“ESG bond funds held back by fear of criticising US, research suggests” – Financial Times – September 2, 2020

On September 2, 2020 the Financial Times reported that research suggests that “(f)und managers’ unwillingness to criticise western governments, particularly that of the US, is holding back the development of “sustainable” government bond funds.

While corporate bonds can be scored using a similar ESG scoring system to that used for equities, “there are still question marks over how to best evaluate government debt, where there is a fine line between making an objective ESG assessment and straying into political territory”, said Kenneth Lamont, research analyst for passive strategies at Morningstar.

The debate about evaluating sovereign debt issuers may be most acute around the US, which some could say fails to meet the necessary ESG standards, yet is by far the largest issuer of debt, accounting for 36 per cent of the FTSE World Government Bond Index.

‘At what point do you exclude the US?’ asked Mr Lamont. ‘It is the biggest arms manufacturer in the world, you have social inequality. It is one of the biggest polluters and withdrew from the Paris Climate Agreement, and yet excluding the US from your fixed income exposure is problematic.’

He said some fund groups had ‘admitted that if they were to strictly follow their ESG guidelines the US would be excluded’, but for investment reasons decided that they cannot ignore the ‘largest and safest’ government bond market in the world.”

The article also explores challenges in ESG ratings of emerging market sovereign bonds.

Registered subscribers may read the article on the Financial Times internet site.