By Hector McNeil, Co-Founder and Co-CEO, HANetf.
We live in an age where we are starting to think more about where and how the products we use are sourced. In the world of commodities, this has focused investors’ minds on key issues like environmental impact and the exploitation of labour in the developing world.
Hector McNeil, Co-Founder and Co-CEO of HANetf.
For investors in commodities, ESG criteria are becoming a more important measurement. While we can focus an ESG lens on the work practices of a mining company, what about the gold we invest in?
Responsible sourcing of gold applies ESG criteria to how gold is mined and used and where it has come from.
One of the attractions of gold ETCs has been that investors can be confident that the ETC is holding actual gold bullion in vaults. This level of confidence is even more welcome during times of economic uncertainty, but can you enjoy similar levels of confidence about the source of that gold?
Responsible sourcing of gold grew in importance when both the London Bullion Market Association and the World Gold Council established guidelines for ethical gold last year. Gold throws up a number of key ESG issues for ETCs that need to be addressed, especially as this is a commodity that remains in circulation:
● Exploitation of labour
● Impact on the local environment – e.g. land use and water scarcity
● Impacts on local communities
● Corruption and money laundering issues
The gold mining industry has been presented with new guidelines by the World Gold Council that cover many of the issues raised above, as well as the use of supply chains and human rights monitoring. The LBMA has instituted a responsible sourcing program that certifies London Good Delivery Bars that meet its own ethical criteria and are underpinned by regular audits of refiners.
Emphasis is placed on the sourcing of gold from artisanal-scale mines (ASMs), small scale mines, frequently in remote areas with poorer oversight and no large scale mining presence. Some of these may be controlled by criminal or terrorist organisations or use exploitative labour practices. Refiners are now being required to double-check their ASM sources and certify that they meet the required standards.
These initiatives are now creating a considerable pool of gold bars that can meet higher investor ESG standards. The bars can be certified and tracked to ensure that they are of good provenance.
It was only natural that HANetf decided to embrace these criteria for our own gold ETC product, which we launched with the UK’s The Royal Mint in February. This was a first for the ETF industry, as The Royal Mint Physical Gold ETC (RMAU LN) aims to exclusively use responsibly-sourced bars that meet the requirements of the LBMA responsible sourcing program.
Fully-compliant ETCs will need to be fully transparent, disclosing the bars they hold and their provenance. This can be harder to effect if the ETC is older and owns many legacy bars from the pre-2012 era. Many of the largest gold ETCs on the market were launched prior to 2012 and may find it hard, given the size of their holdings, to transition to a position where their bars all meet these new standards.
Investors’ concerns about gold are being stepped up and the gold mining and processing industry is responding with the prospect for tighter requirements to meet these ethical standards.
At the African Mining Indaba in Cape Town at the start of February, the LBMA stated that it would be pushing for even higher standards of transparency over the next three years with more transparency and a higher quality audit required. The ETF industry is playing an important role in pushing for these higher standards. We anticipate that responsibly-sourced gold will become the standard for gold and silver ETCs going forward.
As with all ETFs, your capital is at risk.
(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)