It is often easier to conceptualise ESG considerations when making investments at a corporate level. A company’s activities are often relatively narrow in focus, and forming a direct link between the company and those activities that we don’t support (polluting, gambling, smoking, drinking and so on) or those that we do (health, education, renewable resources) is usually relatively clear.
Investing in government bonds, on the other hand, raises issues that can be quite complex. When Goldman Sachs purchased Venezuelan government bonds in 2017 they were condemned for propping up an unpopular regime, while in other crises investors who sold government bonds (the original ‘bond vigilantes’) were occasionally seen as punishing the local population and subverting self-determination.
However, such complexity is not a reason to shy away from government bonds as an investment. For one, it is clear that government has a huge role to play in impacting the very forces that ESG investors care about most. From an investment perspective, they are also an asset class that can play a key role in generating return and managing portfolio risk, whether this be through long or short duration positions. This is especially important for multi asset funds which seek to deliver specific and consistent return and volatility properties across a range of environments.
Dealing with complexity. Where can we make a difference?
The wide range of activities that governments perform will mean that no government will be beyond reproach from the strictest of ESG perspectives. Defence spending is an obvious example, as are nations which have a significant reliance on fossil fuel production.
At the same time, much government spending will be made with a view to improve living standards. If we take the US as an example, although it has the largest known defence spending among nations, most of its expenditure (based on current guesstimates) is still on social care. David McCandless’ work on data visualisation provides more on putting this information into context
When viewed through this lens, it seems inappropriate to exclude US Treasury holdings simply because a government performs some activity which may not tally with ESG objectives, in the same way as we might with a single company.
Rather, we must consider whether net effects of government expenditure are beneficial. This can be challenging, but this should not be an excuse for hiding from the issue.
Political agnosticism
As the Venezuelan example illustrates, there is a risk that investing in governments can be perceived as an endorsement of a political viewpoint or support for an incumbent regime. Our view is that we should never seek to do this. In the first place our view is that we should always seek to be respectful of different views, and humble about our ability to ‘know the answer’ on how societies should be run.
As the chart below (which is based on the methodology of MSCI’s ESG government ratings) demonstrates, assessment of institutions with regards to levels of corruption, the rule of law, and human rights are an important part of the ‘G in ESG.’.
However, just as the investment decision must be free from bias, so should these governance assessments be as free as possible for political beliefs. As we have written before, it seems that polarised political views can be a source of bias in investment decision making just as they can in any other area. Emotional reactions to particular issues or individualsare unhelpful, and taking a political stance on investment can be harmful to returns. Although the distinction can be blurry, we must seek to avoid allowing political views to colour assessments of governance and institutional structures.
Case studies
How might we apply some of these considerations? The current environment provides some useful examples. In particular, three emerging markets could be argued to be quite appealing from an investment standpoint, but when ESG considerations are taken into account two of those become far less so. Forming such judgements can be challenging in such markets where less data is available and transparency in general is poor.
.
Colombia has been one of the key sustainability players in the international arena and supported the development of the UN Sustainable Development Goals. By contrast, despite Indonesia having been given an overall ESG rating of BB by MSCI and attractive fundamentals, the country appears to lack both sufficiently strong environmental policies regarding palm oil and other environmental controls at both national and international levels. Egypt on the other hand faces challenges from a social governance perspective: irrespective of any views on the incumbent regime, prevailing institutional structures are such that organisations such as Freedom House (an independent organisation that measures and reviews indicators of freedom around the world) judge the nation to be one of the least free in the world.
Each government will entail its own variety of forces that must be considered in addition to such traditional forces as inflation, policy, and currency influences.
Conclusion
Figure 2 illustrates the range of considerations that must be taken into account when assessing government bonds from an ESG perspective. Ratings agencies like MSCI (which provide specific ESG ratings distinct from traditional credit ratings) can provide help in assessing these factors. However these must be supplemented with qualitative considerations, and other inputs such as the below:
:
Critically, there will also be significant overlap between ESG and investment considerations. Many forces related to governance will have an influence on the ability and willingness of sovereigns to pay back their debt, or levels of inflation that are expected in an economy. Living standards, health care, and education will have huge impacts on the level of productivity, and hence growth, in an economy over the long-term.
It might be easy to dismiss environmental concerns as too far off, but with climate change and extreme weather having the potential to have very real impacts on growth, and with countries such as Mexico having issued bonds with 100 year maturities in the recent past, such a view is becoming far less prevalent.
