Skip to content

The scale and nature of government bonds mean they are core holdings in almost all investment portfolios. But do they have a natural home in socially responsible portfolios, and if so, how are they assessed for environmental, social and governance factors?

The largest financial market globally, at approximately $57 trillion, is that of government bonds.

When issued by large, developed economies such as the UK or US, government bonds are considered to be very low risk, in part due to their high credit ratings. They’re prized by investors both for the shelter they provide from market volatility and for portfolio diversification.

Investors looking to enhance the environmental, social and governance (ESG) credentials of their portfolio – without trading off potential performance, diversification or liquidity – may still want to treat government bonds as a core asset class.

In fact, leading ESG investment bodies and practitioners alike support the case for explicit ESG consideration when investing in government bonds. In a white paper on the subject, Allianz Global Investors, one of the world’s largest investment companies, wrote that “empirical findings suggest that specific ESG factors are important determinants of the financial performance of sovereign bonds”.

How are government bonds assessed for ESG?

As we explain in our Socially Responsible Investing whitepaper, we believe the most effective ESG assessments are those that prioritise materiality. In other words, that means assessing the ESG factors that matter most from a risk and opportunity perspective to the company or security.

The same principle applies when assessing a country’s ESG characteristics – materiality matters. But assessing ESG issues in government bonds is by no means an easy task due to the cross-sectional nature of the challenges they face.

That said, there are a number of frameworks and resources available for the assessment of ESG in government bonds. They include a recently launched World Bank sovereign ESG data portal, rating schemes devised by independent ESG experts such as MSCI, and proprietary frameworks developed by some of the largest sovereign debt investors globally.

Typically, these frameworks assess the impact of long term ESG factors on a nation’s economy by analysing the nature of the environmental, social and governance challenges it faces. This means understanding how a given country is exposed based on factors such as its geographical location, its socio-economic structure and its financial resources. It also requires understanding the extent to which the country is managing these risks and taking advantage of the opportunities they may present.

How does Nutmeg assess ESG in government bonds?

Nutmeg’s investment team draws on ESG research from one of the world’s leading providers, MSCI. Their framework is designed to provide an overall sustainability assessment for 99% of the government bonds available globally, issued by 198 countries.

Similar to MSCI’s corporate ratings, the framework analyses many sub-factors within the ESG pillars. And doing so helps form an overall perspective for how exposed a country is to ESG risks, and how well they manage these risks.

The framework and factors under consideration are shown below:

This framework, and the ratings it provides for government bonds globally, allows us to understand how government securities score when it comes to their ESG risks, and how well placed they are to tackle the challenges they face. It allows us to compare government securities across ESG issues and understand their relative strengths and weaknesses.

The framework also allows us to integrate ratings data for government bonds into our in-app ESG scoring portfolios, so you know where all of your investments stand when it comes to alignment with your personal values.


[1] The Barclays Global Aggregate bond index, which measures the value of the government bonds issued in 24 currencies, contains around 24,500 securities currently and has a value of approximately $57 trillion. Source: Bloomberg, 31/10/2019.

[2] MSCI ESG Government Ratings: ESG risk factors, from MSCI Research Inc.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance.