The substance of sustainability: Opportunity for active managers

Katherine Collins and Jackie VanderBrug discuss the importance of analyzing the interconnection of the elements of E, S, and G to fully understand the companies they invest in.

Cathy Saunders, Head of Corporate Sustainability and Public Policy, Putnam Investments

Katherine Collins, CFA, MTS, Head of Sustainable Investing, Putnam
Jackie VanderBrug, Head of Sustainability Strategy, Putnam

Cathy Saunders: Katherine, at one of your early meetings at Putnam, you described a “calling” that led you to undertake your work in sustainable investing. I’d like to ask you, and Jackie, has that calling become more defined over time? Has it become broader, more expansive? Is your conviction today higher or lower, or about the same?

Katherine Collins: After the turbulent events of recent years, my convictions around sustainable investing are stronger than ever. Committing to a career of “purpose” — both for individuals and organizations — can serve as a kind of true north. At Putnam, we ask fundamental questions about corporate purpose. What are your most amazing organizational strengths? What has your experience prepared you to do? How do those skills meet the needs of the world at large? What kinds of opportunities does this create?

The context of these questions is always shifting. For me personally, for Putnam, and for the companies we invest in, it’s important to focus on the central questions and the strengths and skills we have established, while at the same time recognizing what has shifted in the larger world.

In speaking with the companies we invest in, it’s clear that amid increased noise, we have the chance to step back and reflect on fundamentals. Why does this company exist in the first place? What are we trying to accomplish as an organization? How can we do better? What specific sustainability issues are most relevant for our operating context? We focus on the particular setting of each portfolio company, and this provides greater clarity on what is essential versus peripheral.

Jackie VanderBrug: The current noise can be challenging and frustrating, but as we work through it with our investment process, a natural winnowing takes place. A helpful guide to distinguishing between noise and substance can be found in Katherine’s book, The Nature of Investing: Resilient Investment Strategies Through Biomimicry, in which she describes how in nature things often expand broadly at an early stage of growth, then concentrate, then grow in a more focused way.

To better understand how we got here, let’s consider how different environmental, social, and governance [ESG] themes have moved to the foreground of sustainable investing just in the past few years. In time, the arc of the past four years may prove to be a fundamental inflection point for sustainable investing.

  • In 2019, the Business Roundtable redefined the purpose of a corporation from shareholder primacy to broad stakeholder commitment. This was an inflection point in corporate governance.
  • The Covid pandemic and lockdown in 2020 made us focus on the S in ESG investing, notably with respect to health risks among frontline workers.
  • Through all of this, and notwithstanding the economic dislocation of Covid, by 2021, a majority of the world’s economies had committed to the goal of net zero [reducing net greenhouse gas emissions to as close to zero as possible]. This goal was first enshrined in the 2015 Paris Agreement, an international treaty covering climate change mitigation, adaptation, and finance.

Cathy Saunders: It seems that for any given moment in time, there has been a growing focus on either the E, S, or G elements, or on the collective implications of all three. How does that work?

Jackie VanderBrug: One advantage to active management is that we have the chance to take a holistic view, instead of constantly posing either-or questions. There’s a concept called “dynamic materiality” in sustainable investing, which reflects the fact that the world is always changing, and so the analysis of relevant business issues needs to evolve as well. It’s rare to see wholesale shifts in what’s important — for example, a company that manufactures complex industrial products will constantly be focused on supplier effectiveness and customer benefits. But in a time of rapid inflation or supply disruptions, those material issues need to be analyzed in different ways. So, investors have to be constantly vigilant, connecting their analysis of financially material issues to current operating conditions.

Katherine Collins: It’s a matter of distinguishing between shifts that are substantial and those that represent only a temporal change in the noise level. As Jackie noted, the categories of financial materiality change fairly slowly, but operating conditions change more rapidly. Analysis of these interconnections speaks to our position as active managers.

One reason the industry likes to falsely separate E, S, and G is that it’s much easier to analyze these factors in isolation. The problem is that the world is interconnected and dynamic; using a fragmented and static analytical structure does not give us the whole picture. Active management and human portfolio managers can really shine by understanding the interconnection of elements and the way they evolve over time.

Sometimes, people view investing as a simple utility function — dollars in, dollars out. But we believe that to make the best decisions for our clients, we must deeply understand the companies we own in all their complexity. This is where we add value.

Cathy Saunders: Could you offer an example of how this works?

