Shiny Gold, Tarnished Process
In today’s post, we discuss some of the risks the gold industry faces, how asset managers are adjusting strategies, and organizations setting standards for responsibly sourced gold.
Source: Just ETF
Industry History
When you think of gold what’s one of the first things that comes to mind? Wealth, success, luxury, or prosperity? For thousands of years, gold has reflected these very ideals. In 4000 B.C. gold was used as fashion décor in Eastern Europe, in 1500 B.C. the Middle East recognized gold as the standard medium of exchange for international trade, and in 1091 B.C. gold squares were some of the first legalized forms of money in China. [1] Today, gold is mainly used for luxury items like jewelry but it also has expanded to other markets like electronics, industrial equipment, and even the medical industry. While gold is prized by many, the process of mining gold has long been in the shadows. Gold mining’s nefarious reality is the industry provides exploitation, trade, and trafficking of natural resources, represents significant profits for criminals, and can be used to finance terrorist activities, and widespread human rights abuse issues. Violent conflict continues to take place including the last year’s violent attack at Solhan which made its way to international attention.
Mining operations span almost every continent, and the market is projected to continue to grow. At the end of 2021, the gold mining industry was valued at $197.58 Billion. [2] The price of gold is at record highs including record high profit margins as investors typically will use gold to hedge against inflation or geopolitical risks. With a positive trajectory and continuing human rights violations, we have seen International Organizations like the OECD take action. Investment managers are also paying attention as Franklin Templeton and Sprott Assessment Management launched some of the first sustainably sourced gold funds. In today’s post, we discuss some of the risks in the gold industry, how asset managers are adjusting strategies, and organizations setting standards for responsibly sourced gold.
Source: Visual Capitalist
Not So Golden After All
Environmental Impacts
There are a variety of environmental concerns that should be taken into account for any mining operations, including gold operations. Two of the main environmental concerns are acid mine drainage and tailings.
During the mining process, there could be sulfide in the minerals. When excavating the mines, sometimes sulfide is exposed to water or air, mixing to form sulfuric acid. The problems associated with acid mine drainage is it can contaminate water, disrupt plants and aquatic animals, and even erode infrastructure. Additionally, acid mine drainage isn’t biodegradable meaning it won’t break down over time. While the effects can be detrimental, there are ways companies can safely address potential spills and the treatment of sulfuric acid.
The second main environmental impact is tailings. Tailings are the by-product of mining operations once the valuable minerals are separated. In gold mining, it is common to separate arsenic from the gold using liquid mercury. Mercury is a toxic element that effects the nervous system, immune system, and can cause long term health issues. Once separated, the leftover minerals are stored in tailing facilities, so these minerals don’t end up polluting the environment. Many mining companies will deploy tailing management strategies that adhere to international standards like the Global Industry Standard on Tailings Management (GISMT). By implementing these standards companies can create safer facilities to store tailings, ensure the safety of their workers, and set standards to monitor sites. [3]
Human Rights Violations
It is estimated that 40 million people around the world work in gold or diamond mining operations. About one-fifth of these people work in Small Scale Mining operations which is an important source of income for communities. However, gold (and diamond) mining has been linked to violence due to land rights, Indigenous People’s Rights, forced labor, and child labor. [4]
Artisanal and Small-Scale Gold Mining
One of the issues the OECD is tackling is ensuring that standards do not marginalize workers that operate in Artisanal and Small-Scale Mining (ASM) but ensuring that these miners have standards for safety, health, and environmental protection. ASM could be formal or informal mining operations with simplified forms of exploration, extraction, and transportation. Usually, these mining operations are not capital intensive, have high labor intensity, and could be families of small groups working at the mine. Due to the limited regulations, these miners are subjected to a variety of health problems due to accidents, overexertion, dust inhalation, or exposure to toxic chemicals and gases. These mines are common in poverty-stricken communities and remote parts of the world with no regulations or regulated work sites. Another common issue at these sites is child labor. Children can be exposed to chemicals, breaking down and processing rocks, and led contamination by ingestion of dust. [4] Many times children will work in deep and unstable pits which could be prone to accidents.
Franklin Templeton Responsibly Sourced Gold Fund
With the increased focus on human rights issues, responsibly sourced funds continue to be on the rise. At the end of June, Franklin Templeton, an investment firm based in New York, launched the Franklin Responsibly Sourced Gold ETF (FGLD). According to the fund strategy, they invest in companies that are in accordance with the London Bullion Markets Association (LBMA) Responsible Gold Guidance. The LBMA’s Responsible Gold Guidance establishes minimum requirements that are mandatory along the entire gold supply chain for all Good Delivery refiners wishing to trade with the London Bullion Market, intended to ensure, among other things, that London Good Delivery gold is mined through verified supply chains that meet certain internationally recognized ethical standards. [5] According to the fund’s description, it aims to be a cost-effective and simple way to participate in the gold market as well as serving as a diversifier relative to traditional stocks and bonds.
The LBMA has established the Responsible Sourcing Program which is mandatory for any refiners wishing to trade on the London Bullion Market.[6] This program basis its guidance from the Organization for Economic Co-operation and Development (OECD) Due Diligence Guidance. For readers not familiar with this organization, it is an international organization focused on developing policies that foster prosperity, equality, opportunity, and well-being for all. The program sets standards on how to source minerals from conflict-affect and high-risk areas, the due diligence process for sourcing gold that can be used in a company’s supply chain, recommended framework to implement for the due diligence process, and suggested measures for risk mitigation.
Mover & Shakers
One luxury jewelry company that has strong supplier standards to help mitigate and prevent human rights violations in the mining process is Tiffany and Co. The company was evaluated by Human Rights Watch as one of the highest ranking jewelry companies in taking steps towards responsible sourcing. The company has full chain custody over its gold and has a partial chain of custody over its diamonds. The company also has a framework for responsible artisanal mining to make sure all miners have fair wages and access to the global market to sell their products. Their supplier code of conduct outlines the expectations of all suppliers regarding human rights practices, and they also state they will terminate any supplier who violates their code. Infromation on their responsible sourcing procedures can be found within their ESG report. [7]
Sources
[1] http://www.nma.org/pdf/gold/gold_history.pdf
[5] https://www.researchandmarkets.com/reports/5574847/global-gold-mining-market-2022-edition?
[7] https://media.tiffany.com/is/content/Tiffany/Tiffany_Sustainability_Full_Report
Definitions
[6] LBMA: The LBMA is an over-the-counter market for trading metals like gold and silver. Its mission is to ensure the highest level of leadership, integrity, and transparency for global precious metal industries by advancing standards and developing market solutions.