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Gold’s Misguided ESG Ratings

February 12, 2020

Read Time 4 MIN

 

Geopolitical Events Support Gold

Gold started the year driven by risks associated with geopolitical events. On January 3, a U.S. drone attack on an Iranian general in Iraq led to a retaliatory strike by Iran on a U.S.-Iraq military base on January 8. This enabled gold to briefly reach the $1,600 per ounce level for the first time since 2013. Gold pulled back to its low for the month on January 14, but then trended higher with news of the Coronavirus outbreak in China. Metals and crude oil prices fell sharply as the virus spread and markets worried about impacts on economic growth in China and beyond. U.S. treasuries rallied and gold finished the month with a $71.89 per ounce (4.7%) gain at $1,589.16. Meanwhile, gold stocks underperformed gold, probably due to some mean reversion following strong outperformance in December.

Gold Price not Indicative of Physical Demand

The World Gold Council (WGC) reported that total gold demand fell 1% in 2019. Consumer demand for jewelry, bars, and coins was especially weak, falling 11% to a decade low, mainly due to weakness in India and China. Given the decline in demand, how is it that the gold price was able to advance 18% in 2019? It’s because gold behaves more like a financial asset than a commodity. Physical demand drives commodities prices, whereas financial demand drives gold prices. Strong buying from bullion exchange traded products and central banks for gold as a financial and currency hedge drove the price, even though the volumetrically larger consumer demand was very weak. Investment demand in the paper market (futures and over-the-counter) also contributed to gains in 2019. We expect the same demand and price relationships to persist in 2020 if gold price strength continues. It currently looks like gold is poised to trend through $1,600 per ounce in the first half of the year.

ESG Movement Emerges as Lifestyle Demands Fuel Pollution

Around the world, most people, organizations, corporations and governments have finally come to realize that there is too much pollution of all types and that the planet would be a better place if there was less of it. Our lifestyles are the fundamental drivers of pollution. The cartoon below shows the average American will consume over 3 million pounds of the minerals, metals and fuels needed to manufacture and build virtually everything around us. Europeans and Japanese consume a similar amount, while there are billions of others who aspire to attain the same wealth and conveniences as people in developed countries. Extracting and consuming such quantities creates pollution, but who is willing to give up his or her flat-screen, car or vacation in order to reduce their carbon footprint?

2019 Mineral Baby

There is a tremendous amount of discussion, controversy and politics around the impact that pollution will have on the environment in the future. Out of this has emerged a broad-based movement to mitigate the threat that pollution poses. In finance, this movement is known as ESG (Environment/Social/Governance) investing. According to Bloomberg, assets invested using a broad definition of this approach reached $30.7 trillion at the start of 2018.

ESG investing has the best intentions, however, within the gold industry, we believe it carries many shortcomings as it is currently being used. ESG ratings agencies score and rank companies based on their ESG performance. These agencies are becoming powerful gatekeepers as a growing number of investors use ESG ratings to screen companies for further consideration. Unfortunately, the precious metals industry ranks among the riskiest due to its environmental and social exposure. Unlike most industries, mining companies cannot choose the climate, community or location that is best suited for their business. They must build in and around their ore deposits, which are essentially scattered randomly around the world and usually in very remote places. Mining is also capital intensive, requiring more heavy equipment, material and energy than most businesses. Therefore, we believe for an investor to compare the ESG performance of a mining company to a retailer, aerospace, or semiconductor company is disingenuous. Generally, the closer a sector is to the consumer or end-user, the lower the ESG risk. However, in our view no other sector could exist without the basic materials that mining provides.

