And how investors evaluate and respond to the risks and opportunities inherent in this transition will inevitably influence how they build and manage their portfolios, particularly over the medium and long term.
To further explore the implications of the transition to Net Zero carbon for gold as a portfolio asset, we collaborated with specialist climate risk consultancy Urgentem Research. Specifically, we sought to quantify the impact of introducing gold as a strategic investment to a global multi-asset portfolio from a climate transition perspective, while mindful of its risk and return performance too.
Holding gold in a diversified portfolio can help reduce its carbon footprint without sacrificing returns
The multi-asset portfolios, with data covering 5 years of monthly returns, were back-tested using different % allocations of assets to explore how the incorporation of gold at increasing weights might impact the portfolio’s risk-return profile and its overall carbon footprint. (Historic carbon data for assets beyond 5 years is limited.)
The increased allocations to gold had a notable impact on the carbon footprint and emissions intensity of the market value of the overall portfolio . For a portfolio of 70% equities and 30% bonds, introducing a 10% allocation to gold (and reducing the other asset holdings by equal amounts) lowered the emissions intensity of portfolio value by 7%, and a 20% holding in gold lowered it by 17%.