ESG Investing in a Climate of Urgency | Lord Abbett
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Market View

The recent IPCC report on the pace of climate change has helped focus attention on the growth–and performance—of sustainable investments.

Read time: 2 minutes

The August 2021 report published by the Intergovernmental Panel on Climate Change (IPCC) offered a sobering assessment of the Earth’s climate and its vulnerability, “unequivocally” linking increases in greenhouse gas emissions to human activity.

As such, it also focuses attention on the growing market for sustainable investments. In the past year, Market View has provided updates on Lord Abbett’s approach to ESG (environmental, social, and governance)-related investments, especially regarding climate-linked bonds. In the wake of the IPCC report, we thought this would be a good time to check in on the progress of sustainable investments in the United States and around the world. We think there are two developments worth highlighting:

  1. Assets in sustainable funds grew 14% during the second quarter of 2021 and now total over $300 billion.

Sustainable funds took in roughly $17.5 billion of net flows in the second quarter of 2021, according to Morningstar data. Interestingly, the breakdown of active and passive flows shifted, as shown in Figure 1. Active sustainable funds had a record quarter, amassing $8.4 billion, or 48% of the flows. In the first quarter, active funds only accounted for 30% of the flows. At an asset-class level, equity funds continued to make up the lion’s share but flows into fixed-income funds reached a new record of $2.7 billion.

 

Figure 1. Actively Managed Sustainable Funds Have Seen Record Growth
Quarterly asset flows in ESG-focused U.S. mutual funds, by category

Source: Morningstar Direct. Data as of June 30, 2021. For illustrative purposes only.

 

  1. Sustainable investments have outperformed in two key measures.

Globally and across all markets, 58% of ESG-screened indexes tracked by Morningstar beat their broad market equivalents during the second quarter. Much of the outperformance can be attributed to the revival of technology stocks, which represent a heavy weighting in most sustainable indexes. Focusing on the United States, the Morningstar US Sustainability Index posted a competitive second-quarter performance following a first quarter when some ESG indexes lagged their non-ESG benchmarks, as energy stocks led the U.S. market by a wide margin.

What about the longer term? Data on the Morningstar World Large Stock Category show that sustainable investments (as defined) within the category have outperformed the equities that do not meet that designation over the one-, three-, five-, 10-, and 15-year periods through June 30, 2021 (see Figure 2).

 

Figure 2. Globally, Sustainable Equities Have Outperformed over the Longer Term
Cumulative total return for the indicated periods (through June 30, 2021)

Source: Morningstar Direct. Morningstar category average cumulative total returns for the period ending 06/30/2021.
Past performance is not a reliable indicator or guarantee of future results. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

A Focus on Climate

As we have noted before, we believe that ESG factors can materially impact investments in the portfolios we manage. In a previous Market View, Lord Abbett Portfolio Managers Annika Lombardi and Leah Traub noted, “What we have found over time … is that focusing on the ESG risks in our investments offers us the potential to improve our risk-adjusted return profile.”

On May 28, 2020, we launched our dedicated ESG strategy, the Climate Focused Bond Fund. This strategy leverages our 50-year history of managing multi-sector, fixed-income portfolios by investing in issuers and securities that we believe are having a positive impact on the environment, as well as those that may benefit from structural shifts resulting from an increasing emphasis on the global climate.  

Lord Abbett has sharpened its focus on ESG, including the establishment of two new roles at the firm, Chief Sustainability Officer and Head of ESG Investment. As Lombardi and Traub noted, “We have integrated ESG criteria within all our investment strategies, because we believe it can potentially make better outcomes for our clients—and our planet.”

 

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.

Unless otherwise noted, all discussions are based on U.S. markets and U.S. monetary and fiscal policies.

Asset allocation or diversification does not guarantee a profit or protect against loss in declining markets.

No investing strategy can overcome all market volatility or guarantee future results.

The value of investments and any income from them is not guaranteed and may fall as well as rise, and an investor may not get back the amount originally invested. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance.

Market forecasts and projections are based on current market conditions and are subject to change without notice.

Projections should not be considered a guarantee.

The credit quality of fixed-income securities in a portfolio is 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.

This material 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.

The views and opinions expressed are as of the date of publication, and do not necessarily represent the views of the firm as a whole. Any such views are subject to change at any time based upon market or other conditions and Lord Abbett disclaims any responsibility to update such views. Lord Abbett cannot be responsible for any direct or incidental loss incurred by applying any of the information offered.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

Please consult your investment professional for additional information concerning your specific situation.

Glossary and Index Definitions

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.

Morningstar Information:

Morningstar World Large Stock Category: World-stock portfolios have few geographical limitations. It is common for these portfolios to invest the majority of their assets in the U.S., Europe, and Japan, with the remainder divided among the globe’s smaller markets. These portfolios typically have 20%-60% of assets in U.S. stocks.

A strategy is classified as a “Sustainable Investment” if it is described as focusing on sustainability, impact, or environmental, social, and governance (ESG) factors in its prospectus or other regulatory filings. This classification does not measure how Morningstar rates the effectiveness of the fund’s sustainable strategy. Instead, it reflects the fund’s stated objectives.

The Morningstar US Sustainability Index is designed to provide exposure to equities that score highly on sustainable investing criteria, while targeting 50% coverage by float market cap of the large and mid-capitalization stocks of the U.S. market.

© 2021 Morningstar, Inc. All rights reserved.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

This material is the copyright © 2021 of Lord, Abbett & Co. LLC. All Rights Reserved.  

Important Information for U.S. Investors

Lord Abbett mutual funds are distributed by Lord Abbett Distributor LLC.

FOR MORE INFORMATION ON ANY LORD ABBETT FUNDS, CONTACT YOUR INVESTMENT PROFESSIONAL OR LORD ABBETT DISTRIBUTOR LLC AT 888-522-2388, OR VISIT US AT LORDABBETT.COM FOR A PROSPECTUS, WHICH CONTAINS IMPORTANT INFORMATION ABOUT A FUND'S INVESTMENT GOALS, SALES CHARGES, EXPENSES AND RISKS THAT AN INVESTOR SHOULD CONSIDER AND READ CAREFULLY BEFORE INVESTING.

The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

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.

Important Information for non-U.S. Investors

Note to Switzerland Investors: This is an advertising document.

Note to European Investors: This communication is issued in the United Kingdom and distributed throughout Europe by Lord Abbett UK Ltd., a Private Limited Company registered in England and Wales under company number 10804287 with its registered office at Tallis House, 2 Tallis Street, Temple, London, United Kingdom, EC4Y 0AB. Lord Abbett UK Ltd (FRN 783356) is an Appointed Representative of Duff & Phelps Securities Ltd. (FRN 466588) which is authorised and regulated by the Financial Conduct Authority.

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