Some of Europe's strictest ESG funds are snubbing the world's most liquid investment — the $16 trillion U.S. Treasuries market.
A €33 billion ($36 billion) 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 U.S. government's stance on capital punishment or climate change. The exclusions rank the U.S. 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 U.S. Treasuries," said Rupini Deepa Rajagopalan, head of the ESG office at Berenberg, which oversees about €36.7 billion. She cited the death penalty, nuclear weapons and U.S. non-participation in global environmental accords, such as the Kyoto Protocol.
Boycotting 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, which has more than $60 billion in assets. "And what if U.S. Treasuries outperform? You'd be giving up a lot of performance for the benefit of better ESG properties."