The investing landscape is changing rapidly, with environmental, social, and governance (ESG) standards playing an increasingly influential role. Adding to this growing trend, Baden-Württemberg, a state in Germany, has decided to steer clear of US Treasurys, citing a mismatch with its recently implemented sustainable investing criteria.

Baden-Württemberg’s decision comes in the wake of a new law that places ESG factors on an equal footing with profitability and liquidity. With around $18 billion in holdings under its watch, the state’s investment calls are now guided by the UN Sustainable Development Goals, the EU’s Taxonomy Regulation, and the Paris Agreement on climate change.

The US, along with other nations like Finland, Latvia, and Greece, currently falls short of these updated investment criteria. This situation arises from the US’s non-ratification of several international treaties, particularly those concerning women’s rights and certain weapons types.

To illustrate this point, the US was ranked 38th in the world in the 2022 SDG Gender Index, which monitors the empowerment of women and girls. Furthermore, the US has not ratified the Treaty on the Prohibition of Nuclear Weapons and withdrew from the Arms Trade Treaty under the previous administration. While the current administration has rejoined the Paris climate agreement, these other factors weigh against the country’s ESG rating in Baden-Württemberg’s eyes.

Arnim Emrich, the head of Baden-Württemberg’s treasury and asset management unit, admitted that this new approach of excluding certain investments based on treaty participation might seem quite blunt. However, he justified it as the only straightforward and objective proxy available.

Baden-Württemberg isn’t the pioneer in this regard. Schleswig-Holstein, another German state, already has a law that eschews US Treasurys based on similar ESG grounds.

Even so, this German stance is unlikely to significantly shake the $24 trillion US bond market. German holdings of Treasurys total just around $85 billion. Yet, these cases do offer a fascinating insight into how ESG considerations are gradually reshaping investment strategies, a development keenly watched by savvy entrepreneurs and investors around the globe.