By Peter Hobson
LONDON (Reuters) - Want to invest in ethical gold? It's harder than it looks.
A push by investment funds to avoid bullion from unethical sources by buying newly made bars is limited in its impact because many still contain old gold whose provenance is unknown, bankers and refiners say.
That means very few investment funds know the origin of their product and its environmental and humanitarian record, denting ambitions to tap into the booming market for sustainable investments.
The world's biggest gold-backed funds have increasingly focused on holding bars made since 2012, when the standard-setting London Bullion Market Association (LBMA) brought in rules to ensure metal in the $15 trillion a year wholesale market was not linked to crime or violence.
But given how often older bars are melted and recycled, many made after that date still contain gold whose history is unverifiable, bankers and refiners told Reuters.
It is not clear how much old gold is in new bars, but more than half the metal processed by mainstream refineries is recycled, LBMA data show.
"It is an illusion to believe that if you re-refine, you get 'newly born' gold that is ethically acceptable," said Patrick Schein, a refiner and board member at the Alliance for Responsible Mining. "It resembles greenwashing."
Schein said it was fine for funds to hold recycled gold if it was alongside newly dug metal from industrial and artisanal mines, but that they should be transparent. "When it is not possible to trace origin, just say so," he said.
Gold is not a natural draw for ESG investors, given the large environmental cost of digging it out of the ground, but the metal is a valuable financial asset and mines are large employers in developing nations.
Recycled gold has less environmental impact than mined metal, but because its origin is often unknown there is a risk it may have passed through criminal or violent hands.
While investors are increasingly focused on environmental, social and governance (ESG) metrics when deciding where to invest, the gold industry, like many sectors, does not have mandatory rules around ESG compliance.
LBMA Chief Executive Ruth Crowell, while acknowledging that old gold ends up in new bars, said the focus on newer bars showed funds are taking ESG seriously.
"It's definitely a positive step," she said. She predicts greater transparency and more ambitious sourcing commitments in the future.
'IT'S THE SAME GOLD'
One of the most popular ways to invest in gold is through exchange-traded funds (ETFs) and similar products which issue shares backed by bullion.
Of the ten largest, six, which at the end of last year held 955 tonnes of gold worth around $55 billion, told Reuters they prioritised bars made since 2012. Three of these favoured bars made since 2019, when rules had become tougher.
Several funds use their post-2012 or post-2019 pledges in their marketing materials, though none of the largest explicitly pitch themselves as "ethical" or "green".
The LBMA's Crowell said seeking post-2012 bars was meaningful because standards tightened so sharply. Post-2019 pledges appeared more of a "marketing play", she said, as changes that year were less significant.
Bankers said rising demand for newer gold bars in Europe had led to more made before 2012 being sent to Asia, where fewer buyers have ESG requirements.
As gold travels east, refineries typically recast the large bars traded in the West into smaller ones favoured in Asia, industry sources said. Some of these return to Europe and the United States and are remade again into bars which, because they are new, funds would accept, the sources said.
"It's the same gold," said an executive at a large gold-trading bank.
The four top-ten funds comfortable with pre-2012 bars include the two biggest, the World Gold Council's SPDR funds, which held 1,050 tonnes of gold at the end of last year, and Blackrock (NYSE:BLK)'s iShares funds, which had 769 tonnes.
The World Gold Council, founded by mining companies to promote the use of gold, said it supported higher ethical standards but that old bars should not be excluded as this has no meaningful ethical impact and would impair market liquidity, which is essential for large funds to operate.
Blackrock said LBMA rules allowed for use of old bars. "Our ETPs are classified as responsibly sourced by the LBMA based on its industry standards," a spokesperson said.
TRACEABLE GOLD
Funds do have the option to pay more to avoid wholesale bars and get gold with a guaranteed origin. This could be from mines or recycled metal if the fund prioritises low environmental impact over traceability.
But the vast majority of ETFs don't hold specific-origin gold. Some said this was because only the wholesale market, with its huge pool of interchangeable gold bars, can cope with the size and frequency of their transactions. Others said their investors did not want to pay a premium.
Some small funds are holding gold whose origin they know.
Swiss banking group Raiffeisen and Swiss wealth managers de Pury Pictet Turrettini each last year launched gold funds committed to traceable metal from large and artisanal mines.
When this is unavailable, they get bars from the wholesale market but seek to later swap them for known-origin ones, they said.
Making known-origin gold requires refiners to use more complex processes and segregated production lines. Many do produce some gold this way, chiefly for the jewellery market, and although it is more costly, much more could be supplied, refiners said.
The Raiffeisen and Pictet funds, whose management charges are broadly in line with the 10 largest ETFs, are still small, each containing less than 2 tonnes of gold.
But bigger funds will follow their lead, said Melchior de Muralt at de Pury Pictet Turrettini. "More and more ETFs will hold traceable gold, even if only 10% or 20%, to accommodate ESG-driven clients," he said.