Do Gilts Have a Place in an ESG Restricted Portfolio?

‘Gilts’ are generally viewed as a low-risk, secure asset class with often long maturity times. Issued by HM Treasury, Gilts are listed on the London Stock Exchange and come in two forms: Conventional and Index-linked. Conventional Gilts are the simplest type of Government or Treasury debt and form 76% of the ‘book’, guaranteeing a fixed-income payment (the coupon) until the Gilt matures. Index-linked Gilts form the remaining 24% of Treasury debt and have similar characteristics as Conventional Gilts, except they reflect actual rather than nominal borrowing rates, thus the coupon is variable in line with RPI Index fluctuations. The total portfolio of HM Treasury issued Gilts at the end of 2024 stood at £1,880.6bn¹.

Unlike other asset classes, especially equities and corporate bonds, Gilts have historically played a modest active role as far as ESG (environmental, social and governance) investments are concerned. Gilts may be viewed typically as ‘neutral’ or even ‘benign’ rather like cash, and therefore ethically acceptable; however, there are some ethical considerations to bear in mind. Responsible investors have, by and large, struggled to integrate any ESG screens given one is dealing with Sovereign entities rather than investible companies. Corporate and supra-national debt instruments (e.g. Network Rail or Transport for London) are perfectly easy to screen, but where exactly does one begin in ‘screening’ countries?

Any portfolio that has a human rights ticker as part of a screened approach, could begin by integrating an oppressive regimes ethical overlay; usually this would mean avoiding any investment if the territory or government is deemed ‘oppressive’ in terms of human rights abuses (evidence of Modern Slavery, imprisonment without trial, extrajudicial executions, nil freedoms of expression, religion, the media or assembly etc).  

For UK sovereign debt, the potential conflict comes from the allocation of Gilt proceeds to areas of national expenditure such as defence or a nuclear weapons programme. There is clearly a case, under very strict criteria, for avoiding Gilts on the basis that there will be some allocation to defence. The positive argument however would be that any UK defence spending is solely for national security purposes, and does not contribute towards the wider arms trade. For nuclear weapons, of course, the ethical challenges are more nuanced given these are classed as ‘unconventional weapons of mass destruction’. Because public spending is not hypothecated, investors must take a ‘once and for all’ approach to whether Gilts are acceptable or not based on individual tolerance. Historically as part of the Cold War dividend, defence spending in Western democracies fell as a priority as more was spent on welfare and health programs. Since the Russian invasion of Ukraine however, defence spending is set to increase to between 3-5% of national GDP, some of which will be raised from increased Gilt issuances. In the fiscal year 2024-25, defence allocated spending represented 5.2%² of UK national spending or £66bn.

Investors having navigated this far, may be safe in thinking OECD issued debt could perhaps be viewed as acceptable, in avoiding the worst instances of human rights abuses. This assumption needs care. Not all OECD countries (for instance the United States) have signed up to international protocols that proscribe land mines and cluster bombs; other OECD countries may also be viewed more sceptically from a human rights perspective e.g., Turkey and Colombia³.

Gilts are a challenging asset class to assess, but overall, they are usually seen as ‘neutral’ and as having a place in a balanced ESG portfolio of fixed interest instruments where they contribute capital preservation and fund liquidity over the medium to long-term. At 5.2% of national spending, defence may also be viewed as within a ‘normal’ 10% portfolio exclusion level for any banned category of investment, albeit caveats around unconventional weapons remain.

¹Total Government debt stood at £2,522.4bn at 31 December 2024 of which 89% was Conventional and Index Linked Gilts Debt Management Report 2025-26 (Accessible) - GOV.UK

² UK defence spending - House of Commons Library and Public spending: a brief introduction - House of Commons Library. Defence spending calculations have been complicated by changes to NATO commitments announced in Spring 2025, which are likely to elevate overall spending by more than the historic figure of 2.5% of GDP to between 3-5% by the early 2030s. By Fiscal 2028/29 defence is expected to be around £73bn of budgeted expenditure.

³ There are currently 38 countries within the OECD, mostly, but not exclusively, comprising mature democracies.  Members and partners | OECD