Climate change is both a physical reality and a rapidly growing systemic and existential risk that all aspects of society are currently learning to address. It is now widely understood that greenhouse gas (GHG) emissions must therefore decrease very rapidly – ultimately, to ‘Net Zero’ – if we are to avoid potentially catastrophic consequences. The process of decarbonising the economy is such an urgent priority that it is currently reshaping nearly all policy, business, and investment decisions.
And how investors evaluate and respond to the risks and opportunities inherent in this transition will inevitably influence how they build and manage their portfolios, particularly over the medium and long term.
To further explore the implications of the transition to Net Zero carbon for gold as a portfolio asset, we collaborated with specialist climate risk consultancy Urgentem Research. Specifically, we sought to quantify the impact of introducing gold as a strategic investment to a global multi-asset portfolio from a climate transition perspective, while mindful of its risk and return performance too.
Portfolio performance
Holding gold in a diversified portfolio can help reduce its carbon footprint without sacrificing returns
The multi-asset portfolios, with data covering 5 years of monthly returns, were back-tested using different % allocations of assets to explore how the incorporation of gold at increasing weights might impact the portfolio’s risk-return profile and its overall carbon footprint. (Historic carbon data for assets beyond 5 years is limited.)
The increased allocations to gold had a notable impact on the carbon footprint and emissions intensity of the market value of the overall portfolio . For a portfolio of 70% equities and 30% bonds, introducing a 10% allocation to gold (and reducing the other asset holdings by equal amounts) lowered the emissions intensity of portfolio value by 7%, and a 20% holding in gold lowered it by 17%.
Key findings
- Including gold as a portfolio asset can have a positive impact on portfolio performance from a climate transition perspective
- The benefits of holding gold in a globally diversified portfolio (of equities and corporate bonds) include:Reducing the portfolio’s overall carbon footprint
- Increasing portfolio alignment to climate targets and decarbonisation (Net Zero) pathways
- Increasing the allocation to gold lowers the implied temperature increase of a portfolio
- Reducing the vulnerability of the portfolio to climate transition risks and shocks, such as the introduction of a carbon tax
- The positive portfolio climate impacts were achieved without adversely affecting the risk-return profile of the portfolio. In fact, there were strong indications that an allocation to gold would improve the performance and risk profile of the portfolio,
There were also strong indications that an allocation to gold, in addition to its climate transition benefits would also improve the risk-return profile of the portfolio.
