Sustainable Bonds: In Search of a Multi-Sector Approach | Lord Abbett
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Market View

As demand for ESG-related (environment, social & governance) investments surges, bond investors may face the challenge of finding opportunities across the full range of fixed-income asset classes.

Read time: 3 minutes

Surging demand for sustainable investments, a component of ESG investment considerations, has prompted many asset managers to implement sustainable investment mandates, but to varying degrees across asset classes. Here, we provide a potential solution for bond investors looking for a diversified, sustainable investment approach.

In 2020, net flows into ESG-related, open-ended and exchange-traded investment funds available to U.S. investors were about $51 billion, according to Morningstar. This year, through the third quarter, flows have already surpassed the total for last year, recording over $54 billion in net inflows for U.S.-registered funds, which are generally not available to non-U.S. investors. As demand for these products increases, managers have taken steps over the last few years to align products to the needs of the market. A recent survey of 187 global asset managers found that 84% are either implementing or evaluating sustainability in their portfolios, compared to 53% in the 2018 survey.1 However, there is divergence of implementation across asset classes, and the extent to which managers are using sustainability considerations within the investment process is higher or lower, depending on the asset class, as shown in Figure 1.

 

Figure 1. Managers are Using Sustainable Investment Considerations More Often in Stock Portfolios
Survey data for the period February 1, 2021–April 30, 2021


Source: FTSE Russell, “2021 Global Survey Findings from Asset Owners.” Most recent 2021 survey data as of April 2021. The historical data shown in the chart above are for illustrative purposes only and do not represent any specific portfolio managed by Lord Abbett or any particular investment.
 

Finding Sustainability in Fixed Income

Asset managers face a variety of challenges when incorporating sustainability and other ESG-related criteria into their investment strategies. And despite the fact that fixed income is a much larger segment of the global financial markets, it remains behind equity when it comes to the availability and quality of ESG data needed for the specific requirements of bonds, such as sustainability metrics for long-duration securities. Further, within fixed-income sectors, managers have been more successful incorporating sustainability criteria across corporate bonds compared to other sectors. According to the same survey cited above, 89% of respondents currently using a sustainable fixed-income allocation are doing so within credit or corporate portfolios (see Figure 2), while other sectors, such as securitized fixed income and municipal bonds are less represented.

 

Figure 2. Credit/Corporate Portfolios Lead Sustainability Considerations in Fixed-Income Portfolios

Survey data for the period February 1, 2021–April 30, 2021

Source: FTSE Russell, “2021 Global Survey Findings from Asset Owners.” Most recent 2021 survey data as of April 2021. The historical data shown in the chart above are for illustrative purposes only and do not represent any specific portfolio managed by Lord Abbett or any particular investment.

 

A Broader Opportunity Set

At Lord Abbett, we have developed proprietary ESG scoring models to address gaps in the information available from external ESG research. The Lord Abbett Climate Focused Bond Fund is managed according to a rigorous investment process covering multiple sectors of the global fixed-income market, including municipal bonds and securitized fixed-income issues. This multi-sector, fixed-income approach uses positive, negative, and thematic screening to invest in securities of issuers we believe have, or will have, a positive impact on the climate. The strategy focuses on five major themes including clean energy, energy efficiency, low carbon transportation, water, and other important factors such as waste management and recycling.

The Fund also invests in both labeled green bonds, which earmark proceeds for climate and environmental projects, and unlabeled green bonds, whose activities are closely aligned with pivotal climatic themes. For example, we consider investment in companies whose revenues are generated primarily through activities targeting a clean energy solution, but whose debt securities aren’t specifically labeled as green bonds. We believe these bonds provide a demonstrable contribution to improving the climate and importantly may enhance the risk and reward profile of the Climate Focused Bond Fund.

We believe one of the most profound ways we can create positive social impact as a global corporate citizen is by evaluating and engaging with companies based on their actions with respect to ESG issues. While ESG factors are considered in the management of all Lord Abbett investment strategies, for investors looking for sustainable, mandated fixed-income funds, the Lord Abbett Climate Focused Bond Fund may be a potential solution.

