Fund buyers increased their government bond exposure towards the end of 2023, shrugging aside ethical concerns some clients may have about the asset class.
Our database shows seven allocators bought into passive investment funds that track either a US government bond or a European government bond index fund in the final six months of 2023, with four of those buyers acquiring the Vanguard US Government Bond Index fund.
One more bought a tracker that focuses on US government bonds with a duration of more than 20 years, one bought a euro denominated government bond index fund, and two bought gilt funds.
In total, there are 30 different government bond positions owned by the ESG model portfolios tracked by Asset Allocator.
Not all of the actively managed ethical bond funds in the market are willing to own government bond funds in such portfolios, as they believe its not appropriate to own instruments where the capital may be used to buy weaponry.
Of the allocators in our ESG database, 65 per cent have a government bond position. This compares to 78 per cent in our non-ESG database.
Bertrand Rocher, of sustainable focused fund house Mirova, believes it is impossible to evaluate the sustainable criteria of a traditional government bond, as the capital can be deployed across so many areas of government spending.
But he said some European countries, including the UK, have began to issue bonds that are specifically “green” in nature, with the capital ring-fenced for specific government projects that can be assessed for their sustainable credentials.
Stuart Chilvers works on the Rathbone Ethical Bond fund which does not invest in government debt and a recently-launched sustainable bond fund which can and does invest in government bonds.
He acknowledged ethical considerations around a particular government bond were “not straightforward”, with a range of views existing in the industry.
But he said: “We recognise that most bond-issuing countries devote some of their budgets to military spending and generate tax revenues from controversial industries.
"However, we believe this needs to be considered alongside the significant positive impact that many governments have on the environment and society, whether this be through environmental regulations, spending devoted to education [or other socially useful functions].”
Chilvers said he would only invest in government bonds issued by countries that met a specific set of criteria, including that defence spending as a proportion of GDP is not above the global average on a rolling three year basis, that civil and political freedom be maintained and that the country be committed to combating the impacts of climate change.
