Gold and the ESG Revolution

John Mulligan, Director, Member & Market Relations, World Gold Council

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


[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


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


[7] Sydney Morning Herald, January 10, 2020


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

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