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
Environmental [2] |
Social |
Governance |
Climate Change |
Labour Rights |
Anti-Corruption |
Carbon Emissions |
Human Rights |
Anti-Money Laundering |
Pollution |
Diversity |
Corporate Governance |
Waste Management |
Community Impact |
Tax Transparency |
Water Scarcity |
Health & Safety |
Executive Pay |
Biodiversity |
Customer Responsibility |
Accounting Standards |
Land Use |
Supply Chain Labour Standards |
|
Sourcing of Raw Materials |
Privacy & Data Security |
|
Cleantech |
Financial Product Safety |
|
Renewable Energy |
|
|
Green Economy Exposure |
|
|
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.
Environmental [6] |
Social |
Governance |
Climate Change |
Labour Rights |
Anti-Corruption |
Carbon Emissions |
Human Rights |
Anti-Money Laundering |
Pollution |
Diversity |
Corporate Governance |
Waste Management |
Community Impact |
Tax Transparency |
Water Scarcity |
Health & Safety |
Executive Pay |
Biodiversity |
Customer Responsibility |
Accounting Standards |
Land Use |
Supply Chain Labour Standards |
|
Sourcing of Raw Materials |
Privacy & Data Security |
|
Cleantech |
Financial Product Safety |
|
Renewable Energy |
|
|
Green Economy Exposure |
|
|
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.