(Bloomberg) -- Australia isn’t paying the price for being a climate laggard. At least not yet.Some of the world’s biggest investors continue to hold Australian debt even as they pledge to shift money away from countries and assets that don’t align with a low-carbon world.More than half of Australia’s A$906 billion ($699 billion) in government bonds were owned by foreign investors at the end of last year, up from a 16-year low in June, according to government figures. That’s helping make the country’s debt among the top performers in Asia this year, while its dollar is one of the gainers among Group of 10 currencies.“You don’t want to throw the baby out with the bath water,” said Bhanu Singh, head of Asia Pacific portfolio management at Austin, Texas-based Dimensional Fund Advisors LP. The firm holds Australian debt among its $637 billion in assets, including in its global sustainable fixed-income fund. “Ultimately, you’re trying to meet both the ESG and investment objective.”Australia underscores the challenges for global asset managers as they look to meet client demands for more sustainable investments: They want to make their portfolios greener, yet they also have a fiduciary duty to make money.Australia is falling behind other developed nations when it comes to climate change. It scrapped a price on carbon in 2013, and hasn’t set a net-zero emissions target, unlike its major trading partners Japan and China. Australia is the world’s third-biggest per-capita emitter given its resource-based economy, and has only pledged to cut greenhouse gases by between 26% and 28% by 2030. That trails the U.S., with its 50% reduction target, and the 40% to 45% pledged by Canada, another commodity-driven economy.The relatively modest goals have made Australia an easy target for global funds. Robeco, a Dutch unit of Orix Corp. that has about 91% of its 176 billion euros ($213 billion) in ESG-integrated portfolios, has shunned the nation in its new Paris-accord bond fund, said Rikkert Scholten, a senior portfolio manager. Yet the firm still holds the bonds in other funds.“It is not forbidden for us to invest, but the idea is that the overall profile should be aligned with the Paris Agreement,” he said in an interview. “The carbon profile of Australia does not fit.”Some money managers holding the bonds point to gains Australia is making within the wider spectrum of ESG, or environmental, social and governance metrics. It’s in the top quartile of sovereign rankings for meeting the United Nation’s Sustainable Development Goals that include energy from cheap, renewable sources, notes Harvey Bradley, a portfolio manager at Insight Investment International Ltd. The London-based company runs 753 billion pounds ($1.05 trillion) and owns Australian government debt. The country also ranks ninth globally in a 2019 Franklin Templeton scoring of nations that puts more weight on social and governance factors than environmental policies.Australia’s state governments are beginning to reform their economies to meet carbon-neutral goals, lowering the nation’s emissions by default. The country is one of the world’s biggest producers of roof-top solar, allowing big power consumers in South Australia to get paid to take electricity.Investors can also count on Australia to pay them back. It ranks seventh out of 125 countries for its ability to repay debt according to Insight’s scoring system, Bradley said by phone. Australia is one of just 11 countries with a AAA credit rating from Standard & Poor’s, despite warnings that climate change will impact ratings.“The challenges with more focus on the environment will mean there will be greater scrutiny in Australia over time if it doesn’t pull its weight,” Insight’s Head of Responsible Investment Josh Kendall said in the same interview. “So the noises might get louder, but it’s not likely to have an influence as it’s more likely to pay back its debt.”As pressure mounts to cut emissions further, Australia may soon pay a price if it fails to make sufficient progress. The nation’s economy could contract by 6% over the next five decades if it doesn’t take stronger action to curb greenhouse gas emissions, according to Deloitte Access Economics. About one-third of the economy and almost a quarter of the workforce are exposed to disruption if key trading nations source cleaner materials elsewhere, according to the report.Value Elsewhere“As a responsible investor, we need to take action and perhaps handicap our valuation on Australia, or perhaps look for a country that looks better” if more steps aren’t taken, said Guillaume Mascotto, head of ESG and investment stewardship at Kansas City-based American Century Investments, which holds Australian 30-year debt among its $218 billion in assets. “It’s not that we’re excluding Australia per se, but we’re finding value somewhere else where the spreads look more attractive with the ESG profile as well.”Within Australia meanwhile, some investors aren’t waiting for stronger action from the federal government, which has been a champion of the fossil-fuel industry. Altius Asset Management Pty., a A$2.3 billion unit of the Australian Unity finance firm, is underweight Australian debt, favoring state governments that are more attuned to decarbonizing.“We’re a very open economy in a global marketplace, which is going to demand better of us,” Chief Investment Officer Bill Bovingdon said. “It’s either going to be a challenge we rise to with conscious and early effort, or it’s something we’ll be dragged kicking and screaming to down the track.”(Updates with details of state governments decarbonizing in 10th paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2021 Bloomberg L.P.