Hi. I’m Annika Lombardi. The team and I believe that Environmental, Social and Governance – or ESG – investing is all about understanding the impact that your investment decisions have on the world at large. My colleague and Lord Abbett’s Co-Director of Taxable Fixed Income, Rob Lee, believes deeply in these principles, both personally and professionally, and I’m excited to share a recent conversation with you. This is Green Shoots.
Thanks for joining me today, Rob, I'm-- I'm really excited to have you on the podcast because I know ESG is something that you're very passionate about…
… You’re 100% right. I am very passionate about this topic, and it's, I think, for multiple reason. The first reason is on a professional basis, these trends are very powerful. And let me just be very specific. First, on environment, and climate change, and global warming, the-- you can't get away from the science. Anyone who's studied this stuff-- in depth, which I have-- should be pretty convinced that what we are experience is real, and not only is it real, it is having a big effect on the planet, and on society at large.p>ROB
And this is just on climate and the environment. Because of that, as a professional investor, you have to be focused on this.
Rob says there are may examples for why these issues are an integral part of the investment process.
In my mind, every-- almost everything we are investing in, every company, every type of security, these issues are relevant. So I'll give you one example. If we were investing in real estate investment trusts, or commercial mortgage backed securities, and we have properties that are near rivers, or near coasts, rising seas matter. Just as one example. Another could be-- both regulatory, and legislative change-- very relevant after the recent election here in the U.S., and the Biden administration's-- proposed bills right now are affecting everything from tack-- energy tax credits-- both for renewables, and for fossil fuels in opposite directions, very relevant for energy companies, very relevant for metals and mining companies.
And the list goes on and on. So as a professional investor, you need to be focused on these things…
As I said at the beginning of this podcast, Rob and I are alike in that ESG isn’t just a component of the investment process, but is something we both consider outside of the office, too.
…On a personal level I would also say this is also very, very, very important to me. And that's because even before ESG gained so much-- momentum in recent years, it's just kind of a life philosophy. I don't like wastes. I believe that it is important to-- really pay it forward and think about future generations. And it's something that I'm personally passionate about because as a father, and a s-- you know, a member of society, and someone who is-- getting a little bit older, I care about future generations, and-- all of these issues, both again on the social and environmental side, absolutely critical and very high priorities for me.
Rob will talk more about his personal perspective a bit later, but at this point we pivoted to take a deeper dive into the investment side, as Rob oversees a number of different funds, many of which are multi-sector funds, where it can be challenging to identify and track ESG risk, not to mention quantify these risks across different asset classes. I asked him to give us an example of how he evaluates ESG in non-standard asset classes, like securitized products.
When we refer to securitized products, we mean… ???
An example is mortgage backed securities, which are … ???
OK. Back to Rob.
… as you know, Annika, the ESG data that exists is-- I think much more complete for-- companies, and that's true both on the equity and the fixed income side, most relevant to me and to us. On the corporate credit side, whether that's investment grade corporate bonds, or-- high yield issuers-- and even many emerging market-- bond issuers, the data is there. It's not for every company, but it is much more complete there.
As you mentioned, there are certain bond sectors, important ones, prominent ones, in multi-sector bond portfolios that I help manage, where the data is not quite as good. It's not as complete. It is more-- it's an earlier stage of development. But what I would suggest, and what we have done here at Lord Abbett, is that gives us an opportunity. And what we have actually done is we have asked every one of our investment professionals to focus on this because it's so important and so critical to our investing.
So let me-- let me make that concrete and give you a real example. In each one of these-- what are called securitized product sectors, we are examining a number of things. We are looking at the issuer or the sponsor, we are looking at the actual collateral. And I'll make it more real. If we're investing in commercial mortgage backed securities and we are looking at an office building, as one example, we are examining who the tenants are. We are examining is the building a LEED certified building, LEED standing for-- leadership in-- energy and environmental design.
And a LEED certified platinum building, which means it is all a sequel to summarize, more green than a non-platinum-- a LEED certified platinum building. We believe that has-- a lot of interest for tenants, and can command, all else being equal, higher rents. That effects the cash flow and the operating income from-- for that building. It affects the demand from those tenants, and therefore is relevant for the investor.
Do you believe that ESG factors, whether positive or negative, are fully factored into valuations in asset classes like securitized products right now?
