Responsible Investment Officer
Although gold has reacquired its shine among investors on the prowl for safe assets, it remains a dilemma when considered in the context of sustainability. As with companies that use fossil fuels, the general view is that a gold rush gives little thought to the social impact. Points of concern include the health and safety risks for employees and the negative external impact on the environment.
At least, this is a generally accepted view. An article published by VanEck, an investment company, offers a different perspective, however. “Over the years, the gold industry has learned the hard way that shareholders are not the only stakeholders that should profit from a gold mine", writes Joe Foster, portfolio manager and strategist. But shareholders are becoming increasingly critical of the impact of mining too, as is shown by, among other things, the Dutch investors’ initiative – under the banner of the Association of Investors for Sustainable Development (VBDO) – to tackle mining companies on their water use.
“Investors should be mindful of the effects of both its extraction and its use as a commodity.”
Foster is unhappy about the fact that the image of gold extraction is strongly influenced by stories about artisanal or small-scale mining. A growing problem in many regions, such as Africa and South America, is that such activities are usually illegal, resulting in poor working conditions and environmental pollution. This usually gives rise to damages claims amounting to millions of dollars per company. According to Foster, however, modern commercial gold extraction has nothing to do with those types of activities and suggests that gold miners that operate in distant corners of the world actually have a positive impact. They bring employment and better infrastructure, healthcare and education to the communities where they operate.
Nonetheless, even professional gold mining companies have to deal with myriad controversies surrounding their mines. One of the key problems of gold extraction is its extreme water use. Estimates show that the annual water used by gold mines around the globe could fill nearly half a million Olympic swimming pools. Gold mines compete with local agriculture for the already scarcely available water. The US mining company Newmont, for instance, was again forced to postpone a major project in the north of Peru last year, due to concerns about the risk of water scarcity in the surrounding area. Another problem is water and soil contamination due to the large amounts of residues containing heavy metals and chemicals, such as cyanide, which are then discharged into rivers and lakes.
Despite the steps that are being taken to introduce mining standards, it remains to be seen if sustainable gold mining is actually feasible. The IUCN, an organisation for conservation of nature, therefore argues that only responsible mining is possible; it will never be sustainable. But it may be more important to ask ourselves: do we as a society even need this amount of gold?
As you say, only a small part of the annual demand for gold (approximately 10%) is designated for industrial use, such as in phones but also for nuclear medicine. Investors in gold therefore compete directly with the industrial sector for the acquisition of this commodity. The rising demand for gold means that the cost price of gold as a commodity for applications, such as its use in cancer treatment, is increasing. A parallel can be drawn with investors taking refuge in food commodities during the financial crisis in 2008, resulting in price increases for grain, corn, sugar and cocoa.
Although I realise that gold remains the foundation of our financial system, investors should be mindful of the effects of both its extraction and its use as a commodity. Given this impact, it does not seem like such a safe investment after all. Not for our society, at least!