Gold Industry Sets Global ESG Principles

Each gold operation has hundreds of environmental and social criteria and many are unique to each operation. Gold companies we have spoken to engage regularly with the ratings agencies. However, they are concerned that the huge volume of ESG information is overwhelming and that the agencies lack the capacity or expertise to do an adequate evaluation. There are also concerns that ratings agencies have an over-reliance on press and internet articles and non-governmental organizations (NGO) reports for information. We believe these often carry a negative bias against mining and lack a balanced third-party perspective. In addition, there is a “black box” aspect and lack of standardization as to how each agency arrives at their rankings. For example, Sustainalytics describes the core of their model as “a list of subindustry ‘Beta Indicators’ that generate so-called ‘Beta Signals’ that finally get added to the subindustry default beta value of 1 together with the Qualitative Overlay and the Correction Factor.” We doubt there are many investors that can relate to this description.

Current ESG ratings analysis also ignores the contribution mining has made to thousands of communities around the world. Mining creates jobs and brings health care and education to lesser developed countries where we believe few businesses or charities would operate. In places like Nevada, Western Australia or Canada, mining supports much of the rural economy, lifestyle and culture. We believe that any ESG analysis must incorporate on-the-ground performance, in addition to the checklists and public information used by ratings agencies.

The gold industry has recognized the need for rigor and standardization in ESG reporting. To accomplish this, in 2019 the industry-backed WGC published Responsible Gold Mining Principles (RGMP). The RGMP sets ten ESG principles containing 51 items for companies to report on. The principles are a synthesis of a number of global standards already in use as well as input from a range of stakeholders and agencies. They are aimed at providing investor and consumer confidence that gold is ethically sourced. Conformance with the principles will be insured annually through public reporting and a third party “independent assurance” conducted at both the mine site and corporate level. Companies that participate will be allowed a three-year period of implementation, with independent assurance beginning in the third year. We expect all of the gold producers in which we invest to adopt RGMP.

The WGC has also set a lofty goal of net-zero emissions by 2050 through process enhancement, decarbonisation of transport and electricity, self-sufficient energy and emissions off-sets. While the industry is already reducing emissions where it makes the most economic sense, in our opinion, meeting the 2050 goal will require further technical advances in renewable energy, battery storage and electric vehicles that are beyond the gold industry’s control. Companies stand ready to test and adopt new technologies, but we believe widespread implementation is years from becoming reality.

Managing environmental and social risk is nothing new to gold companies. In fact, it is among the most important aspects of their business. We do not invest in companies that fail to strive for ESG excellence. However, if investors avoid the broader mining industry due to what we see as unrealistic or misguided ESG expectations, the industry may become starved of capital needed to maintain production. If taken to extreme, we believe a lack of capital creates shortages and rising prices that could bring an unwanted inflationary cycle with world-wide economic hardship.

Download Commentary PDF with Fund specific information and performance.

IMPORTANT DISCLOSURE

All company, sector, and sub-industry weightings as of January 31, 2020 unless otherwise noted.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

About VanEck International Investors Gold Fund (INIVX): You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The Fund’s overall portfolio may decline in value due to developments specific to the gold industry. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The Fund is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Diversification does not assure a profit or protect against loss.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus. An investor should consider a Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

IMPORTANT DISCLOSURE

All company, sector, and sub-industry weightings as of January 31, 2020 unless otherwise noted.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

About VanEck International Investors Gold Fund (INIVX): You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The Fund’s overall portfolio may decline in value due to developments specific to the gold industry. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The Fund is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

Diversification does not assure a profit or protect against loss.

ESG investing is qualitative and subjective by nature, and there is no guarantee that the factors utilized by VanEck or any judgment exercised by VanEck will reflect the opinions of any particular investor. Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and VanEck is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices. Socially responsible norms differ by region. There is no assurance that the socially responsible investing strategy and techniques employed will be successful.

ESG integration is the practice of incorporating material environmental, social and governance (ESG) information or insights alongside traditional measures into the investment decision process to improve long term financial outcomes of portfolios. Unless otherwise stated within the Fund’s investment objective, inclusion of this statement does not imply that the Fund has an ESG-aligned investment objective, but rather describes how ESG information is integrated into the overall investment process.

Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus. An investor should consider a Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.