Gold: The Smart Choice for ESG-Savvy InvestorsBy Alejandro Ehrenberg | Mon, 12/07/2020 - 10:33
Don't miss Terry Heymann's participation as a speaker at Mexico Mining Forum 2021 on February 10-11. You can find the program and registration here!
Q: Why does the gold industry actively seek environmental and social responsibility standards?
A: There has been a confluence of different factors that have come together to put environmental, social and governance (ESG) matters at the forefront of the gold industry’s activities. This has led to what we are seeing today: a number of standards and principles coming out that speak to what constitutes good ESG performance. There are several reasons for this. First, investors, governments, mining communities and companies in the gold supply chain are paying more attention to ESG factors. End-users of gold are becoming more aware, as well.
There is a long history of responsible business practice in the gold mining sector. Companies in the industry generally tend to recognize that operating responsibly is the right thing to do since it supports the overall effectiveness of their businesses. For example, putting health and safety at the top of your priority list is not only ethical it will also give you greater control of your daily operations and enable you to become more productive.
Over time, a number of issues started to be grouped under the broad umbrella of ESG. The World Gold Council (WGC) started hearing from investors and other stakeholders that determining what constitutes a good ESG performance was getting somewhat confusing. In response to that concern, the WGC put together an overarching framework: Responsible Gold Mining Principles (RGMP). Its objective is to gather in one place all those ESG issues. This framework was built under the direction of our members: forward-thinking gold producing companies. The RGMP are designed to consolidate in one easy-accessible instrument all the risks that need to be managed from an ESG perspective. It is about synthesizing the gold industry’s broad ESG landscape for everyone to be able to know what to expect of responsible gold mining.
Q: How strong is ESG across each link of the gold supply chain?
A: The key parts of the chain are, first, large-scale gold miners, which are committed to operating at high ESG levels. Second, refiners. They have an important role in undertaking due diligence and making sure they source gold responsibly. Next come downstream purchasers, like banks, jewelers and technology manufacturers. Also, there are artisanal and small-scale miners (ASM) that contribute a significant amount of annual gold supply that needs to find its way through the supply chain as well.
At the moment, there are strong systems in place for large-scale miners. They normally have public disclosure mechanisms and other accountability instruments. There are robust systems in place at the refiners, too, and if they are accredited with the LBMA, they undergo strict due diligence sourcing standards. Downstream companies have rigorous sourcing criteria as well.
The issues tend to present themselves with ASM. It is important to point out that there are exemplary ESG practices in ASM. There is nothing inherently wrong with the sector. They can be a responsible source of gold. However, there are many bad examples. To discern between responsible and irresponsible practices in the ASM sector, formalization is crucial. Standards are hard to implement in a setting of informality, so it would be beneficial for ASM to enter the formal gold supply chain. The sector could then implement standards that would benefit all stakeholders. Achieving that requires an effort from stakeholders across the industry and government.
Q: How does the Conflict-Free Gold Standard (CFGS) help a country like Mexico, which is experiencing violence in certain gold-producing regions?
A: The CFGS was released in 2012 in an effort to address how to operate responsibly in areas considered to be affected by conflict. The WGC was involved with the OECD in the development of this standard. The main goal was to define which areas should be defined as conflict-affected and high-risk. It is up to companies to define whether they operate in such an area. The WGC does not decide this but can provide guidance for companies to make the assessment. If it is decided that a gold producer is operating in a conflict zone, then the standard helps that producer demonstrate it has the systems and processes to operate responsibly. Any area where there is conflict requires economic opportunity and activity to overcome the challenges and build peace. The CFGS is a tool for doing that responsibly.
At present, the CFGS is included in the RGMP. The section that deals with human rights and conflict requires companies to implement the CFGS.
Q: What is the role of the gold industry in achieving the UN Sustainable Development Goals (SDGs)?
A: The WGC is a membership association that constitutes 28 companies that are at the forefront of the gold sector. Our board is made up of these companies’ CEOs. They decide the agenda and highlight the importance of having a gold industry that cares about operating responsibly. There is a strong belief that, when done responsibly, the sector can be a development engine for the regions where it operates.
Our first approach is to help companies make sure that they do no harm. Once that is settled, we focus on maximizing positive impact. There are many examples of how the gold sector plays a role as a development partner. Almost across all 17 SDGs you can find compelling examples of how the gold industry is contributing. The industry provides healthcare for its workers and communities — a relevant issue in 2020. It fosters education, supports entrepreneurship and develops infrastructure. To make this explicit, the RGMP articulates what constitutes responsible mining and then ties it to the SDGs.
Q: Why is gold a good asset in ESG-savvy portfolios?
A: The WGC does a great amount of work to make the purely economic case for gold clear. We have tools and information to that end. In regard to the ESG case for gold, there are two key factors to consider. First, from an economic lens, some ESG factors — in particular climate change — will heavily impact investment portfolios over the next 10 to 20 years. We will very likely see repricing among asset classes and risk evaluation will be dramatically impacted by climate change. For example, real estate in coastal areas will be strongly repriced. Many businesses are doubting whether they will attract investment in the future, like the coal industry. In all this uncertainty, gold will play an increasingly important role as a climate change mitigating asset. Generally speaking, the metal is already a risk-mitigation asset. But as investors increasingly factor in climate, the case for holding gold in a diversified portfolio will be even stronger. The WGC has evaluated the performance of gold under different climate scenarios and the metal will outperform other asset classes under various scenarios.
Moreover, as investors increasingly look to incorporate an ESG component into their investment-making process, it is important to say that gold and gold mining should be considered as part of that outlook. The gold industry’s ESG performance is strong, notwithstanding the risks that need to be managed. That is true with respect to physical gold, ETF instruments or gold mining equities. Each method of gaining exposure to gold has merits, depending on the investor’s circumstances. But all of them have solid ESG characteristics.
The World Gold Council is the market development organization for the gold industry. It works across all parts of the industry, from gold mining to investment. Its aim is to stimulate and sustain demand for gold.