As the energy transition starts to pick up pace, decarbonisation is quickly becoming a key focus for many institutional investors. We speak to the World Gold Council about the role gold can play in this process and where gold sits in a broader ESG framework.
As the coronavirus pandemic started to spread across the world in early 2020, not many people would have suspected that gold would have a role to play in fighting this health crisis.
We are not talking here about gold as a hedge to an economic downturn, although it does have those properties as well. No, we are talking about the role it plays in rapid antigen tests.
Early in the pandemic, complex lab-based testing tools were developed to determine whether people had contracted the virus. But as it spread, and increasingly more people needed to be tested, the elaborate processes involved in the early tests caused capacity issues and turnaround times increased dramatically.
[Gold] is used in the rapid antigen tests to produce a result and so it has been a massive help in fighting the pandemic. Because so little of it is used, it is only going to be a tiny part of the gold demand, but it has a great impact on society
The rapid antigen test provided a solution, and in these tests microscopic amounts of the precious metal are used in the process to get a positive or negative outcome.
“The way that gold has supported us through COVID is actually much more multifaceted than people realise,” Jaspar Crawley, Head of Institutional Sales for the APAC region at the World Gold Council says in an interview with [i3] Insights.
“It is used in the rapid antigen tests to produce a result and so it has been a massive help in fighting the pandemic. Because so little of it is used, it is only going to be a tiny part of the gold demand, but it has a great impact on society,” he says.
Similarly, gold is used in diagnostic tools to detect life threatening diseases such as malaria, HIV/AIDS and can even be used in pregnancy tests.
“Gold has played a role in getting us out of the pandemic, but it also helps fight malaria in Tanzania and Ghana, for example,” Crawley says.
Gold and ESG
From an environmental, social and corporate governance (ESG) perspective gold is an interesting asset. Because of its application in diagnostic tools, the precious metal can be seen as a contributor to the ‘S’ in ESG.
It also aligns the UN endorsed sustainable development goals (SDGs), in particular with SDG number 3, which is to ensure healthy lives and promote well-being for all.
But when we look at the interaction between gold and the environment, the relationship is less straightforward. The image of a large open-pit gold mine might not immediately scream environmental credentials.
But Crawley says members of the World Gold Council need to comply with the organisation’s Responsible Gold Mining Principles and these include principles for environmental stewardship and biodiversity.
“Responsible miners should already be mindful of the need to minimise environmental destruction, avoid deforestation and preserve biodiversity,” Crawley says. “For example, Responsible Gold Mining Principles 8.1 is about managing environmental impacts and 9.1 is about biodiversity.
“We hope that the COP26 deforestation agreement will add further impetus to wider adherence to the principles, which are already being observed and implemented by our members and others,” he says.
As institutional investors increasingly commit to achieve net zero carbon emissions in their portfolios by 2050, every asset is being scrutinised for its impact on the overall carbon footprint of portfolios.
Gold as an investable commodity is not necessarily carbon intensive. In bullion form, it often just sits in a bank’s vault. It might occasionally get transported elsewhere, which involves carbon emissions, but at an institutional level gold investments tend not to move around much.
“Gold as an asset, in bullion form, is not associated with any emissions or future accumulating emissions,” Crawley says.
“The relatively small amounts of gold moved around each year, and the fact that it doesn’t necessarily require dedicated transportation is of benefit in reducing gold’s carbon impacts, particularly when compared with bulk metals, commodities and materials that require large-scale transport in order to be brought to market,” he says.
As such, an investment in gold might even lower a portfolio’s footprint.
The World Gold Council estimates in a report, titled ‘Gold and climate change: Decarbonising investment portfolios’, that for a typical balanced portfolio of 70 per cent equities and 30 per cent bonds, introducing a 10 per cent allocation to gold and reducing the other asset holdings proportionately lowered the emissions intensity by 7 per cent, while a 20 per cent holding in gold lowered it by 17 per cent.
Where carbon emissions do come into play is in the mining of gold.
“Most of the emissions from the gold sector are related to gold mining operations,” Crawley says. “We estimate around 95 per cent of those emissions are associated with purchased power or fuel combustion. Of this, electricity represents the largest source of emissions at the mine site.
The ability for the gold industry to demonstrate its capacity to contribute to emissions reduction aligned to Paris targets is largely dependent on its ability to change how it sources and uses power and fuels
“The ability for the gold industry to demonstrate its capacity to contribute to emissions reduction aligned to Paris targets is largely dependent on its ability to change how it sources and uses power and fuels,” he says.
The World Gold Council estimates that based on the known plans of the gold mining industry, the emissions intensity of power used in gold production is set to fall by 35 per cent by 2030.
A large part of this fall will come from replacing site-generated electricity from diesel, heavy fuel oil and coal with grid connectivity and the increased use of renewable energy sources.
For example, Newmont has fully electrified its Borden mine in Canada, including using electric vehicles instead of a diesel-powered fleet. This reduces emissions by 70 per cent, but also improves safety as it reduces the need for underground ventilation.
In West Africa, gold miner IAMGOLD is the main partner in building a 22 hectare 15MW solar power plant for its Essakane mine in Burkina Faso. This will see its annual fuel oil consumption reduced by approximately 6mn litres, a reduction of about 18,500t of CO2 emissions.
“There are more [projects] being developed or launched and newer mines will increasingly start to adopt such approaches and technologies,” Crawley says.
“But since Paris, we have seen the ‘stretch’ target of 1.5 degrees Celcius become the priority, driven by our better understanding of the science. We need to be more ambitious in our emissions reduction actions if we are to moderate climate impacts.
“Gold mining’s reduction of the emissions from its power sources would likely need to approach 50 per cent by 2030 if it is to keep on track in moving towards a 1.5 degree scenario.
“In our analysis, the additional reduction needed is currently expected to come from the substantial energy and operational efficiency initiatives, which have increasingly been a feature of modern mining over the last decade, initially driven by the need to better manage costs, but now directed also towards further emissions reduction.
“Analysis from Wood Mackenzie – which provided much of the data and projections for the ‘Gold and climate change: energy transition’ report – shows that newer projects, and those likely to come onstream over the next decade, are likely to be lower emitting, not least as those projects will be more favoured by investors and industry stakeholders.
The expectations for decarbonisation of the gold mining industry does come with a caveat. As the metal becomes more scarce, new projects might explore more challenging ore bodies, which tend to require more energy-intensive techniques to process.
But Crawley says this will only focus the efforts of gold miners on shifting to renewable energy.
“This makes the transition to cleaner electricity even more pressing. Overall, however, the expected trend is that strategic replacement of reserves and the assets more likely to be funded and developed will shift to have lower emission impacts,” he says.
This article is sponsored by the World Gold Council. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.