Environmental, social, and governance (ESG) issues have moved to the forefront of investors’ minds. The gold industry has not been immune from this shift, but as one of the few tangible, globally recognised assets, gold investment includes a series of unique ESG considerations not always recognised or understood.
The world's wholesale, physical gold market is centred in London under the auspices of LBMA (London Bullion Market Association), some of whose Members participate in the familiar twice-daily price auction. Daily London and loco-London turnover in Q4 2021 equalled some $51bn, but beyond trading, LBMA's Members - and accredited precious metals refineries across the world - are responsible for ensuring that the gold and silver delivered into London is responsibly sourced.
This is more complex than it may seem.
A priority for traders and investors is knowing where the metal originates and whether it was mined and refined in a socially responsible and environmentally sensitive manner. The response to this concern forms a foundation of the Responsible Gold Guidance (RGG) rules which apply primarily to refineries on LBMA's Good Delivery List, a much sought-after position which, among other benefits, enables refiners to sell gold at the international market price.
An issue with gold is that a small amount is easily transportable and highly desirable - a standard 400ml can filled with gold would be today worth some £33,500. But unlike diamonds whose colour and/or exact chemical composition can usually enable the source to be identified, London Good Delivery gold is minimum 995 parts/1,000 pure, meaning it is nigh-on impossible to use mineralogical analysis to establish its origin once refined.
It is for this reason that the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas is embedded within the RGG, and accredited refineries are subject to an extensive independent audit to ensure they follow established Know Your Customer rules. Among these are policies designed to establish both line of sight on the source and destination of the gold being processed. For example, the audit requires confirmation that the gold-supplying counterparty and its ultimate beneficial owners are not on any government lists as wanted money launderers, or as known fraudsters or terrorists.
At first sight a simple solution to questions of provenance would be to source gold exclusively from large, well-established mines with all appropriate security and anti-money laundering measures in place. But the precious metals industry also recognizes the importance of artisanal and small-scale mining (ASM) which, it is estimated, supports 40m gold miners worldwide and produces as much as 20% of annual mined production.
While ASM contributes a small percentage of the London throughput, the industry works with national governments, NGOs and other stakeholders to improve market access and increase the attractiveness of ASM gold to GDL refiners.
Problematic Extraction Methods
A key issue within ASM is the method of extraction which commonly involves mercury or cyanide which are environmentally destructive as well as life-threatening. Rather than imposing an outright moratorium on gold extracted using these poisons, the London market is taking a more nuanced approach, conscious that a ban would threaten the existence of ASM communities by denying their income or by driving communities into the hands of illegal gold traffickers. To help combat this issue, the industry is a signatory to the Minamata Convention on Mercury, a global treaty to protect human health and the environment from the adverse effects of mercury. The convention entered into force in August 2017 and includes a ban on the use of mercury in new mines, and the phasing-out of mercury use in mines already in existence.
Such moves appear to be working. In Ghana, which has recently overtaken South Africa as the continent's largest gold producer, some 40% of gold is sourced from artisanal and small-scale mines. Moreover, in November 2021, GhanaWeb reported that the Ghanaian government "has approved and procured a mercury-free mineral processing technology for small scale and community mining programmes to create sustainable jobs and protect the environment, the lives of miners, the communities and the entire citizenry".
Supply Chain Integrity: Recycled Gold
One current trend among ESG-conscious buyers is purchasing recycled gold, and some jewellers and high-end watch manufacturers are focusing their buying power here.
However, without high levels of due diligence recycled gold is not without its issues. Unlike, for example, glass where over 75% is recycled in the UK, recycling gold does not diminish miners' enthusiasm for extracting more. Furthermore, recycling raises concerns over where and how the original gold was sourced. National authorities in leading trading hubs are increasing efforts to combat the purchase of illicit new gold, which is sold at a substantial discount to the formal market price and then laundered into the legitimate mainstream through the recycled market.
The global precious metals industry works actively to ensure the quality of the metals it offers, and to support the lives and livelihoods of all those in the supply chain.
Responsibly sourced material - whether from industrial, artisanal or recycled sources—should also provide investors the same ethical assurances. For this reason, investors need have few concerns about buying and holding an asset proven over centuries, as precious metals remain an exceptional store of value.