 

1FTSE Russell, “2021 Global Survey Findings from Asset Owners”

 

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.

IMPORTANT CLIMATE FOCUSED BOND FUND INFORMATION

New Fund Risk: The Climate Focused Bond Fund is recently organized. There can be no assurance that the Fund will reach or maintain a sufficient asset size to effectively implement its investment strategy.

A Note about Risk: The 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 non-U.S. 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. The fund performance history at this time is very limited; therefore, performance achieved during its initial period of investment operation may not be replicated over longer periods and may not be indicative of how the Fund will perform in the future. These factors can affect Fund performance.

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

The Climate Focused Bond Fund is available to U.S. investors as an SEC-registered investment company and to non-U.S. investors as an Ireland-domiciled Undertaking for Collective Investments in Transferable Securities ("UCITS"). Please see below for additional information.

The Climate Focused Bond Fund is distributed by Lord Abbett Distributor LLC, member FINRA.

Important Information for U.S. Investors:

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Lord Abbett Funds. This and other important information is 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.

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:

The Lord Abbett Climate Focused Bond Fund is a sub-fund of Lord Abbett Passport Portfolios plc, an open-ended investment company with variable capital constituted as an umbrella fund with segregated liability between its sub-funds under the laws of Ireland (registered number 534227), and is authorized and regulated by the Central Bank of Ireland as an Undertaking for Collective Investments in Transferable Securities ("UCITS"). Authorization of the Lord Abbett Passport Portfolios plc by the Central Bank of Ireland is not an endorsement or guarantee nor is the Central Bank of Ireland responsible for the contents of any marketing material or the Fund's prospectus. Authorization by the Central Bank of Ireland shall not constitute a warranty as to the performance of the Lord Abbett Passport Portfolios plc and the Central Bank of Ireland shall not be liable for the performance of the Lord Abbett Passport Portfolios plc.

Shares of the Fund are only available for certain non-U.S. persons in select transactions outside the United States, or, in limited circumstances, otherwise in transactions which are exempt in reliance on Regulation S from the registration requirements of the United States Securities Act of 1933, as amended and such other laws as may be applicable. This material does not constitute an offer to subscribe for shares in the Fund. The offering or sale of Fund shares may be restricted in certain jurisdictions. For information regarding jurisdictions in which the Funds are registered or passported, please visit passportportfolios.com. Fund shares may be sold on a private placement basis depending on the jurisdiction. This material should not be used or distributed in any jurisdiction, other than those in which the Funds are authorized, where authorization for distribution is required. Lord Abbett Distributor LLC ("LAD") is authorized by the Fund to facilitate the distribution of shares in certain jurisdictions through dealers, referral agents, sub-distributors and other financial intermediaries. Any entity forwarding this material, which is produced by LAD in the United States, to other parties takes full responsibility for ensuring compliance with applicable securities laws in connection with its distribution.

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.

 A decision may be taken at any time to terminate the arrangements made for the marketing of the Fund in any EEA Member State in which it is currently marketed. In such circumstances, Shareholders in the affected EEA Member State will be notified of this decision and will be provided with the opportunity to redeem their shareholding in the Fund free of any charges or deductions for at least 30 working days from the date of such notification.

 

Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund. This and other important information is contained in the Fund's prospectus, fund supplements, KIIDs, and Summary of Shareholder Rights. Read these documents carefully before you invest. To obtain a prospectus, fund supplement, and KIIDs for any Lord Abbett fund, contact your investment professional, Lord Abbett Distributor LLC at (888) 522-2388, or visit us at  www.lordabbett.com . Where required under national rules, the key investor information document (KIID), Summary of Shareholder Rights, fund supplement and prospectus will also be available in the local language of the relevant EEA Member State.

Additional Important Information

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 & 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.

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.

Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates.

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

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