ESG allocators turn to government bonds

One of the perennially discussed questions among responsible investment professionals is whether government bonds can be included in ESG portfolios.

Naysayers argue that as government budgets include items such as weapons spending, they can be ethical, while others contend that governments also fund healthcare systems.

The DFMs we monitor have certainly been nailing their colours to the mast this year, with a general uptick in demand for government bonds funds. 

Vanguard’s long duration gilt index fund has picked up one new buyer this year, as has the L&G All Stocks Gilt index fund, which is now owned by five of the allocators we cover and is the most owned gilt fund among the allocators we cover. 

The iShares Core UK Gilt fund and Lyxor’s Core UK Government Bond fund have also been bought this year.

None of the gilt funds we monitor has been sold by an allocator we monitor this year, while 15 different allocators own at least one such fund. 

Of course the reason for owning such assets may be prosaic enough, higher yields make the assets more attractive, and the bane of ESG portfolio constructors’ lives is that the equity exposure tends to be very growth oriented, so government bonds can act as a proper diversifier, albeit both are arguably vulnerable to higher interest rates.