Ultimately, while assessing government bonds from an ESG perspective may be more difficult than for corporates, the role that they play is ultimately too important to ignore: both in terms of investment opportunities and – critically – in shaping the future of the world.
Maria Municchi, Fund Manager Multi-Asset at M&G Investments
To continue please select your investor category and your country of residence.
Select your Country:
Qualified Investor
This Swiss Fund Platform website is only intended for qualified investors within the meaning of Art. 10 par. 3 and 3ter of the Collective Investment Schemes Act (CISA). Qualified investors are professional clients within the meaning of Art. 4 par. 3-5 and Art. 5 paras. 1 and 4 FinSA as well as private clients who meet the requirements of Art. 10 par. 3ter. In particular, qualified investors are:
- Financial intermediaries under the Banking Act (BankA), the Financial Institutions Act (FinSA) and the CISA;
- insurance companies in accordance with the Insurance Act (ISA);
- Foreign clients subject to prudential supervision such as financial intermediaries and insurance companies;
- Central banks;
- Public corporations with professional treasury services;
- Pension funds and institutions that, according to their purpose, serve occupational pension plans, with professional treasury;
- Company with professional treasury;
- Private investment structures built for high net worth individuals with professional treasury services;
- Institutional clients pursuant to Art. 4 para. 4 FinSA;
- Large companies that meet the requirements of Art. 4 para. 5 lit. a-c FinSA;
- private clients, for whom a financial intermediary within the meaning of Article 4 paragraph 3 letter a FinSA or a foreign financial intermediary subject to equivalent prudential supervision provides asset management or investment advice within the meaning of Article 3 letter c items 3 and 4 FinSA within the framework of a long-term asset management or investment advisory relationship, unless they have declared that they do not wish to be considered as such. The declaration must be in writing or in another form verifiable by text.
LEGAL NOTES
Persons who access information on the website of Swiss Fund Platform AG (hereinafter also referred to as "SFP" or "We" or "Us") agree to the following terms and conditions. Swiss Fund Platform AG acts solely as a platform and does not offer any financial services or advice. The information, newsletters or articles on economic and financial topics published on the SFP website do not constitute an aid to decision-making or a recommendation for economic, legal, tax or other advisory questions, or an offer or invitation to buy or sell investment instruments, to effect transactions or to conclude any legal transaction, and in particular do not constitute investment advice or asset management and cannot replace advice and assessment tailored to the individual case.
For qualified advice, please contact an appropriate professional.
The information published is provided by SFP for personal use and information purposes only and is subject to change without notice. SFP takes great care to ensure that the information contained on this website comes from reliable sources, but makes no warranties (express or implied) as to the accuracy, completeness or timeliness of the information published on the SFP website. In particular, SFP is under no obligation to remove or update any outdated information from the SFP website or to expressly mark it as such.
Swiss Fund Platform recommends that you read this disclaimer regularly in order to familiarize yourself with any changes. The date of the last update is listed below.
ACCESS RESTRICTION BY DOMICILE AND INVESTOR CATEGORY
This Swiss Fund Platform website is only intended for qualified investors within the meaning of Art. 10 par. 3 and 3ter of the Collective Investment Schemes Act (CISA). Qualified investors are professional clients within the meaning of Art. 4 par. 3-5 and Art. 5 paras. 1 and 4 FinSA as well as private clients who meet the requirements of Art. 10 par. 3ter. In particular, qualified investors are:
- Financial intermediaries under the Banking Act (BankA), the Financial Institutions Act (FinSA) and the CISA;
- insurance companies in accordance with the Insurance Act (ISA);
- Foreign clients subject to prudential supervision such as financial intermediaries and insurance companies;
- Central banks;
- Public corporations with professional treasury services;
- Pension funds and institutions that, according to their purpose, serve occupational pension plans, with professional treasury;
- Company with professional treasury;
- Private investment structures built for high net worth individuals with professional treasury services;
- Institutional clients pursuant to Art. 4 para. 4 FinSA;
- Large companies that meet the requirements of Art. 4 para. 5 lit. a-c FinSA;
- private clients, for whom a financial intermediary within the meaning of Article 4 paragraph 3 letter a FinSA or a foreign financial intermediary subject to equivalent prudential supervision provides asset management or investment advice within the meaning of Article 3 letter c items 3 and 4 FinSA within the framework of a long-term asset management or investment advisory relationship, unless they have declared that they do not wish to be considered as such. The declaration must be in writing or in another form verifiable by text.