Katherine Collins: In recent years, we’ve spent a lot of time with a consumer-facing food company with a long-standing brand built on the integrity of its ingredients. When Covid hit, the company was simultaneously confronted with issues around supply networks and the frontline work environment of its team. By managing these challenges well, the company achieved tremendous performance, and the stock reflected this success.

This is a classic example of dynamic materiality and the value of active management. Employees and suppliers are both perpetually top considerations with respect to financial materiality. And yet, during this particular time, the nature and importance of the issues were in flux. A more static approach to ESG analysis might have missed these shifts and related investment insights.

Cathy Saunders: Investors often look for information to be compartmentalized and part of a checklist. How difficult is your complex analysis in terms of reporting?

Jackie VanderBrug: An investor may say, “I’m looking for this.” And the challenge for us is to determine how our reporting can respond to those client interests while providing as much context as possible. If, for example, you establish a data point like portfolio carbon intensity, that is an interesting calculation, but the follow-on questions might be even more interesting. How has that metric changed over time? How much of it is due to sector allocation versus benchmark? How concentrated are the emissions sources within the portfolio, and how does that relate to the investment strategy? Understanding this broader context for portfolio analytics is important, just as it is for risk measures or portfolio performance.

Putnam believes that one number is never going to be sufficient — nor are the over 1,000 data points that some of the new reporting requirements mandate. So, we explore a broader range of material investment information so that our analysts, portfolio managers, and clients can compare and understand strategies and better match them to investor preference.

Katherine Collins: It’s worth emphasizing that the kind of reporting required for regulatory compliance is different from the reporting that I need as a portfolio manager seeking to enhance investment processes. And neither of these might be the same as the reporting that a client requires to assess a match between their needs and the investment products we’re offering. All of these functions are vital, but they require different information for different purposes.

Cathy Saunders: Putnam is known for moving beyond data gathering and box-ticking by asking companies to develop their ideas into a kind of essay question.

Jackie VanderBrug: One of the less well understood “superpowers” of a quality active manager is engagement. Analysts and portfolio managers establish deep relationships and industry knowledge over years, providing a unique foundation for direct and collaborative discussions with management teams. Recently, institutional and retail investors have become more interested in engagement approaches. We are able to share how our engagement — which is an integral part of our fundamental research process, context specific, and linked to business fundamentals — leads to client benefits.

Sustainability across Putnam Investments

Sustainability at Putnam is focused not only on sustainable and ESG-focused investment products, but also across products and business functions. We use a lens of materiality and business relevance to incorporate sustainability considerations into our research, our stewardship, and our corporate operations.


Cathy Saunders: In the media, we sometimes hear that European policymakers and financial industry leaders are ahead of their American counterparts when it comes to sustainability. Is this true?

Katherine Collins: When you think in terms of one or another approach being ahead, it brings to mind a kind of racetrack where everyone is on the exact same path. This is not the case. Sustainability policy in Europe tends to take a top-down and prescriptive regulatory approach. With some similar end goals in mind, the U.S. has more of a bottom-up philosophy, focused on incentives for innovation and development. We need to move beyond characterizing policies as “ahead” or “behind” and instead appreciate their different forms and functions.

Jackie VanderBrug: European policymakers take this approach in many different economic sectors. A prime reason that the European Union exists is because there is a belief among the members that collective policy is an effective way to govern. By contrast, the U.S. strength is in innovation and capital allocation. A good example is the Inflation Reduction Act [2022], which embeds climate goals and actions into the federal tax code, creating substantial incentives for companies and asset managers to engage in sustainable practices.

Cathy Saunders: Will we be calling these investment strategies “sustainable” 10 or 15 years from now, or will they be embedded into everything we do?

Katherine Collins: Integrating business-relevant sustainability analysis into the investment process is an integral part of being a thoughtful investor. That’s why our fundamental approach to equity research at Putnam focuses on financially material business issues tailored to specific corporate settings. The question for sustainable investment products is how to go above and beyond this approach to ESG integration. The goal is to create products where the investment process benefits from sustainability insights and related opportunities. Our Putnam Sustainable Leaders and Putnam Sustainable Future strategies are good examples.

Jackie VanderBrug: As active managers, we are constantly analyzing what is changing in the world to identify opportunities to make better investments on behalf of our clients. Nomenclature will continue to evolve, but the substance of sustainability is here to stay.

Cathy Saunders: Thanks, Katherine Collins and Jackie VanderBrug.

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