ESG funds blacklist $16tn US Treasuries market
October 15 2019 10:21 PM

Bloomberg/ London

Some of Europe’s strictest ESG funds are snubbing the world’s most liquid investment - the $16tn US Treasuries market.
A €33bn ($36bn) French state pension plan and ESG funds run by the likes of Erste Asset Management, Joh Berenberg Gossler & Co and Union Investment all shun Treasuries based on the US government’s stance on capital punishment or climate change. 
The exclusions rank the US alongside arms makers, tobacco producers and distilleries in falling foul of environmental, social and governance standards.
“ESG-dedicated investors would usually avoid or question investments in US Treasuries,” said Rupini Deepa Rajagopalan, head of the ESG office at Berenberg, which oversees about €36.7bn. She cited the death penalty, nuclear weapons and the US’s non-participation in global environmental accords, such as the Kyoto Protocol.
Treasuries highlights a key challenge for ESG managers that often divides the industry – defining what is and isn’t a “responsible” investment. It also shows how ESG investors have to balance ethical standards against the need to make money, particularly when avoiding large liquid markets makes it harder to spread risk or to react quickly in a crisis.
“For any global fixed-income fund, excluding all Treasuries is a very big and far reaching decision,” said Chris Brils, a portfolio manager at Actiam NV, which has more than $60bn in assets. “And what if US Treasuries outperform? You’d be giving up a lot of performance for the benefit of better ESG properties.” 
The French Public Service Additional Pension Scheme, known as ERAFP, excludes Treasuries because capital punishment is allowed in some states, according to Alice Blais, a spokeswoman. The fund, which manages pensions for civil servants, does buy US corporate debt.
Investment excludes Treasuries from the €48bn of assets that it runs on the strictest ESG criteria. The funds also avoid French OATs, due to the country’s atomic policy, and Poland is being monitored because of free-speech concerns.
The investor looks at US mortgage bonds as an alternative to Treasuries, according to Henrik Pontzen, head of ESG at Union, which oversees 349bn euros in total. It can also buy bonds from companies with high ESG ratings, even if the proceeds aren’t specifically earmarked for sustainable projects, he said.
European bond buyers, traditionally the heart of ESG investing, may also be more easily able to snub Treasuries than investors elsewhere because they are naturally less disposed to hold US debt. Still, this could change as ESG investing gains pace elsewhere.
Other ESG funds specifically exclude sovereigns from their ESG criteria. The $126mn Brown Advisory Sustainable Bond Fund invests “at least 80%” of its funds in ESG-compliant debt, and then also holds securities from the US government and international government entities.
Amy Hauter, a portfolio manager at Baltimore-based Brown Advisory, said she couldn’t immediately comment on the fund’s strategy.
Quandry Robeco and Hermes Investment Management are among investors that don’t explicitly exclude Treasuries from sustainable funds, partly because they are focused on corporate rather than sovereign borrowers. Hermes recently launched a range of funds that aims to change the behaviour of high-yield issuers in line with the UN’ Sustainable Development Goals.
ESG investors are aware that boycotting Treasuries, or other major nations’ debt, may not impact state policies. That’s because countries can easily sell notes to a host of other investors and because there is no major history of governments responding to bondholders’ non-financial concerns.
“It is far more difficult to lobby an overseas government on changing policy than an individual company that a fund may be able to meet face-to-face,” said Graeme Anderson, who is chairman of TwentyFour Asset Management and is leading the investment firm’s ESG efforts. “All investors have different opinions on what ESG means, but you have to be realistic.”

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