Gold and decarbonising investment portfolios

We have just published the latest in the ‘gold and climate change’ research series subtitled ‘decarbonising investment portfolios’. This, the fourth of our climate-focused reports, builds on our previous work to quantify gold’s carbon footprint and its decarbonisation pathway. Combining these ‘building blocks’ has provided us with a fairly rounded and detailed perspective on gold’s relationship with climate change. We have now been able to examine, in some detail, not only the potential impacts that the gold supply chain might have on the climate, but also what climate risks and impacts might mean for gold’s performance and prospects as an investment asset.

Gold, uniquely among mined products, is a mainstream financial asset. This requires us to look at the metal in a very different way than if it were simply a commodity. This is, of course, very well known to us at the World Gold Council and underpins our very extensive research experience and depth of expertise in examining gold’s qualities as a portfolio asset. But, in the context of climate change, this also requires potential investors to consider how they might integrate gold into portfolio strategies that are rapidly being reshaped by the need to adapt to climate-related risks, particularly the transition to a decarbonised economy. This can pose substantial challenges as the methodologies and metrics that have evolved rapidly to help investors realign their investment holdings to climate targets may not appear immediately compatible with alternative or tangible assets like gold.

In response to this challenge, our latest research, produced in collaboration with climate risk specialists at Urgentem Research, looks at the decarbonisation of gold from the investor’s perspective. Specifically, it seeks to quantify how the transition to a net zero carbon economy might impact gold’s performance as an asset and its ability to contribute to portfolio decarbonisation and resilience. The findings are strongly supportive of our earlier work and hypotheses that gold might offer investors demonstrable benefits as a climate-risk mitigation asset.

Using a range of measures, we note that an allocation to gold can have a demonstrable impact on reducing the emissions profile of a global equity and bond portfolio and lower its ‘implied temperature’ – an indication of the projected impact of investment holdings on the global climate outlook. Increased allocations to gold allow closer alignment of portfolios with net zero carbon scenarios and 1.5C climate targets. In addition to gold’s potential role in reducing the carbon impacts of a portfolio, it may also be relatively impervious to the heightened risk to portfolio value from a rising carbon price, which is widely perceived as likely needed to accelerate the transition to a low carbon economy.

Currently, few mainstream global portfolios can demonstrate full alignment with Paris Agreement climate targets. There is, therefore, a compelling case for including gold as a strategic asset to contribute to closer target alignment while also protecting value and moderating risk. 

In summary, this latest analysis lends further credence to the suggestion that gold might contribute to portfolio resilience in the context of climate transition risks. 

Please read our new report Gold and climate change: decarbonising investment portfolios here.