By definition, there are gold bars in circulation that were mined and smelted in ways that would be unacceptable today. Therefore, investors who enjoy the diversification benefits of holding gold in their portfolio have long demanded the gold industry to make the necessary strides to provide clarity around the provenance of gold that goes into making the gold bars. The industry met the challenge by implementing a policy around responsibly sourced gold.

Gold industry initiatives 

The two main gold industry trade bodies, The World Gold Council and London Bullion Market Association have both established guidelines for responsible gold sourcing. In September 2019, The World Gold Council launched their “Responsible Gold Mining Principles” 3 – a set of guidelines for miners that covers ten key areas - environmental impact, responsible supply chain, workforce safety, human and labour rights, community impact, environmental stewardship, land use and water & energy use. 

The London Bullion Market Association has created guidelines4 for refiners that are designed to further ensure that gold has been sourced responsibly and has not contributed to conflict money laundering, terrorist financing or global human rights abuses. LBMA members are required to have regular audits to ensure these guidelines are met.

‘London Good Delivery’ bars produced after 2012 typically meet the LBMA responsible gold sourcing requirements.

We can see that the application of WCG and LBMA standards [5] plays a significant role in addressing risk across all three ESG pillars within a gold allocation.

A new standard in responsible gold

In February 2020, HANetf made history by launching the first gold ETC with a European Sovereign Mint – The Royal Mint Responsibly Sourced Physical Gold ETC (RMAU). Uniquely, gold in RMAU is held in the vaults of The Royal Mint as opposed to a commercial bank. This is the first and only time in history that a sovereign mint has guaranteed the security of the assets in an ETC, removing a key source of systemic risk from the ETC chain. The ETC is listed on London Stock Exchange and XETRA. 

RMAU is unique in explicitly holding physical gold bars that are responsibly sourced from the LBMA’s Responsible Gold Sourcing Programme on a best endeavor basis. Since launch, the ETC has provided 100% coverage of gold bars that meet this rigorous standard. 

Investors are assured that the gold is extracted in a manner that does not cause, support or benefit unlawful armed conflict or contribute to serious human rights abuses or breaches of humanitarian law. In contrast, older gold ETFs and ETCs are more likely to hold physical gold that was not responsibly sourced. The older the ETC being held, the more likely it will have bars that don’t meet the programme’s strict requirements and their creation and redemption processes don’t specify this subset of LBMA ‘good delivery’ bars. This is the case for ETC issued in Europe, North America and Asia. We believe that over time, this will become the standard for gold ETCs, but for older, legacy funds which hold billions of USD in gold bars it will be difficult and take significant time and resources to implement.

RMAU provides a full list of bars it holds on the HANetf website, which includes everything you need to identify the bar and its provenance. The bars are also audited regularly by a third-party firm. 

Therefore, investors who seek to enhance the ESG profile of their portfolio can consider RMAU as an alternative to their existing gold allocation.

Article Date: 17th March 2020.