Gold, a staple in a ‘green’ investment portfolio

In the face of the climate emergency, the economy is tending to decarbonise at a rapid pace. Against a backdrop of rising taxes on polluting industries, a study shows that increasing the share of gold in a diversified investment portfolio reduces its overall carbon footprint without affecting returns.

 

EU data confirm that Europe experienced its warmest summer ever in 2022 and that global temperatures over the past eight years have been the highest since records began. The pace of global warming urges a drastic reduction in greenhouse gas emissions. This is the only way to avoid the catastrophic consequences associated with climate change.

Given this reality, the process of decarbonising the economy is such an urgent priority that it is conditioning a large part of current political, business and investment decisions. In this regard, a report by the consultancy Urgentem concludes that the inclusion of gold in a diversified investment portfolio “can have a positive impact on portfolio performance from a climate transition perspective”, as it reduces the overall carbon footprint of the portfolio without affecting returns. 

  

More gold, fewer emissions

The study analysed how diversified investment portfolios with different asset mixes would have performed over five years to determine how the inclusion of gold affects the risk-return profile and the overall carbon footprint.

Their conclusion is that, for example, in a portfolio with 70% equities and 30% bonds, devoting 10% of that portfolio to gold would reduce emissions by 7% while increasing the percentage of gold to 20% would reduce emissions by 17%. Furthermore, there are clear indications that the inclusion of gold in the portfolio improves the risk-return profile.

Although none of the asset mixes analysed would achieve the zero emissions target by 2050, the ones that would come closest would be those that include a higher percentage dedicated to gold. In fact, the only ones that manage to reduce emissions are those that devote at least 20% of their investment to gold.

In terms of the contribution of investment portfolios to the projected global temperature rise up to 2100, gold would also play a very positive role in mitigating its climate impact. The study estimates that devoting half of the portfolio to gold would result in a 40% reduction (more than 1°C) in the warming generated by that portfolio. A portfolio with 70% equities and 30% bonds would generate an increase of 2.96°C, while a portfolio with 45% equities, 5% bonds and 50% gold would only increase it by 1.76°C.

 

What if emissions taxes were raised?

One of the main policy tools to curb climate change and accelerate the transition to an emission-free economy is the taxation of greenhouse gas emissions. In this respect, analysis of carbon dioxide prices shows that a higher proportion of gold will help reduce the market risk for a portfolio. The more stringent emission reduction policies become, the more desirable it will be to increase the share of gold in the portfolio.

The authors of the study admit that the limited time frame (five years) of the data initially collected and the relative outperformance of gold over this period may have biased expectations of gold returns, but they caution that longer-term analysis also confirms the favourable effect of gold inclusion on the return profile of the portfolio, albeit to a lesser extent.

Moreover, the report’s authors assume that an investor inherits a substantial proportion of the carbon footprint associated with gold mining and production. Their forward-looking analysis, therefore, allows them to assess how much portfolios would be affected by the potential decarbonisation of this precious metal.

 

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  1. Joan Santacruz CarlúsJoan Santacruz Carlús says:

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