Decarbonisation and net-zero targets are front of mind for many investors these days. So why is one of the biggest asset classes – government bonds – not in the picture?

The Paris Agreement, a pledge signed by 174 countries at the 2015 United Nations Climate Change Conference, has had something of a transformative effect on the way people invest. As the planet’s temperature has risen, so too has investor interest in portfolios that align with the goal of achieving net-zero global carbon emissions by 2050. As the energy transition continues to play out, it's more critical than ever investors have the climate integration tools at their disposal for all asset classes.

However, the drive towards net-zero investing has, so far, left out sovereign bonds. For example, a recent report from the Net Zero Asset Managers Initiative found that out of 325 signatories, only 24 had included sovereign debt in their sustainability portfolios, which was far fewer than for all other major asset classes. This is despite the global sovereign bond market accounting for US $64tn. Many institutional investors are also required to hold sovereign bonds for asset-liability matching purposes and matching adjustment reasons.

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