It's a great question and I would say-- as a general statement, not completely. Now, ESG is a very important topic, top of mind-- for many investors, many professional investors, but there-- there's a continuum there. So not all investors are focused there, and-- some of them are less thoughtful, or less advanced in terms of their analysis here. And I'm not suggested we are the-- you know, the number one. We're always striving to be. But I think because of that continuum where you always have some leaders and some laggards on many topic-- in this particular case, ESG-- it is not, as a general rule, in my opinion, fully factored in.
So-- here's another hard question for you. I think a lot of investors-- as well as clients, have come to recognize that factoring ESG-- metrics or themes into the investment process is a crucial part of identifying the best risk adjusted returns. But it seems like the focus is shifting a little more towards impact now. Do you believe that investors can actually have an impact on their world by how they invest?
My short answer is absolutely yes. There are a couple of ways to think about this. So any issuer of bonds, or stock-- they care about where they can finance themselves. They care about what level they can raise capital at. And in kind of basic finance terms, the weighted average cost of capital matters to them, because if you could borrow, whether you're issuing debt or equity, at very attractive rates, you can then take that-- those proceeds, invest it in new projects, invest it in your business, invest it in-- in new business lines, and grow your businesses.
Yeah, and I know measuring impact is something that-- that's becoming more and more important-- not only for Lord Abbett, but for the industry as a whole, as it becomes so much more important for the end investors to know the exact impact that their capital is having on the world. So it's been really interesting to see the growth in-- in data providers, the improvement in disclosure, particularly in Europe, but here in the U.S. as well, as investors really try to wrap their hand-- right, wrap their arms around how their money is affecting the community and the environment around them. So I definitely expect this to be an area to get a lot more focus in the next couple of years.
But maybe talking a little bit more about the future, we’ve seen so much growth in the sustainable finance industry, even just in the past couple of years, so I’d be interested to hear your thoughts on how you see the industry evolving over time.
… It really isn’t about timeframes, it’s about secular change, in my opinion, it is about being forward-thinking, and forward-looking, and really thinking about what the future is going to be.
The interests-- in investing in sustainability, in the future, in green bonds-- in social bonds, in ESG products will-- is, in my opinion, only likely to continue and to accelerate. And that's why you're seeing-- that's why you're seeing all of these trends. They're based on kind of some of the most fundamental, and quite frankly, powerful-- issues going on in the world today.
One of the pushbacks that we hear sometimes from clients or potential clients is that they think they may have to sacrifice returns-- by investing in either an ESG friendly, or an impact fund. Do you share that view, Rob?
Yeah, and this is a-- very relevant and important question for every professional investor, and asset owners, you know, people who are actually investing their money, whether it's institutions, or individuals. And I would say it is not 100% clear. These are complicated topics that the future will tell us one way or another, but I'll tell you what I believe.
I don't think it is true at all to say that investing in ESG related products or sustainable- type investing is going to lead to weaker returns, or weaker risk adjusted returns. I don't think that's true at all. To say the opposite, to be honest, it's not clear that the opposite is true either. But I'll tell you where I come down, and you know this Annika. (LAUGH) This is where I come down.
Again, this is the job of the professional investor, to identify over different time horizons, and diff-- different time periods, what the future is going to look like, with uncertainty, with great uncertainty. And all the things that I talked about before, what I believe are secular and powerful trends, all else equal, in my opinion, leads me to believe that the secular forces here mean ESG investing can be very rewarding, both in-- in returns, and risk adjusted returns.
Before we finished our conversation, Rob and I revisited the big picture. Going beyond ESG investing, he spoke of sustainability as a lifelong focus, his family, and his desire to leave the world a better place for them.
part of my life philosophy is and always has been-- what is my highest purpose? I mean, as a person, you know, my existence, what is my highest purpose? And my highest purpose has always been, and continues to be, to serve others.
And it's very consistent with what I do as a-- as a professional investor. I love what I do. It's interesting, it's challenging, it's a bit stressful, but I believe you can do good and do well at the same time.
One of the things I think about quite often is a Bible verse from Luke which says, "To whom much is given much will be required," and I think those of us that, you know, work in asset management, or who have the resources to invest, we are fortunate to be in a position where we can actually impact the society, our society, and the world by how we direct our capital. So I think it kinda goes along the lines of what you were saying, Rob, trying to leave the world in a better place by whatever means you have.
Thank you for listening to Green Shoots. We’d love it if you subscribed to Green Shoots via your favorite podcast platform, and between episodes, you can always get the latest insights from my colleagues at Lord Abbett dot com. See you next time.
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