Government bonds are a type of sovereign debt that retail investors can access. Standard government bonds raise proceeds that are spent at the respective country’s government’s discretion – meaning that the capital raised can contribute to anything from social welfare and infrastructure, to the military or foreign political intervention.
Therefore, taking the framework of the UN Sustainable Development Goals  as a lens for positive impact, the actions of governments, despite democratically elected, can be seen as positively but also negatively impactful.
Our Positive Impact  portfolios’ dual mandate is to maximise both positive impact and financial returns. In line with that, unscreened funds investing in standard government bonds, like the UK gilts, do not fit within our investment framework and are avoided. Instead of investing in standard government bonds, our sovereign debt exposure is through dedicated green or sustainability bonds, or the bonds of supranational development banks. The proceeds of these bonds are spent on a defined set of positive-impact projects linked positively to the UN Goals, like renewable energy or low carbon transport infrastructure.
We are eagerly awaiting the UK’s confirmation of the ‘green gilt’ launches that will help power the UK’s green recovery from the pandemic-induced economic slowdown. The first ones are expected in 2021, lagging a lot of other European countries in the use of these instruments.
Meanwhile, our Future Leaders  portfolios are built with a core focus on ‘ESG leaders’ – those companies that are the most responsible within their sector. Translating this ranking logic to governments is more complicated. An individual investor may find it easy to take a stand against certain government policies, but it is harder to justify for professional investors who represent a diverse set of political views. For Future Leaders  we have built an ESG framework for government debt eligibility that considers ESG factors specific to sovereigns. This draws on guidance from the World Wide Governance Indicators project (led by the World bank) and research by Freedom House. It looks at issues including rule of law, corruption and independence of the electoral system to distinguish democratic, free governments from oppressive regimes.
In this way, Future Leaders  excludes investment in government bonds from oppressive regimes (like China) but includes investments in democratically elected governments (such as UK gilts). In addition, we seek an overweight in specific green and sustainability government bonds by using Green Bond indices, as described above.