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Gold’s glitter can reduce portfolio climate transition risk
Asset offers investors positive impact without sacrificing returns despite ‘embedded’ carbon footprint
Bayani S. Cruz 30 Sep 2021

Investing in gold can contribute to portfolio resilience in the context of climate transition risks, and an allocation to this precious metal can reduce the emissions profile of a portfolio and facilitate closer alignment of it with net-zero carbon scenarios, according to a recent study.

“Holding gold in a diversified portfolio can help reduce its carbon footprint without sacrificing returns,” states the Gold and Climate Change: Decarbonizing Investment Portfolios study, conducted by the World Gold Council (WGC) and Urgentem, a climate risk analytics consultancy.

The study is the latest in a series of research being conducted by the WGC in its effort to contribute to a clearer, more consistent appreciation of how climate-related risks and opportunities might impact the future prospects of the gold industry.

Including gold as a portfolio asset, the study argues, can have a positive impact on portfolio performance from a climate transition perspective, based on the performance of multi-asset portfolios, with data covering five years of weekly returns that were back-tested using different allocations of assets to explore how the incorporation of gold at increasing weights may impact the portfolio’s risk-return profile and its overall carbon footprint. (Historic data for assets beyond 5 years is limited.) 

For a portfolio of 70% equities and 30% bonds, introducing a 10% allocation to gold, and reducing the other asset holdings by equal amounts, lowers the emissions intensity of portfolio value by 7%, according to the study. Holding a 20% allocation lowers it by 17%.

The benefits of holding gold in a globally diversified portfolio of equities and corporate bonds include:
  • reducing the portfolio’s overall carbon footprint
  • increasing its alignment to climate targets and decarbonisation (net-zero) pathways
  • lowering its implied temperature increase
  • reducing its vulnerability to climate transition risks and shocks, such as the introduction of a carbon tax.

The positive portfolio climate impacts were achieved without adversely affecting the risk-return profile of the portfolio. In fact, there were strong indications that an allocation to gold would improve the performance and risk profile of the portfolio, in addition to its climate transition benefits.

While the limited (five-year) time frame of the initial back-testing, and gold’s relative outperformance during this period, might have skewed the return expectations for gold, longer-term testing found that the performance profile impacts of gold allocations on the portfolio were similarly favourable, albeit to a lesser extent.

Also, in practice, holding physical gold or a gold-backed investment product will be associated with only minimal direct emissions. However, this analysis adopted the assumption that an investor would inherit a substantial proportion of the ‘embedded’ carbon footprint associated with the mining and production of gold. This enabled a forward-looking analysis of how gold’s carbon profile and future decarbonisation potential might affect a portfolio’s alignment with climate targets and, specifically, a net-zero carbon emission scenario.

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