Despite the challenges of investing sustainably in sovereign debt, Paul Grainger, head of global fixed income & currency, and Marcus Jennings, fixed income strategist, gave insights at a roundtable this week on how to invest in sovereign debt sustainably and why these bonds can form part of a broader portfolio strategy.

As ESG factors become increasingly important for investors, Schroders, an investment manager, believes that its new Sustainable Bond Fund, designed for the UK market, can meet clients' expectations.

Launched earlier this year, the fund is designed to provide investors with long-term diversified returns from both sovereign and corporate debt, across developed and emerging markets.

“When we started doing this four or five years ago, we looked at how do we create a bond fund that meets sustainable criteria,” Paul Grainger, head of Global Fixed Income & Currency, said.

“Some clients said they don’t want to invest in sovereigns, saying it can’t be sustainable as it includes nuclear power stations, armies and so on. Others, even with that, recognised the role of sovereign fixed income as a safe-haven asset,” he added.  

“We consequently devised a strategy that capitalises on Schroders' sustainable expertise across all sectors of the fixed income universe. We identified opportunities in sovereign, government related and currencies, as well as corporate credit,” he stressed.

“Sustainability is also not just something that is in vogue. Governance is critically important for sovereign investors, so that they can deliver returns and mitigate risks,” Grainger explained.

“The data is backward looking,” he added. “Whatever we do today, is not where we will be in the future. We have to continue to evolve the product. We have to be very clear therefore about the criteria we are using. In the future, we want every sovereign to be sustainable,” he stressed.

Grainger highlighted that the product is a building block for people’s portfolios: “It is a bond portfolio and can invest in sovereign, credit and supranational agencies, like the World Bank or the European Investment Bank.” 

Criteria   
The fund is based on three main pillars: the UN Sustainable Development Goals; net zero policy; and political and civil rights necessary for sustainable growth. “Only countries that satisfy these criteria are included,” Marcus Jennings, fixed income strategist, said.

“Countries must ensure that they develop a clear, documented policy that sets out how they will achieve net zero, not just make a pledge,” he added.   

The targeted countries include the UK, France, Japan, Germany, South Korea and New Zealand. “Australia, however, is not included as it does not yet have a credible net zero policy, although it plans to do more in this area,” he said.

“If the US pulled out of the Paris accord and net zero goals, the fund would not hold US treasuries,” Grainger added. Although he acknowledged that its exposure to the US is minimal.

He also believes that the bond market is becoming much more attractive, even though it had a bad start to the year. “I am confident that it will reassert itself,” he stressed.