When building an environmental, social and governance (ESG) friendly portfolio, investors often consider key issues like a company’s carbon emissions. But what about other inclusions in the portfolio, like metals? Do they have a place in an ESG-friendly portfolio? In a recent report, the World Gold Council argues that gold does indeed have a place.
The World Gold Council cited advice from the Morgan Stanley Institute for Sustainable Investing. It said investors could start working toward a net-zero portfolio by starting with an estimate of the carbon emissions currently generated within their portfolio. They can then use that number as a benchmark to measure their progress toward achieving a net-zero portfolio.
Estimating Gold’s Carbon Footprint
In previous research, the World Gold Council looked at how the gold mining and refining processes generate carbon. It found that almost all of the emissions from the gold supply chain are generated during mining. At least 80% of those emissions were generated from the consumption of or on-site generation of electricity.
In another study, the council tried to quantify carbon emissions from mining sites to map out decarbonization strategies for gold mining. To estimate the carbon footprint of gold in a portfolio, the World Gold Council assumes that the gold came from a combination of newly mined gold, thus inheriting much of the carbon footprint of the mining and refining processes, and recycled gold, which has a much lower level of carbon emissions. The council estimates that the proportion of embedded emissions from newly mined and recycled gold was about 70/30.
To calculate the carbon footprint, the World Gold Council divided the carbon generated by the process into three scopes, direct emissions from operations owned or controlled by the reporting company, indirect emissions from electricity, steam, heating or cooling consumed by the company and indirect emissions occurring in the company’s value chain and not reported in the second scope.
The Problem With Including Gold In a Portfolio’s Carbon Footprint
The World Gold Council noted a key issue with including gold in a carbon-friendly portfolio. There is a problem with consistency against other assets because gold must be assessed from both a climate and a financial performance perspective.
To begin, the council calculated the volume of carbon per ton of gold based on the methodology already discussed. However, sometimes the volume of gold is not available. In that case, it recommends using the gold price to calculate the gold volume held in the portfolio based on the approximate value of the metal when it was purchased.
After the gold has been incorporated into the portfolio and given a weighting, the metal’s carbon emissions can be calculated. Using a market capitalization approach, investors can calculate the carbon intensity for the gold and the other assets in their portfolios on a comparable basis.
Other Findings Involving Gold’s Carbon Footprint
The World Gold Council found that gold’s impact on a portfolio’s carbon footprint only becomes significant when it has a higher weighting within the portfolio. However, even with a 40% allocation to gold, its share of carbon emissions is negligible. We should note that a 40% allocation or higher to gold could negatively impact the portfolio’s risk profile due to decreased diversification.
When comparing gold to other investments, the World Gold Council found healthcare and services to have the smallest carbon footprint, followed by technology and communications and then gold. At the other end of the spectrum, extractives and mineral processing had the highest carbon intensity by far, followed by transportation, infrastructure resource transformation and renewable resources and alternative energy.
Portfolio Strategies
The World Gold Council looked at several portfolio allocations to determine the trajectory of each and figure out which, if any, would put investors on the path toward a net-zero 2050 scenario. A portfolio that was 70% equities and 30% fixed income was the furthest away from a net-zero scenario. Moving to 65% equities, 25% fixed income and 10% gold moved closer to a net-zero scenario.
A portfolio that was 55% equities, 15% fixed income and 30% gold was the middle of the road between the worst-case scenario with no gold and the best-case scenario, which was 45% equities, 5% fixed income and 50% gold. The second-best scenario was 50% equities, 10% fixed income and 40% gold.
However, the World Gold Council did not consider the risk profile of portfolios with such high allocations to gold. Of note, not a single one of the allocation mixes put investors on track for a net-zero portfolio by 2050.
What This Means for Today’s Portfolio
One of the biggest issues when it comes to portfolio allocating is choosing a mix that not only diversifies your holdings but also performs well. Gold has been struggling recently, although experts differ on their views of what will happen next with the yellow metal.
Central banks have begun removing their accommodations, with some moving at a fast pace due to significant pressure from inflation. Treasury yields and the U.S. dollar have also been impacting gold prices, but things were looking up for the metal on Monday.
“The surge in Treasury yields is ripe for a pause, so that should provide some support for bullion,” Edward Moya of OANDA said in an email on Friday. “The lists of risks to the global economic recovery are growing, but right now, optimism is high that 2022 will be stronger for larger economies.
He pointed out that gold successfully avoided a retest of $1,700 an ounce last week but warned that it could be tested this week. On Monday, gold stayed well above $1,700, but it looked like $1,770 was an area of significant resistance. Any move above that level could mean a retest of the key $1,800 an ounce level. On the other hand, if the gold price tumbles back below $1,750, it could be headed for a retest of $1,700, as Moya suggested. The yellow metal is hanging onto gains for now, but that could change as the week goes on.
On the date of publication, the author did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Michelle Jones is editor-in-chief for ValueWalk.com and has been with the site since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Email her at Mjones@valuewalk.com.
