Solid long-term returns backed by rigorous sustainability research

Solid long-term returns backed by rigorous sustainability research

Q1 2021 Putnam Sustainable Funds Q&A

  • Both funds outperformed their benchmarks for the 1-, 3-, 5-, and 10-year, and life-of-fund periods ended March 31, 2021.
  • Environmental health is an important sustainability theme that the funds have exposure to across several holdings.
  • We have published a research report for financial advisors exploring insights and investment implications of mental health (Financial advisors, download PDF here).

How have the funds performed?

Katherine: For the quarter, Sustainable Future outperformed its benchmark, and Sustainable Leaders modestly underperformed. However, both funds outperformed over longer time periods, including the 1-, 3-, 5-, and 10-year, and life-of-fund periods ended March 31, 2021. It’s important to note that the funds’ sustainable approaches began in March 2018.

Could you highlight one of the sustainability themes in your investment research?

Stephanie: Environmental health is one notable area of focus. The effects of climate change — extreme weather events, temperature change, and ocean and soil degradation — are becoming more common and more acute. As a result, many companies are looking to build climate resiliency into their business models, while others seek to generate solutions to mitigate climate change and its impacts. Our portfolios include companies focused on a number of solutions within this broad theme. Examples include renewable energy such as solar and wind power, sustainable agriculture, and commitments to reduce carbon footprints and waste. An example of the latter is single-use plastics.

Katherine: In terms of our sustainability themes and research, we have discovered that so many of our social, economic, climate, and health-related issues are intertwined. All these systems influence one another in important ways. We believe companies that are taking a more systemic and holistic view of how their businesses fit into these bigger systems are very well equipped to address these issues, to mitigate risks, and to create long-term business opportunities.

Could you describe the strategy for Putnam Sustainable Leaders Fund?

Stephanie: With this fund, we seek companies with strong fundamentals that are linked to leadership in financially material sustainability issues. The stocks of these companies are typically, but not always, considered to be growth stocks, and in most cases they are large-cap in size. We look for performance that demonstrates true leadership — not just compliance — in areas that are relevant to the companies we invest in. These areas can include clean and efficient materials use, reductions in carbon or water intensity, improvements in workplace equality and diversity, and alignment of management incentives with the company’s sustainability objectives. We invest in companies where strength in relevant sustainability issues is increasing their long-term business potential. In addition to differentiated leadership in material sustainability areas, we look for companies to display transparency in goal-setting and in reporting progress, and for companies to have impact that extends beyond company walls. By focusing on material ESG issues for each individual business, we aim to identify companies with durable financial performance and potentially lower risk profiles.

Could you describe the strategy of Putnam Sustainable Future Fund?

Katherine: Our emphasis for this fund is on solutions-oriented companies — those that offer innovative ways to address our greatest sustainability challenges. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are mid-cap or small-cap in size. We seek to invest in companies whose products and services contribute to positive environmental, economic, or social impact. By providing these solutions, the companies in the portfolio offer potential for strong financial growth and profitability, in our view. Again, we always seek a combination of three attributes: strong fundamental prospects, reasonable valuation, and positive impact.

What are some examples of positive impact that you seek from companies?

Stephanie: We are always looking for positive impact that is linked to long-term fundamental prospects and financial performance. From an environmental perspective, positive impact could mean improving water quality or reducing greenhouse gas emissions. Positive social impact could include improvements in health and well-being or better access to information and opportunity. Throughout our research process for both portfolios, we take a tailored, company-specific approach, including first-hand interactions with management teams of companies and ongoing collaboration with Putnam’s research analysts.

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