By Eric Strand, Founder of the AuAg ESG Gold Mining UCITS ETF

The investment case for gold and gold miners is supported by two megatrends affecting the investment environment in the coming years (and decades). These megatrends are “monetary inflation” and “the transformation to a green world”.

The first megatrend, monetary inflation, is not a new phenomenon but has been a recurring topic throughout history. Large empires, such as the Roman, and the Chinese dynasties, and many more, have fallen after becoming victims of their own money printing and monetary inflation. Since the financial crisis in 2008, money and debt creation have gone into overdrive. Monetary inflation can now be seen in many financial assets. The global debt is just growing and can at these levels not cope with higher interest rates resulting in a continued environment of negative real rates. The price of gold will, over time, reflect the megatrend of unabated money printing and growing debt. When the price of gold rises in a bull market, it can dramatically impact the profitability of a gold mining company.

The second megatrend is the transformation to a green world. Gold and other precious metals have unique properties that make them indispensable in this transformation. Precious metals enable us to breathe clean air, as they are a core component of the catalytic converter used in petrol and diesel cars to reduce toxic gases and pollutants. In the coming years, traditional vehicles will be replaced by electric vehicles. This shift requires the elements with the best electric conductivity but also the ones that are most durable, bendable, and non-corrosive. This is the perfect use case for metals, such as gold, silver, and copper.

As the mining sector is a part of the global greenhouse gas emissions, it is important to be conscious of ESG aspects when investing. Impact investing within the industry promotes environmentally friendly miners to be on the grid, build solar farms on-site, use fuel-cell mining trucks, and restore sites post-project, leaving reusable infrastructure (roads, water, electricity) for other projects.

The focus on ESG has increased among gold miners in the past years. This is a consequence of external pressure from investors, but also due to the mining companies themselves. When gold is produced with high social, environmental and safety standards, it can have a transformative effect on the socio-economic development in the countries where the gold is found. Many gold mining companies have their own social responsibility programmes and focus on following different global directives such as the Responsible Gold Mining Principles and UN Global Compact. Mining is often portrayed as an industry that you do not want to have in your community. But a responsible gold mining company is often welcomed as they bring jobs, training and often make social investments in the community.

AuAg ESG Gold Mining UCITS ETF (ESGO)

AuAg ESG Gold Mining UCITS ETF (ESGO) is Europe’s first gold mining ETF with an ESG conscious mandate. The ESGO ESG gold mining ETF tracks an index that ranks companies involved in gold mining for ESG characteristics and excludes all but the 25 best-in-class ESG Risk companies in the sector. In addition, the ETF has an equal-weighted construction to help decrease concentration risk. When you trade ETFs your capital Is at risk.

The ETF is designed to hold responsible mining companies that strive to be in line with the Paris Agreement. To succeed, the best mining companies are becoming energy self-sufficient and carbon and water neutral. Utilizing an ESG best-in-class strategy within the sector also ensures that investors do not own companies that are not ESG-friendly (otherwise owned by default in a plain market-weighted index).

The ETF tracks the Solactive AuAg Gold Mining Index, which ranks companies involved in gold mining for ESG characteristics and excludes all but the 25 best-in-class ESG Risk companies in the sector. Independent ESG screening is provided by Sustainalytics, which has more than 25 years of experience in delivering ESG-related research. The ETF is classified as Article 8 under the Sustainable Finance Disclosure Regulation (SFDR).

The index chooses its constituents from a universe of stocks with market capitalizations above $500 million and average daily trading volumes greater than $5m.

The new smart index uses a broad Revere Business Industry Classification System (RBICS) definition to include the whole precious metals universe of companies involved in gold mining to mimic the universe of the largest gold miner indices (peers).

The index then harnesses ESG data from Sustainalytics to remove companies known as violators of the UN Global Compact and then rank the remaining constituents according to an ESG Risk rating.

The ESG risk rating measure the degree to which a company’s economic value is at risk driven by ESG factors or, more technically speaking, managed risks but also the magnitude of a company’s unmanaged ESG risks. Two main components need to be evaluated to calculate the ESG risk rating of each company: corporate governance and material ESG issues. Corporate governance reflects that poor corporate governance (for example, board/management quality, ownership, board structure, etc.) could pose material ESG risks for companies. Material ESG issues (MEIs) are company and industry-specific and includes areas such as “bribery and corruption”, “carbon emissions”, and “occupational health and safety”. The MEIs are broken down into managed and unmanaged risks. The final ESG risk rating is calculated from the overall exposure, managed, and unmanaged risks.

The 25 firms with the most favourable (i.e. lowest risk) ESG Risk ratings are selected for inclusion in the index, which is then equally weighted to avoid concentration in larger gold mining companies. Rebalancing occurs every quarter. Five companies were included during the latest rebalancing (1st of July), and five were removed from the fund.

The portfolio includes many names familiar to investors in regular gold mining ETFs, for example: Newmont, Newcrest, Wheaton, and AngloGold Ashanti. But there are some notable exclusions, such as industry giants Barrick Gold and Kirkland Gold.

AuAg Funds is creating investor-friendly financial concepts with a strong focus on precious metals & green-tech elements. In addition to the ESGO ETF, they also have two daily traded funds: AuAg Silver Bullet, and AuAg Precious Green.

By Eric Strand, Founder of the AuAg ESG Gold Mining UCITS ETF