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Gold and the ESG Revolution

March 16 2020, 09:26 GMT

We are witnessing a seismic shift in the world of investing which is redefining how

investors perceive and approach assets, companies and sectors. A clear and

pervasive reality has emerged where investment decisions are increasingly
driven by environmental, social and governance (ESG) factors. The ESG Revolution
may, in fact, have been more of an Evolution, and some would argue has been a
long time coming, but it is now definitely mainstream. And a substantial body
of regulation is just around the corner that will catalyse further change,
redirecting very substantial sums of capital towards sustainable investments.

This is not to say that
practical financial and investment principles have been abandoned in favour of purely
political, philanthropic or altruistic motivations. Rather, investors (and
policy makers) are seeking to drive positive societal and environmental
outcomes via investments underpinned by robust business cases. We may face a
daunting range of challenges in moving towards a more sustainable global
economy but, concurrently, very significant opportunities are also unfurling
before us.... there are many common misperceptions regarding the nature of modern gold production.

Green bonds, for example, may
still be a miniscule part of the overall global bond market, but funds are
flowing into them at an accelerating rate; the year-on-year value of green
bonds issued in the first half of 2019 rose by 48%.[1]

So why might this be of such significance for the mining
sector, and gold mining in particular? Because I believe that the opportunities
for positive action are such that, if grasped, they might hold the key to
transforming societal perceptions of – and wider investor interest in - the
industry.

For those not involved in gold mining, or those only aware
of its past reputation or the negative social environmental impacts associated
with the worst aspects of artisanal gold mining, there are many common
misperceptions regarding the nature of modern gold production.

As investors have moved to embed a greater understanding of
ESG-related risks into their thinking, similar considerations have been shaping
the evolution of the gold supply chain. To ensure that gold is produced
sustainably and responsibly, key market participants across the industry have
evolved a range of initiatives and standards to give stakeholders, consumers
and investors greater confidence in the provenance of gold as a responsibly
sourced product or asset. And, of course, this all starts at the mine.

To guide and support this progress, World Gold Council recently
launched the Responsible Gold Mining Principles (RGMPs)[2], a comprehensive framework
through which gold mining companies can set out their position on a wide range
of material ESG factors. The Principles acknowledge and consolidate several guidelines and standards that
already exist to address specific aspects of responsible gold production[3], but integrate them into a single coherent and detailed
definition of what responsible gold mining should look like.

World Gold Council’s Responsible Gold Mining Principles

Independent validation of company conformance to the RGMPs should provide further confidence to investors and stakeholders that the gold production process adheres to high ESG standards, reinforced by external assurance on performance, which should help minimise the risk of “greenwashing”.

The World Gold Council’s Member companies[4], which together represent
over half of all annual corporate gold production, have committed to adhering
to these principles and, over the next few years, we hope the wider industry
will join them in embracing the opportunity to demonstrate its ESG credentials.

There is also often a common misunderstanding regarding the
nature of the gold value chain and, specifically, of mining’s role in creating
and distributing value in host countries and communities.

Gold mining companies are often a major source of income
and economic growth and can play an important role in stimulating and
supporting local socio-economic development. Contrary to the assumptions of
many, the vast majority of gold company expenditure typically remains in the
country in which an operation resides, with 70% of that money paid to
suppliers, contractors and employees. Typically, in most regions, over 90% of
the employees at gold mining operations are from the host country. The economic
value from employment and gold company payments to local suppliers, with
associated tax revenues for local governments, create far more value for gold
producing countries than they obtain from direct royalties on land use and
minerals extraction[5].

Deriving societal benefit from the revenues created by gold
mining will, of course, also depend upon responsible host governments and, for
the development potential of the gold mining industry to be realised, all stakeholders
need to work together in partnership. But arriving at a shared understanding of
the potential value of a vibrant, responsible and sustainable gold industry
might help us move from the transactional type of relationship that often
exists between many industry, government and community stakeholders, towards
more collaborative partnerships.

... gold mining in particular, might be in a constructive position to ... make a positive contribution to achieving net zero carbon targets.

As investors seek to focus on longer-term socio-economic
development outcomes, they often orientate their objectives around the United
Nations’ Sustainable Development Goals (SDGs); 17 goals focusing on key social challenges that range from
ending world hunger to increasing access to clean and renewable energy. Importantly,
in defining these goals and the possible paths to their achievement, the UN explicitly
acknowledged the major role to be played
by private companies. Financial firms are therefore increasingly looking to
identify or develop investment opportunities in the private sector that might
address global needs and meet the goals outlined by the SDGs while also attracting
investors of scale.

Mining has a very significant role to play in addressing
many of the SDGs and, while this potential has been much discussed by academics,
policy advisors and civil society, it might also be to the advantage of the
global mining community to consider in more detail the practical and investment
implications of the goals.

Perhaps the most obvious example of how the mining sector
might contribute to a specific development goals is its current and possible future
role in facilitating the transition to clean energy and a low carbon economy.