When accessing the Swiss Fund Platform website for the first time, the user must select his or her country of domicile and confirm the category of investor to which he or she belongs. Access to this website is restricted to professional investors as defined by FinSA, all other persons are not granted access.
PERFORMANCE
Swiss Fund Platform AG and this website serve only as a platform for external third parties who may use it to offer services, obtain information or network.
SFP has no or only limited influence on the services offered by external third parties and does not guarantee their success or performance. Any investment or transaction made in the course of such services is made outside the Platform and at your own risk. SFP is not liable for any damages incurred in this context.
LIMITATIONS OF LIABILITY
Swiss Fund Platform AG disclaims, without limitation, all liability for any loss or damage of any kind, including any direct, indirect or consequential damages, which may be incurred through the use of or access to the SFP website, or any links contained on the SFP website that lead to third-party websites. SFP has no influence whatsoever on the information published on third party websites and excludes any liability in this respect. SFP expressly warns of the risk of viruses and the possibility of targeted hacking attacks. In order to combat viruses, the use of current browser versions and the installation of constantly updated anti-virus software are recommended. SFP disclaims any liability for damages resulting therefrom, in particular for damages caused by viruses, hacker attacks or other manipulations of the EDP system of the Internet user by unauthorized persons.
USE OF THE SFP WEBSITE
The entire content of the SFP website is protected by copyright. You may not reproduce (in whole or in part), transmit or make available (by electronic means or otherwise), modify, link into or use for any public or commercial purpose the SFP website without the prior written permission of Swiss Fund Platform AG.
The use of this website, including any contact forms, does not constitute any contractual relationship between you and SFP or the authors / publishers.
LOCAL LEGAL RESTRICTION
The Swiss Fund Platform Website contains information and documents on numerous collective investment schemes and is intended only for qualified investors in Switzerland and Liechtenstein. The Swiss Fund Platform Website is expressly not directed at any person in any jurisdiction where (by reason of that person's nationality, tax residence or otherwise) the publication of or access to the Swiss Fund Platform Website is prohibited. Persons subject to such local restrictions are prohibited from accessing the Swiss Fund Platform Website. No copies, printouts or stored data from this website may be made available to the aforementioned persons in any other way. Information on collective investment schemes and documents are provided either by Swiss Fund Platform or by the fund company or other companies themselves. If the information and documents are provided by the companies on the Swiss Fund Platform website, they are based on the information provided by the fund companies or other companies in connection with the distribution licenses of the investment funds. Swiss Fund Platform cannot be held liable for incorrect information regarding the distribution license. If the information and documents on the Swiss Fund Platform website are provided by the fund companies or other companies themselves, the fund provider is responsible for the correct distribution licenses.
LINKS TO OTHER WEBSITES
This website may contain links (URLs) to third party websites and social networks. The linked websites and their content are not under the control of Swiss Fund Platform AG. Their accuracy, accessibility and availability are not guaranteed. SFP reserves the right to modify or remove links at any time. Any responsibility for the links and the content of the linked websites and the use of the links and linked content is disclaimed; access to and use of such websites is at your own risk.
INTANGIBLE PROPERTY RIGHTS
The intellectual property rights, in particular copyright and related rights, to this website (text, images, logos, trademarks, files, etc.) are the sole property of the authors / publishers or Swiss Fund Platform AG or other rights holders, unless otherwise stated.
For private, non-commercial use, it is permitted to download, temporarily store (browser cache) and print out the content, provided that it is reproduced unchanged and in full and with reference to the source. Forwarding of printouts for private, non-commercial use is permitted only if the recipient accepts this disclaimer.
Distribution in electronic form is prohibited. The content may not be reproduced, duplicated, copied or distributed in print, electronically or in any other way without the written consent of the copyright holder. This includes, but is not limited to, displaying the content in a frame on a website, creating derivative works, or using the content in any other way for commercial or public purposes. The systematic retrieval or linking of content (automated or manual) to create a collection, database or directory is not permitted without the written consent of Swiss Fund Platform AG.
TECHNICAL DEFECTS
Swiss Fund Platform AG endeavors, but is not obliged, to keep the website accessible and free of technical defects to the extent and for as long as it is published. Swiss Fund Platform AG does not guarantee that the website or the newsletter or other published content is free of harmful components (viruses, worms, etc.).
DATA PROTECTION
You can find all information about data protection in our privacy policy: LINK
UPDATE DATE
This disclaimer was last updated on 08/09/2023.
06/18/2019
M&G International Investments Switzerland AG