ESG integration within fixed income
The Taxable Fixed Income team integrates ESG considerations into the investment research processes where financially material and relevant. We consider ESG analysis as additive and complementary to the fundamental understanding that is at the center of our investment philosophy. We seek to apply forward-looking ESG insights above and beyond the data. In the same way our credit analysis is forward looking, our evaluation of relevant ESG considerations must also be forward looking.
Materiality maps are a key part of our corporate, sovereign, and structured credit research processes. Fixed income markets are diverse and complex, consisting of various sectors with unique characteristics that influence the materiality criteria as well as their degree of relevance. Our ESG framework recognizes these differences. Our sector specialist teams apply insights to identify the most material ESG factors and apply an ESG lens to evaluate potential investments.
Not every portfolio manager, strategy, or portfolio has the same approach, and specific considerations of ESG elements will vary. For some portfolios, ESG analysis is less important than for others, whether as a matter of investment approach, the asset class, or limitations on data. ESG issues, data, and analyses are all actively evolving, and likewise, we expect our research and investment approaches to continue to develop in ways that are attuned to the contexts of various issuers, asset classes, and investment strategies.
The corporate credit materiality factors are more closely aligned with those of the equity materiality map, with the primary difference being the addition of a governance criterion focused on covenants and bondholder rights.
Sovereign credit has its own unique criteria, such as property rights and economic freedom. Overall, social and governance factors are more material for sovereign credit and for understanding each government’s policy agenda than are environmental factors.
For structured credit, there is a wide variety of subsectors; the relevance of any materiality factor may be quite different by subsector. For example, greenhouse gas emissions are more relevant for commercial mortgage-backed securities than those backed by residential mortgages.
Source: Putnam Investments adapted from SASB materiality map, as of 9/30/22. For illustrative purposes only.
*Specific to corporate credit and different from equity materiality criteria.
Source: Putnam Investments adapted from SASB materiality map, as of 3/31/23. For illustrative purposes only.
Source: Putnam Investments adapted from SASB materiality map, as of 3/31/23. For illustrative purposes only.
Source: Putnam Investments adapted from SASB materiality map, as of 3/31/23. For illustrative purposes only.
Source: Putnam Investments adapted from SASB materiality map, as of 3/31/23. For illustrative purposes only.
Source: Putnam Investments adapted from SASB materiality map, as of 3/31/23. For illustrative purposes only.
As part of our investment analysis, depending on the strategy or portfolio in question, we may integrate environmental, social, or governance (“ESG”) issues or considerations into our research and/or investment decision-making. We believe that certain ESG issues are relevant and material to long-term business fundamentals and security values, and important to all investors. We integrate ESG considerations in our research across asset classes, noting that investment-relevant issues vary by sector, geography, asset class, and issuer context. Research that is tailored to these different settings has potential to add meaningful value. Because our goal is to focus research in areas that are most investment relevant, our approaches are guided by mapping financially material ESG issues. Each asset class has its own unique characteristics that influence the materiality criteria as well as their degree of relevance. Our corporate credit, structured credit, and sovereign credit teams have each developed materiality maps that are tailored to their particular investment settings. Unless stated otherwise in a financial product's documentation, and included within its investment objective and investment policy, ESG integration does not change a product's investment objective or limit the universe of investments. ESG determinations may not be conclusive, and securities of companies/issuers may be purchased and retained, without limit, regardless of potential ESG impact. The impact of ESG Integration on performance is not specifically measurable as investment decisions are discretionary regardless of ESG considerations.