Last year, the World Bank launched its Climate-Smart Mining[6] initiative,
drawing attention to the strategic role metals and minerals will play in the
manufacture of cleaner energy technologies. The move to these technologies is
likely to significantly raise the levels of demand for many metals, requiring
both more mining and more minerals recycling. While gold was not identified in
the World Bank report as a ‘climate-smart’ mineral, there are some promising signs that
gold as an industrial product or input may play a useful role in technological
advancements needed to help mitigate climate change.

And broader recognition of climate-related risks and
potential impacts has undoubtedly been the galvanising force and key driver
behind the widespread escalation of ESG factors in investment decision-making
and the regulatory landscape.

There is no more pressing challenge facing humanity than
that of climate change. The concentration of carbon dioxide (CO2) in
the atmosphere caused by human activity is already wreaking havoc with
environmental systems and weather patterns.  

The science is irrefutable and alarming. Atmospheric CO2
reached a high of over 415 parts per million in May of this year, a level not
seen for 3 million years. According to the World Meteorological Organisation,
the past 4 years have been the hottest on record (the 20 hottest years have
occurred in the past 22 years).  Wildfires have raged across Siberia, Alaska, California
and Australia and these fires appear to be getting larger and more intense. (The
intensity and scale of destruction of the recent Australian bushfires has
pushed the country to what has been described as an “absolutely seminal moment”
in its history[7].)

Sadly, these fires also further exacerbate climate change –
all that carbon literally goes up in smoke!

Last August, we also witnessed Hurricane Dorian, the most
powerful storm ever observed in the North Atlantic. And over the last three
years, the US has suffered three floods previously classified as
once-in-500-year events. The global rise in floods is directly correlated with
rising global temperatures.

Climate-related impacts threaten ecosystems, accelerate
extinction trends and soil erosion, and contribute to greater food and water
insecurity.  They are also a very major
threat to public health, increasingly the likelihood of famine, and infectious
and non-communicable diseases.

If we are to reduce these physical risks and stabilise the climate we need to act immediately and commit to actions that might curb global warming to a limit of no more than 1.5C above the pre-industrial average - we are already 1.1C degrees above that average! - by the end of the century.  This will require us to achieve net zero carbon emissions by around 2050 and, to do so, will require radical changes across all corners of the economy and society, including the restructuring of energy, land use, transport and buildings, with unwavering support from governments, businesses and individuals. These changes represent very substantial transition risks and some sectors will undoubtedly struggle to adapt.

In the World Gold Council’s recent report, ‘Gold and climate
change: current and future impacts’[8],
 we presented evidence that the gold
supply chain, and gold mining in particular, might be in a constructive
position to embrace these changes and make a positive contribution to achieving
net zero carbon targets.  Overall, gold’s
carbon footprint is relatively small, estimated at under 0.3% of annual global
greenhouse gas (GHG) emissions. The vast majority of these emissions are
generated by the mining and milling of gold and, more specifically, from the electricity
and fuels used in powering these processes.

Fortunately, there are already a range of options,
increasingly accessible and cost effective, to allow gold miners to move away
from fossil fuels and decarbonise both their electricity and transportation. Many
gold mining companies are already moving in this direction and our research
indicates how, over the next few decades, renewable energy sources, such as
wind, solar and hydro power, and complementary technologies might prove more
cost effective for miners than the existing carbon-intensive options.

Illustrative potential emissions reduction and transition
pathway for gold mining

As I have described, these are no longer peripheral issues
for investors, bracketed with philanthropic CSR programmes and narrow sustainability
specialisms, as was often the case in the past. At the risk of repetition, I
think it important that the gold mining sector embrace the fact that consideration
of climate-related risks is now a mainstream issue, core to business interests
and increasingly at the heart of basic asset evaluation and selection
processes.  Acknowledging this new
reality, gold miners might now grasp the opportunity to demonstrate sectoral
leadership in taking concerted action to further reduce their emissions and
impacts, in line with science-based targets, to help curb the current climate
trajectory and its potentially destructive consequences.

However, in addition to the question of how a company or
sector might impact climate change, a key issue for potential gold investors –
and, indeed, investors of all asset classes - is how possible climate-related
risks and future scenarios are likely to impact the value of their investments
and the overall performance of their portfolios.

Mercer, the world’s largest world's largest institutional investment advisory firm, have
been proposing that investment strategists integrate climate change risks into
their asset allocation models for a decade or so[9].
More recently, the Task Force on Climate-related Financial Disclosures (TCFD)
has been prompting organisations to implement effective climate-related
financial reporting, emphasising the importance of transparency in evaluating
climate-related risks to support efficient capital-allocation decisions. Only
two years after its launch, nearly 800 organizations, including global
financial firms responsible for assets of over US$118 trillion, have declared
their support for the TCFD and its objectives.

Our findings suggest a relatively robust outlook for gold in the face of a wide range of climate-related risks.

