Q3 2021 Putnam Sustainable Funds Q&A
- U.S. stocks had a challenging third quarter, as economic concerns weighed on investor sentiment.
- Our latest research report, “Investing to thrive,” explores insights and themes of our sustainable investing approach (available to financial professionals at Putnam.com/advisor).
- One investment theme we examine is the “circular economy,” an economic model that emphasizes cycles of reuse, recycling, and reduction.
How were investing conditions, and how did the funds perform in the third quarter?
Most U.S. equity indexes posted losses in the third quarter, as economic concerns weighed on investor sentiment in the final weeks of the period. The Sustainable Leaders portfolio and its benchmark posted modest gains for the quarter, while the Sustainable Future portfolio and its benchmark posted modest losses.
Stock markets struggled as worries mounted over rising inflation and the spread of the Delta variant of Covid-19, which led to an increase in cases worldwide. Growth stocks in particular struggled in the quarter, due in large part to rising 10-year Treasury yields. Yields rose as investors grew concerned that inflation trends — described by the Fed as “transitory” earlier in the year — might be more durable. A number of businesses were challenged by shortages in parts and labor as well as cost pressures for materials, shipping, and labor. However, U.S. stocks were also boosted at times by positive economic data and strong second-quarter 2021 earnings results from businesses.
Your team recently published a report, Investing to thrive, which details themes of your sustainable investing approach. Could you share an example of one of those themes?
Within the overarching category of Thriving Planet™, we examine the circular economy. This refers to an economic model that emphasizes cycles of reuse, recycling, and reduction as opposed to a linear model of extraction, consumption, and disposal. For example, single-use plastics have a negative impact on our planet, especially our oceans. The use of plastics has increased 20-fold over the past 50 years, and recycling rates for plastic are low. Clothing is another example, as 36 billion items of clothing are thrown away in the United States each year. Increasingly, consumers are recognizing the harm to the environment and are looking for alternatives. We seek companies that provide innovative solutions to this challenge through materials innovation, supplier partnerships, and products designed for durability and reuse.
Could you describe the strategy of Putnam Sustainable Leaders Fund?
The Sustainable Leaders portfolio invests in companies that have demonstrated leadership in the sustainability issues that are financially material to their businesses. Our investment thesis is that companies that exhibit this type of commitment also often demonstrate potential for strong long-term financial performance. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are large cap in size.
We characterize leadership in sustainability using four criteria: (1) a focus on material, or relevant, sustainability issues, (2) creativity, proactiveness, or considerations that go beyond compliance or box-checking, (3) transparency demonstrated by specific company goals and clear and consistent progress reporting, and (4) impact, or sustainability characteristics that create benefit beyond a company’s “borders.” Some examples of leadership include clean and efficient materials use, reductions in environmental intensity, or improvements in workplace equality and diversity.
Could you describe the strategy of Putnam Sustainable Future Fund?
The Sustainable Future portfolio invests in companies whose products and services provide solutions to essential sustainability challenges. Our investment thesis is that solutions-oriented companies with potential to create positive social and environmental impact also demonstrate potential for strong growth and long-term financial performance. The stocks of these companies are typically, but not always, considered to be growth stocks, and are often mid cap or small cap in size. Some examples of areas where a company might offer sustainable solutions include prevention and treatment of chronic disease, access to information and opportunity, growth of the renewable energy supply, or development of the circular economy.
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