In today’s Exponential Investor:

  • Most ESG information lacks substance
  • Where did your gold come from?
  • Look to the companies striving for real change

I’ve just spent the past four weeks knee deep in company reports looking for some exciting commodity plays. It was glorious to be eyeballs deep in financial statements and company reports once more.

As much as fun as it was trawl through the paperwork looking for the finer details that helps a company stand, I kept noticing a common theme.

All these glossy environmental social and governance (ESG) statements made me want to stab my eyeballs out with a pen… metaphorically speaking.

Far too many companies had their ESG statements front or centre… before you received any real information or data about the company. Too many companies used big colourful graphics to distract you from the scant data presented. Too many provided vague statements. There was too much of “the environment is our focus” trope.

Plus, I lost count of the number of times I saw  hollow arrows displayed in a circle. The authors were trying to imply some sort of circularity. Or they were trying to show pretty pictures that were proof of their environmental credentials.

The worst part is that it is mostly just empty marketing hype.

Nothing but pretty colours and eye-catching graphics

My cynicism about the ESG space has been building for some time.

This isn’t helped by my recent stint working adjacent to a marketing department. One too many marketing meetings leads you to start questions just how light on facts some of these claims are.

Worse still, is knowing that much of the words used in these reports are ones that track well in a Google search.

I’ve heard rumours of how one company directed its marketing team to simply “double” the size of a competitor’s ESG statement. In this tit-for-tat corporate document war of wording, nether ESG memo held up to scrutiny.

Of course, none of this is helped by the fact that there is no real government body that decides what “ESG” is. Each country is largely left to create and manage its own guidelines. Moreover, for most companies, it’s self-reporting. While there is a market expectation that big multi-billion-dollar corporations are doing something, the obligation to report hard truths isn’t there.

That is perhaps the most infuriating part. Companies can boldly declare what they did well, while sweeping under the rug all the things that didn’t. Hence, the shiny graphics.

And given that the bar is so low as to what counts to really be “ESG focused”, it’s not really anything to be championing.

As an investor, you are left with the impossible task of comparing pears with oranges and, sometimes, some rotten apples.

How gold extracted from child labour ends up in your hands

The gold market is an excellent example of self-regulation failing the end user.

Let’s take small scale or “artisanal” as an example.

Mercury is commonly used in the gold extraction process to separate the precious metal from the ore body. It’s not a big concern for a major global miner, as the company in question will have government regulations to follow in the counties in which it operates. Places like Canada, Australia and the United States have stringent rules around miners.

The real mercury problem is in artisanal gold mining. This mostly occurs in in poor countries where people are exploited. There is no age limit. Children are often found to contribute to the artisanal gold mining sector.  

Pushing aside the poisonous mercury vapours for the individual person actually doing the digging and the sifting, much of the small-scale gold mining is on the banks of rivers that support entire communities. Contamination is frequent and there are ongoing – and serious – public health implications.

Artisanal gold mining is dirty work. Pockets of the gold industry are trying to clean up the supply chain by knowing a metals provenance. Noble as these attempt are, small-scale gold mining is a murky business and gold from all over the world – ethically mined or not – often ends up in the hands of unsuspecting investors.

Small-scale gold miners like this will often sell their gold to a local buyer in their area.

This will then be bought by an even bigger buyer, who will either sell to an international gold buyer or direct to a refinery.

Once it gets to the international markets or a refiner, unethically mined gold is a just a hop, skip and a jump from the gold souks of Dubai.

A tale for another day will be the ongoing war of words between the Dubai-based gold trading community and the London Bullion Market Association (LBMA).

The point that matters most today, is that the Dubai gold traders have consistently pushed backed against any sort of green rules that the LBMA tries to put in place.  

This leaves investors who buy gold in Dubai completely unaware of where they came from.

Another thing to remember is that the Swiss refineries import large volumes of gold from Dubai.

Other refineries don’t get off scot-free either.  

Most gold dealers will do what’s called “buybacks”. In other words, if you have physical gold and would like to sell it, you can take it into the dealer’s bullion office, and he/she will buy it off you at just under the market rate.

From here, the bullion dealers have a couple of options.

Bullion dealers might resell the gold as something called “low premium’” gold (gold that is still in investment-grade bars, but it is no longer considered new).

Or they might sell it to a refinery who will melt it down and then turn it into another branded bar.

Here’s the rub. It is impossible to tell where 99.99% of the refined gold in the world has actually come from. What you have is a lump of precious metals that may have come from anywhere.

Sure, some gold refiners will say they “batch” gold buybacks so it doesn’t get mixed in with freshly mined gold that has been ethically sourced. Maybe they do, but that remains an eternal secret.

For you as an end buyer of gold, there is no disclosure or ledger for you to verify where your precious metals came from. There may be just a glossary ESG brochure talking up a company’s supply chain.

Putting human lives first

At the end of last year, I was fortunate to interview the CEO of major global gold miner Goldfields, as part of a panel on ESG mining at a mining conference in Australia. Unfortunately, it’s behind a paywall so I’m unable to share.

I asked the typical questions that shareholders like to hear, such as the new CEO’s plans for the business, expansion in general and where would future shareholder value come from.

Finally, I closed out with a question about the company’s ESG policies and what the goal was for 2022.

I’ll be honest, I expected a typical toe-the-line board approved answer and instead he shocked me.

He was frank and forthcoming about the environmental impact of mining and how major miners are the ones that should be expected to drive meaningful change. He cited the solar power-based renewable energy micro grids that Goldfields has installed on a couple of its Australian mines to reduce the company’s reliance on diesel.

Then he switched gears, and said the biggest flaw of ESG policies is that there is not enough of a focus on the human element of mining. Yes, diversity and inclusion matter, but so does preventing loss of life on a mine site. In fact, his goal for 2022 was that there be no loss of life on any Goldfields site for 2022.

More than 15,000 miners are killed each year from mining. Granted, these number are largely in unregulated and corrupt third-world countries. Nonetheless, it highlights how dangerous the mining industry can be.

In all my years of talking to management at mining companies, that is something that no one has ever said in a public forum.

It’s also the kind of comment that I’ve used to restore my faith in the sector over time.

And you can too.

There are plenty of companies out there glossing over facts… or just putting up pretty pictures in place of actual data.

Then there are the mining companies that are driving for real and meaningful change.

These are the ones investors should look to.

It takes a bit more leg work, but if ethical investing is important to you, skip the pretty presentation and get to the ESG section of a company’s annual financial report. That is where companies who are making real differences in the ESG space will place the hard numbers that matter.

Until next time,

Shae Russell
Co-editor, Exponential Investor

PS For the sake of transparency, please note that I do not own shares in Goldfields.

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