A Changing Climate for ESG Investments | Lord Abbett
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Market View

Lord Abbett experts look at the growth in investments based on environmental, social, and governance criteria—and how the ESG approach can be applied to a single climate-focused bond strategy

Read time: 3 minutes

Amid the growing prominence of investment strategies tied to environmental, social, and governance (ESG) criteria, we have received many questions from investors about recent developments in the ESG market—and how the approach is being integrated into Lord Abbett’s own investment offerings. We asked Partner and Portfolio Manager Leah Traub to bring us up to date on the first topic, and Portfolio Manager Annika Lombardi to provide insights on how certain ESG factors can be distilled into a single investment strategy.

Especially Strong Growth

Leah Traub: We saw a tremendous amount of ESG bond issuance in 2020, building on very strong issuance levels in the previous year (see Figure 1). The amount of bonds that are tied to environmental, social, or governance measures stood at around $1.3 trillion at the end of 2020, according to data from Morgan Stanley.

 

Figure 1. Issuance of ESG-Related Debt Rose Sharply in 2020

Issuance in billion U.S. dollars for the years indicated

Source: Bloomberg, Morgan Stanley Research. Data as of January 6, 2021. “SSA” refers to issuance by sovereign governments, supranational entities, and agencies. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

There was a debate a few years ago as to whether ESG-dedicated bonds would be a subset of existing corporate or sovereign asset classes or emerge as a distinctive investment category. And I think what we've seen now is that ESG has become its own asset class.

Overall, the new ESG issuance that we saw in 2020 was met with very strong demand in the marketplace. We're even seeing some of these bonds start to outperform non-ESG oriented bonds with similar credit quality ratings and maturity characteristics. That's something that we're watching very closely in terms of how the relative value plays out between these ESG and non-ESG sectors.

One notable development has been the broader range of ESG securities being issued. Beyond green bonds, perhaps the most widely recognized ESG category, we’ve seen issuance in other, less traditional sectors such as high-yield or municipal bonds. Another major trend that has developed since the emergence of COVID-19 is the increase in related social bonds. Countries are issuing sovereign bonds to help deal with the economic and public health impacts of the virus on their economies.

One other developing trend that we're seeing is sustainability-linked bonds, where certain key features of the bonds— coupon for example—are going to be linked to sustainability or other ESG-related metrics going forward. This is a nascent trend, and we think it will expand in the future. We're seeing a lot of interest from clients for these types of bonds.

A Climate-Focused Approach

Annika Lombardi: As Leah notes above, the ESG landscape has grown increasingly diverse. Most recently, Lord Abbett has chosen to focus on a specific outcome via our Climate Focused Bond Fund, applying five decades of multi-sector investing experience. Launched in summer 2020, the strategy evaluates issuers and securities that we believe are having a positive impact on the environment, as well as those that may benefit from structural shifts, as a result of increasing emphasis on the global climate. Lord Abbett believes the long-term economic consequences and structural changes are opportunities for active management.

The strategy’s principles-based approach relies on our understanding of competitive dynamics and the interrelation of value chains, as well as applying a relative-value approach. The Climate Focused Bond Fund taps into five major themes:

 


We believe these themes represent long-term, structural changes in the economy, driven by an increased focus on climate globally. Our Climate Focused Bond Fund seeks to capitalize on these structural trends by investing in issuers that we believe are positioned to benefit from them.

While we are steadfast in our belief that the climate will affect the competitive and investment landscape, the particular nature of issuance is constantly changing. We utilize a multi-sector approach that can respond to variable issuance among sectors and employ relative-value comparisons to drive security selection.

The strategy currently finds climate-focused opportunities in eight sectors in which Lord Abbett has deep expertise, ranging from investment-grade, corporate bonds to U.S. municipals and convertible bonds, securitized products, and green bonds. We also include high yield, creating a much wider opportunity set, greater diversification, and potential opportunities for higher returns.

Our thematic emphasis on a wide range of sectors seeks to ensure that investors have access to the most attractive opportunities today, while allowing for a scalable investment approach that can adapt over the coming decades.

 

 

A Note about Risk: The Lord Abbett Climate Focused Bond Fund is subject to the general risks associated with investing in debt securities, including market, credit, liquidity, and interest rate risk. The value of your investment will change as interest rates fluctuate and in response to market movements. When interest rates fall, the prices of debt securities tend to rise, and when interest rates rise, the prices of debt securities are likely to decline. The Fund is subject to the risk that its climate-focused investment strategy may select or exclude securities of certain issuers for reasons other than investment performance considerations, which may negatively affect its performance relative to unconstrained peers. Certain climate-focused investments may be dependent on government policies and subsidies, which are subject to change or elimination. The Fund may invest in high-yield, lower-rated debt securities, sometimes called junk bonds and may involve greater risks than higher-rated debt securities. These securities carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. The Fund may invest in foreign or emerging-market securities, which may be adversely affected by economic, political, or regulatory factors and subject to currency volatility and greater liquidity risk. The Fund may invest in derivatives, which are subject to greater liquidity, leverage, and counterparty risk. These factors can affect Fund performance.

The Fund's portfolio is actively managed and is subject to change.

The credit quality of the debt securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from `AAA' (highest) to `D' (lowest). Bonds rated `BBB' or above are considered investment grade. Credit ratings `BB' and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.

Important Information for Investors

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action, as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett Funds. This and other important information are contained in the Fund's summary prospectus and/or prospectus. To obtain a prospectus or summary prospectus on any Lord Abbett mutual fund, contact your investment professional, Lord Abbett Distributor LLC at 888-522-2388 or visit us at lordabbett.com. Read the prospectus carefully before you invest.

No investing strategy can overcome all market volatility or guarantee future results. Diversification cannot guarantee a profit or protect against loss in a declining market.

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This Market View may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

A convertible bond is a fixed income instrument that allows the holder to convert the bond into equity under specific conditions. The basic structure of a convertible bond gives the holder the option to hold the bond until maturity and receive cash par value, or to convert the bond into a specified number of shares of stock of the same company.

Coupon is the interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. This is also referred to as the "coupon rate" or "coupon percent rate."

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially- conscious investors use to screen potential investments.

As defined by the World Bank, green bonds are fixed-income securities that support the financing of climate-friendly projects worldwide.

Securitized products are fixed income instruments whose repayment is supported by the cash flows of relatively illiquid assets, such as mortgages, auto loans or credit card receivables.

Spread is the percentage difference in current yields of various classes of fixed-income securities versus Treasury bonds or another benchmark bond measure. A bond spread is often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point).

 

The opinions in this Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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Climate Focused Bond Fund

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