Climate change comes with unique existential and systemic risks that as a society we are still learning to address. Greenhouse gas emissions are now known to be the reason behind climate change, causing policies, businesses and investment decisions to be made around the decrease of greenhouse gasses. This is important to take into account as you’re developing your portfolio to ensure a good investment, and a sustainable future.
Decarbonization can happen at many levels, which may make the term confusing at first. In a broad sense, decarbonization refers to the process of systematically reducing carbon emissions in order to meet defined targets and strategies. Overall, the term tends to refer to the process of reducing carbon emissions in different contexts. The overall goal is to reduce carbon emissions to a ‘net-zero’ to avoid disastrous results.
On a more personal level, the term decarbonising your portfolio is often used by market participants that are looking to make investment decisions that will help make their portfolio more environmentally friendly. People tend to make their portfolios more environmentally friendly by reducing its exposure to high carbon risks by aligning with a low carbon future, and finding investments that actively decarbonise the economy. Adding gold to your portfolio is an excellent way to decarbonise your portfolio.
Decarbonization is important because as a society we are trying to combat climate change, which results in increasing policies that are making decarbonization a priority.
Both governments and companies are beginning to have policies that center decarbonization. In turn, this will have a large effect on market risks and opportunities, and the economic landscape as a whole.
Anyone learning about financial markets must learn about these policies and the effects they have on the market to evaluate and respond to successfully build their portfolios.
As a result, it has become urgent to redirect investments to focus on supporting and enhancing decarbonisation initiatives and processes.
Before we discuss how to decarbonize your portfolio, it is important to discuss where in the gold industry supply chain carbon emissions come from. Understanding exactly where these carbon emissions come from is crucial in understanding how carbon emissions are calculated.
Most carbon emissions from the gold industry supply chain occur when the gold is being mined. With this information, you may be asking if there is such a thing as responsible gold mining. As we become more aware of factors that cause global warming, there are policies put into place to ensure that mining gold is as responsible as it can be.
Around 80% of carbon emissions stem from electricity that is used when mining. There tends to be a combination of new gold, gold that has been previously mined, and recycled gold. Gold that has been previously mined, and recycled gold hold less of a carbon footprint associated with the mining process.
For many people, the worst case scenario would include buying gold that is purely derived from newly mined sources. This is extremely unlikely though, because the percentage of newly sourced gold per year fluctuates around 2.5% of the total stock of gold that people are able to buy.
Due to the complexity of gold’s carbon emissions, and to allow an easier comparison with other assets one may have, gold’s carbon footprint is typically broken down into three categories: Scope1, 2, and 3 emissions:
- Scope 1 emissions focus on direct emissions, which refers to the greenhouse gas emissions that are a direct result of the company that is in control of the mining process.
- Scope 2 emissions focus on indirect greenhouse gas emissions that are generated by purchasing electricity, heating, and cooling by the mining company.
- Scope 3 also focuses on indirect emissions, and includes all of the emissions that are not included in scope two that occur in the value chain.
These Scopes can be used to accurately measure the carbon emissions that gold has while taking into account financial benefits in comparison to other assets.
Decarbonizing your portfolio can be both challenging and rewarding. One of the main challenges that people have when integrating gold into their portfolio is creating an approach that will allow them to analyze gold from both a climate and financial perspective.
To decarbonize your portfolio, you must use different weights (allocations) of equities, bonds, and gold for calculating carbon intensity and total emissions on the basis of market capitalization/ enterprise value.
Once these calculation are made, you can compare how each asset is affecting you carbon footprint.
It is widely perceived that a rising carbon price is likely to be needed to accelerate the transition to a low carbon economy, and that gold could help reduce the carbon footprint of a portfolio. Most of this assumes that gold mining, as well as the energy landscape within which it operates, will continue to decarbonize to create responsible gold mining habits. In the presence of the global energy transition, gold mining is well positioned to both contribute to and benefit from it, offering a clear and concentrated opportunity for the sector to pursue decarbonisation. Since nearly all gold supply chain emissions are produced by mine production, decarbonizing that process effectively decarbonizes gold as an asset.
Climate change can be intimidating, especially when new policies are coming out regularly. However, learning about these policies will ensure that you can make the best decisions possible about your portfolio.
