A collaboration between the World Gold Council (WGC) and specialist climate risk consultancy Urgente finds that adding gold to an investment portfolio can reduce that portfolio’s carbon emissions intensity, as well as increase a portfolio’s resilience against climate transition risks.
The WGC states that climate change is both a physical reality and a rapidly growing systemic and existential risk that all aspects of society are currently learning to address to avoid potentially catastrophic consequences.
In addition, the council says, the process of decarbonising the economy is such an urgent priority that it is currently reshaping nearly all policy, business and investment decisions.
In this regard, 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.
The WGC’s collaboration with Urgente is aimed at specifically seeking to quantify the impact of introducing gold as a strategic investment to a global multi-asset portfolio from a climate transition perspective, while being mindful of its risk and return performance too.
Both organisations find that holding gold in a diversified portfolio can help reduce its carbon footprint without sacrificing returns.
The multi-asset portfolios studied, with data covering five years of weekly returns, were back-tested using different percentage 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.
The WGC and Urgente reveal that the increased allocations to gold had a notable impact on the carbon footprint and emissions intensity of the market value of the overall portfolio studied.
As such, they point out that, 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%, while a 20% holding in gold lowered it by 17%.
There were also strong indications that an allocation to gold, in addition to its climate transition benefits would also improve the risk-return profile of the portfolio, the parties state.
Increasing the allocation to gold can lower the so-called “warming potential” of a portfolio, the WGC states.
Applying a “temperature rating” or “warming potential” label to a portfolio offers a high-level indication of what portfolio holdings imply for the global temperature projected to 2100.
The WGC’s analysis of the impact of asset allocation on such temperature metrics again suggests gold might play a positive role in mitigating portfolio climate impacts.
In this regard, the WGC calculates that a 50% allocation to gold causes the estimated temperature increase implied by portfolio holdings to fall 40%, by over 1 ºC, compared with an equity-heavy portfolio without gold.
Further, the WGC states that gold can reduce the vulnerability of a portfolio to climate transition risks, such as rising carbon taxes.
One of the primary levers and policy responses to climate change, to accelerate the transition to a zero-carbon economy, is generally perceived to be the imposition of a carbon price; putting an explicit price on greenhouse-gas emissions which is then paid for by the emitter.
In this respect, the WGC’s carbon pricing analysis suggests that adding gold or increasing the allocation in the portfolio reduces the yearly value-at-risk.