This
trend is mirrored by increased regulatory scrutiny and rising pressure from
activist shareholders wishing to influence the environmental and climate
policies of public companies. A
very notable example of this trend is the investor group, Climate Action 100+, consisting of over
300 institutional investors who collectively manage more than $34 trillion in
assets. The organisation’s stated aim is to “engage companies on improving
governance, curbing emissions and strengthening climate-related financial
disclosures.” They have already negotiated strategy changes from some very
major GHG emitters.

With this context in mind, the World Gold Council’s
research on climate change seeks to not only outline a credible path for the
gold mining sector to move towards carbon neutrality, but to also offer insights
regarding how gold’s value as an asset might be impacted by climate risks.

Collaborating with global sustainability consultancy Anthesis, we adopted a methodology broadly aligned with established analytical frameworks for institutional investors and focused on assessing the robustness or vulnerability of asset returns in the context of specific climate-related risks and scenarios. We considered how gold and a range of mainstream assets, representing a substantial proportion of current institutional portfolio holdings, might perform in relation to four different climate temperature scenarios: 1.5C, 2C, 3C; and 4C (above the pre-industrial average), and the potential impact on asset returns to year 2030, 2050, and 2100 (in comparison to our current, i.e. 2019, expectations).

In general, lower temperature scenarios (1.5C and 2C) will require rapid transition and therefore impacts will be more prominent in earlier timeframes. Physical risks, however, are more prominently borne out in the later higher temperature (3C and 4C) scenarios where direct tangible impacts overshadow transition aspects.

Our findings suggest a relatively robust outlook for gold in the face of a wide range of climate-related risks. Gold may face some initial headwinds in a rapid transition scenario due, in part, to the urgent diversion of investment to either build net zero carbon infrastructure or from a severe erosion of consumer confidence which would hit discretionary spending. However, many of these risks are perceived as a lower probability, and of less magnitude or duration, when applied to gold; compared with their likely impact on other assets.

Looking at possible outcomes for other key asset classes,
transition risks may soon start to impact US equity valuations as the US economy appears to be
less prepared for decarbonisation than, for example, the European markets. At
the other extreme, inaction on climate change and consequent higher temperature
scenarios will be very challenging in the longer-term for agriculture, food and
soft commodities. Energy and utilities will also struggle as physical impacts
become more frequent and destructive.

Gold’s relative resilience is broadly compatible with the
World Gold Council’s wider research on gold’s role in contributing to optimal
portfolio performance. We have repeatedly demonstrated gold’s potency as a
diversification asset and its relative outperformance of many mainstream assets
when specific risk factors impact their valuations. The wide-ranging nature of
climate-related risks suggests heightened volatility and potentially
destructive disruption across a range of markets and these conditions will likely
bolster gold’s utility as a safe, stabilising asset and as market insurance. This suggests gold may
increasingly come to be recognised by investors as having a positive role to
play in balancing and moderating climate-related impacts on their portfolios.

The technicalities of institutional investment portfolio
construction in the face of climate change may, admittedly, seem somewhat far removed
from the perspective of an investor looking at a particular gold mining asset
or company. But these factors are highly relevant if gold is going to continue
expanding its role as a financial asset, and if gold mining is to reassert its
credentials as a credible and attractive sector for a wider set of investors.

And there is cause for optimism; the whole gold supply
chain, from mine to market, is now in a strong position to demonstrate high ESG
standards and contribute to climate change mitigation. If the industry seizes
these opportunities, then all its participants, investors and stakeholders
should be able to face the future with greater confidence. Whether it’s a
Revolution or an Evolution, now is the time to commit and act!

If you see something in this article that you agree with, or even disagree with, please let us know in the comments below.

Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux Investor communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.


[1] Source: Climate Bonds
Initiative

[2]
https://www.gold.org/about-gold/gold-supply/responsible-gold/responsible-gold-mining-principles

[3] United Nations Guiding
Principles on Business and Human Rights; the OECD Due Diligence Guidance for
Responsible Business Conduct; the Extractive Industries Transparency
Initiative; Guidelines for Multinational Enterprises and the International
Council on Mining and Metals’ (ICMM) Performance Expectations

[4]
https://www.gold.org/who-we-are/our-members

[5] The socio-economic
impacts of gold mining
, World Gold Council, 2015

[6]
https://www.worldbank.org/en/topic/extractiveindustries/brief/climate-smart-mining-minerals-for-climate-action

[7] Sydney Morning Herald, January 10, 2020

[8]
https://www.gold.org/goldhub/research/gold-and-climate-change-current-and-future-impacts

[9] See, for example, Investing
in a Time of Climate Change; The Sequel
(2019), Mercer.


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Any advice contained in this website is general advice only and has been prepared without considering your objectives, financial situations or needs. You should not rely on any advice and / or information contained in this website or via any digital Crux communications. Before making any investment decision we recommend that you consider whether it is appropriate for your situation and seek appropriate financial, taxation and legal advice.

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