Exposure to gold in an investment portfolio can not only act as a diversification tool, but it can also help reduce its carbon footprint without sacrificing returns, argues the World Gold Council (WGC).
In its latest research, the WGC found an increased allocation to gold has “a notable impact on the carbon footprint and emissions intensity of the market value of the overall portfolio”.
“While the limited (five-year) time frame of the initial back-testing, and gold’s relative outperformance during this period, may 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,” said the WGC.
The council looked at the weekly return of multi-asset portfolios and their exposure to different asset classes for five years. For instance, in a portfolio of 70% equities and 30% bonds, introducing a 10% allocation to gold would lower the emissions intensity of the portfolio’s value by 7%, and a 20% holding in gold lowered it by 17%.
Apart from emissions intensity, an increased exposure of gold would increase the portfolio alignment with the climate target to reach “net zero” in carbon emission by 2050, the report shows.
Gold is also attractive for investors who would like to lower the “warming potential” of a portfolio, which is how much the global temperature would increase by 2100 implied by portfolio holdings.
The council’s analysis found that by allocating 50% of the assets in a portfolio to gold, the warming potential would fall by 40%, while a 10% gold allocation would result in a drop in temperature increase by 7%.
Resilience to carbon costs
As the world transits to a zero-carbon economy, it is generally perceived that carbon taxes will be put on emitters, which adds more climate risks to equity or fixed income assets.
By adding gold to a portfolio, the WGC’s carbon pricing analysts think it minimises the annual value-at-risk. Should the policy environment move towards more aggressive positions, a gold allocation can lessen the inherent transition risk.
Nonetheless, while emissions are minimal through holding physical gold or a gold-backed security, investors will inherit a substantial proportion of the “embedded” carbon footprint associated with the mining and production of gold.