Author tag

Responsible investment has taken equity markets by storm. Although its penetration into fixed income markets has been slower, it is picking up speed there too. Yet one area remains overlooked – government bonds.

That’s a major oversight. After all, governments set the rules and regulations that companies and individuals follow, and without their support and investment, the world will not be able to tackle its most pressing problems – climate change in particular. 

Global average temperatures are already 1.2C higher than they were in the pre-industrial era. And even if countries deliver on all the carbon emission-cutting pledges made so far, that degree of warming is expected to double to 2.4C by 2100.1

Fixed income investors have a key part to play in providing the capital required to keep climate change in check. While individually, investors have a negligible influence on government policy, collectively they can make a real difference – after all, the investment community holds USD88 trillion in bonds issued by governments and their agencies.2

In terms of the type of investment, green bonds are a natural choice for climate-conscious government bond investors. It’s a small but rapidly growing universe. According to research by Pictet Asset Management and the Institute of International Finance, the size of the sustainable bond market almost doubled in 2021. But the bulk of that growth came from corporate bond markets and the total amount of ESG-labelled debt accounts for only 2 per cent of the overall bond universe. By 2030, however, that proportion could be as high as a third, with particularly strong growth in emerging markets, the analysis shows.5

As well as its limited size (so far), the green bond market is hampered by a lack of universal rules and standards. Currently, the labelling and certification of sustainable bonds differs considerably from one country to another, while efforts to harmonise disclosure requirements haven’t met with much success. We expect to see increased standardisation as the green bond market deepens and increases in value. 

Given these limitations, we believe that a climate-focused sovereign debt portfolio shouldn’t focus exclusively on green bonds. It should also invest extensively in traditional bonds, which are in greater supply, are easier to understand and exhibit more attractive valuations.