Can you be a green investor and still own a gold ETF?

There is one gold ETF that claims to be more sustainable than the rest. 

Two of the most-popular exchange-traded fund (ETF) trends in recent years include ESG (environmental, social and governance) and gold.

Over the past three years, the amount of money invested in ESG tracker funds has doubled. Demand for gold ETFs has surged, with the precious metal’s price rallying over the past two years, reaching new highs this summer. Meanwhile, several new ESG-focused multi-asset ETFs have recently been launched by BlackRock.

However, these two trends are contradictory in some ways. Of the three components of ESG, environmental impacts probably registers as the most important for private investors. But the process of gold mining has, arguably, a poor environmental record. As Jordan Sriharan, head of the managed portfolio and passive services at Canaccord Genuity, notes: “Gold and ESG are not natural bedfellows.” He says that generally, in his view, investing in gold does not seem to reflect an ESG philosophy.

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While buying gold is not necessarily investing in gold mining companies, arguably buying gold keeps its price high and, therefore, provides a price signal to miners to keep up their activity.

This potentially poses a problem for ESG-minded investors. Many investors view gold as a must-have asset class in any portfolio, although not everyone agrees. As a safe-haven asset, gold is seen by many as offering downside protection when markets are bearish.

On top of this, with other safe-haven assets such as government bonds offering near or below-zero yields, the relative attractiveness of gold has increased. A small number of investors also view gold as a hedge against the supposed risk of future higher inflation owing to a surge in government spending and central bank quantitative easing.

So, what is an investor convinced of the investment case for gold, but wanting to keep their portfolio somewhat environmentally friendly, to do? Such an investor can consider how strictly they want to adhere to an ESG approach.

Some investors may accept a small holding in gold sitting alongside their basket of ESG-screened stocks and bonds.

But for those trying to ensure their exposure to gold is slightly more on the environmentally friendly-side, choosing a specific ETF is not an easy task. Unlike with ETFs tracking stocks or bonds, there isn’t much readily available data on the ESG-compliance of gold ETFs.

There is, however, one potential ETF option for the ESG-minded gold investor: Royal Mint Physical Gold ETC (LSE:RMAU). Kenneth Lamont, senior analyst of manager research and passive strategies at Morningstar, notes that it is the “only ETF in Europe offering physically backed ‘green gold’”. This so-called green gold is responsibly sourced through an audit process.

This ETF was created by the Royal Mint in collaboration with HANetf. The sustainability of the ETF is emphasised in its factsheet, which says: “RMAU is backed by LBMA good delivery bars that are sourced on a best endeavour basis from the LBMA’s Responsible Sourcing program.” In theory, this means that the ETF buys only newer “green-stamped” gold bars.

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However, Lamont cautions that the environmentally friendly nature of the ETF should not be too overstated. He says: “Trumpeting this too loudly could be seen by some as greenwashing. In some ways, it is a technicality.” Greenwashing is when asset managers push themselves or their funds as “green” through marketing, rather than fully integrating ESG and sustainability into their investment processes.

The technicality here is that other, older gold ETFs are currently unable to claim to be as environmentally friendly due to holding older gold from a less environmentally friendly era. Over time, these older ETFs may catch up with RMAU’s environmentalist credentials.

Lamont explains: “This fund is new, so it only buys ‘green’ gold bars, which have been issued recently, while older ETFs have vaults full of ‘non-green’ stamped gold, which can get traded out over time for newer ‘green rubber-stamped’ options. We would expect other gold ETCs to become more ‘green’ as they too buy newer gold bars.”

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