In today’s Exponential Investor:

  • ESG has become a slogan
  • Social proof trumps actual proof
  • Real change or simply picking a fight

Do you have a product to sell?

Tell the world’s that your product is ecofriendly because the tiniest percentage comes from recycled, or ethical materials.

Do you have an environmental problem, but need investors to look away?

Put a PowerPoint presentation together. Add some vibrant colours. Use the words “diversity” and some arbitrary statistics that track well in Google, and… voilà, your sleight of hand covered the faux pas…

Forgive my cynicism, but over the past 18 months I’ve spent far too much time listening to marketing departments talk up their environmental credentials, with scant details to back them up.

“ESG” – the three letters used to imply environmental, social and governance credentials – has become the main tag to draw investors and customers to a product.

Sure, more and more companies are looking at ways to “go green”, so to speak. However, for now most are still stuck on telling you they’re green. Few provide genuine, quantifiable information on how they are actually achieving this.

Don’t get me wrong, all businesses – and consumers for that matter – should be actively looking for ways to reduce their environmental impact.  

My problem with this green push is that the implementation has been lousy.

The poor execution might not be entirely a company’s fault. There aren’t any meaningful national standards to follow, let alone international ones.

That means that most companies are left to grope around in the dark and hope what changes they do introduce will make a meaningful impact.

As it happens, the latest group to jump on to the ESG bandwagon are gold mining and trading companies.

This year, two initiatives have been introduced.

However, will these initiatives actually have a meaningful impact, or do they just represent more virtue signalling?

ESG Initiative #1 – know your client

Proving where metals have originated from has become increasingly important for some gold buyers in the past two years. Sanctions that have been imposed against Russia – a major gold-producing country – since the invasion of Ukraine are a part of this.

This leaves many refiners and bullion dealers with the need to demonstrate that are going above and beyond the guidelines of the London Bullion Market Association (LBMA).

For example, internal compliance departments within gold refiners and bullion dealers are getting tougher in relation to where the metal originates from.

“Know your client” policies have been stepped up. It is no longer enough to simply accept a delivery purely to benefit from volume. Instead, it is necessary to do some due diligence on a prospective supplier. 

Of course, how does a refiner or dealer tell an end user that they’ve done their homework?

With a trademark!

Instead of a shareable history of a precious metal’s origins, there’s a new trademark. Variations of the word “provenance” give social proof of origin, rather than actual proof of origin.

Aside from this promise to the people, there is very little publicly available evidence required to support this.

So you can only believe what they tell you…

ESG Initiative #2 – track and trace

Realising the problems inherent with simply trusting what is said by the dealers and refiners, LBMA announced a plan whereby buyers could “track and trace” the origins of their gold. In March this year it said:

London Bullion Market Association (LBMA) and the World Gold Council (WGC) are collaborating to develop and implement an international system of gold bar integrity, chain of custody and provenance. Over time, this will help consumers, investors, and market participants to trust that their gold is genuine and has been responsibly and sustainably sourced.

To deliver this industry-wide and ground-breaking development for the market, LBMA and WGC have brought together representatives from the global gold supply chain to launch a pilot phase of the project.

This initial phase will see two distributed ledger companies (aXedras and Peer Ledger) demonstrate how their technology can best deliver a global ecosystem that will create an immutable record of a gold bar’s place of origin and chain of custody. This blockchain-backed ledger will register and track bars, capturing the provenance and full transaction history.

The idea of traceable gold is a step in the right direction. But the plan is overwhelmingly flawed. And, unsurprisingly, it lacks detail.

What metal will be traced? The bullion market is enormous. For instance, the four major Swiss gold refiners – PAMP, Argor Heraeus, Valcambi and Metalor – could refine more than 3,100 metric tonnes of gold each year.

Because the major Swiss refineries are a closed market, we only know their refining tonnage capability, not the actual ounces refined each year.

However, if all four were running at capacity, it would equal 99,665,000 troy ounces (toz) of gold per annum.

There are millions of bars and coins in existence. Indeed, the average bullion dealer can stock upwards of 20 different sized gold bars alone. Most of those sizes will be offered by several different brands too. Plus, a bullion dealer who handles coins could have more than 150 individual gold coin designs for sale at any time.

Simply put, it’s just not feasible to track all the gold that is refined in a particular year or available for sale at any point in time through the world’s dealers.

Do you want someone to know you own gold?

In any event, it is highly unlikely a “track and trace” system is aimed at people buying gold in ounces.

The odds are that it’s for big bars: the 1 kilo and 400 oz (12.4kg) types favoured by the institutional market.

Still, it raises the question of just how much does the institutional market really want traceability on their bars?

Jewellery manufacturers who buy one kilo bars are facing similar pressure to prove the provenance of the metal. They would likely value a publicly scrutinised system to prove to customers where they source their gold.  

Central banks are the biggest buyers of 400oz gold buys. Though small economies’ central banks tend to be the biggest buyers of gold. I hardly doubt that the central banks of Turkey, Kazakhstan or Egypt – to take three examples – are going to worry about whether they bought Russian, US or Australian gold.

In a similar vein, if Swiss refiners are reluctant to tell the industry how much gold they refine, they’ll be just as unwilling to share the exact details of where it came from.

Swiss refiners are already under pressure for the vast number of gold imports that come via the United Arab Emirates (specifically Dubai). Essentially, the Swiss refiners are the community through which gold is sent to “clean” it.

Finally, it raises the question on just how much information would be collected about any gold bar and its owner.

For how long will the LBMA only track the provenance of the bar? Once it’s sold, is it no longer going to be tracked?

Or does the ledger expand and follow the unique serial number for the life of the bar?

Are names taken?

Is a bar allocated to a fund or simply noted as being in the hands of a private investor?

What happens if a serial number disappears from the ledger but then suddenly reappears? Does this devalue the bar in any way?  

Most importantly, who has access to a gold bar registry like this?

Will it be available to all bullion dealers and refiners? Is it public?

If the LBMA is the only one with access to this ledger, then what’s the point?

Colour it green

The rush to colour everything green and give the illusion of progress means most ESG plans are ill thought out.

The LBMA has made zero attempt at providing any more information on how this ledger would work and what it would entail.

In fact, I’d argue the initiative was more about making the Dubai gold market look bad than about introducing any meaningful guidelines around provenance for the precious metals industry.

Nevertheless, the concept of using the blockchain-backed gold ledger did generate some mighty good press for our friends at the LBMA.

Which takes us right back to my problem with ESG.

For most companies, it’s all talk and no hard data that people like you and I can verify.

Until next time,

Shae Russell
Co-editor, Exponential Investor