ESG Investing: A Growing Global Focus on Green Bonds | Lord Abbett
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Market View

Governments’ greater emphasis on environmental policy has been accompanied by strong growth in the asset class. What are the potential implications for investment portfolios?

Read time: 2 minutes

We discussed rising global demand for bonds linked to environmental, social and governance (ESG) criteria in a previous Market View. And it looks like that trend is strengthening as we approach Earth Day (April 22) 2021. On March 3, Italy received over €80 billion (US$97 billion) of bids for its €8.5 billion issue of 2045 sovereign green bonds—more than twice the level seen for Germany’s first green bond issuance in 2020, according to a Bloomberg report.1 “European nations are piling into the market to finance a greener recovery from the pandemic,” according to the article.

Indeed, Europe has been the primary geography for the issuance of ESG-related bonds. But the composition of the green bond market is quite diverse by issuing country and issuer type, as shown in Figure 1. One other noteworthy feature of the asset class is that it is almost entirely investment-grade.

 

Figure 1. Green Bonds: The Composition of a Diverse Global Asset Class
Percentage of market value as of January 31, 2021 for indicated categories

Source: Bloomberg and ICE Data Indices, LLC. Based on the ICE BofA Green Bond Index. Data as of January 31, 2021. SSA=Sovereigns, supranationals, and agencies. DM=Developed market. EM=Emerging market. For illustrative purposes only and does not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

The global ESG bond market reached $1.3 trillion in market value at the end of 2020, according to Morgan Stanley. What has driven that growth? One crucial factor is the evolution of government policy on the environment. In Europe, we are seeing policymakers embrace spending on green infrastructure and other ESG-related programs. In the United States, the Biden Administration is also putting a lot of emphasis on ESG-related infrastructure spending, while regulators continue to emphasize the development of electric vehicles and green power sources.

We also note that several other countries, such as China and Japan, are implementing net-zero emissions targets for government and industry. So, the impetus for ESG-related spending is coming from all over the globe. We believe the growth of issuance in ESG-linked bonds—and flows into related investment vehicles such as mutual funds--will continue as investors are increasingly focused on allocating their capital, whether it's to companies, sovereigns, or securities that are having a positive impact on the world.

A Final Word

Even amid their popularity, there is still a lingering notion that investors face a stark choice when considering green bonds—attractive risk-adjusted return versus adherence to ESG criteria. But that notion has been countered by research, including a 2020 report by Morningstar which found “no risk/reward trade-off to investing in ESG [companies] on a global level.”2 Interestingly, the Morningstar research noted that “ESG appears to be a distinct investment factor,” either moderately or not correlated to other known factors.

What we at Lord Abbett have found over time—and additional research has borne this out—is that focusing on the ESG risks in our investments offers us the potential to improve our risk-adjusted return profile. (The Market View mentioned earlier contains more information about our first dedicated ESG strategy, the Climate Focused Bond Fund, and details our actively managed approach to “labeled” and unlabeled” green bonds within the climate-focused space.) 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.

 

1John Ainger, “Italy’s Green Bond Demand Smashes Peers in Debut Offering,” Bloomberg, March 3, 2021.

2Madison Sargis and Patrick Wang, “How Does Investing in ESG Companies Affect Returns?” Morningstar, February 19, 2020.

 

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.

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.

Green bonds: Labeled green bonds are bonds that earmark proceeds for climate and environmental projects. Labeled green bonds are often verified by a third party, which certifies that the bond will fund projects that include environmental benefits. Unlabeled green bonds (or climate-aligned bonds) are securities whose proceeds are supposed to be used for climate-aligned projects and initiatives but are issued without formal certifications.

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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