April 2020

Sustainability and impact report

A dialogue with investors

Executive Summary

Putnam’s sustainable investing process is integrated with fundamental equity research

  • The sustainable investing team is part of the core 59-person equity research and portfolio management group, not separate from it.
  • The team’s top priority is to extend Putnam’s long-standing strength in fundamental research to produce deeper insights in context-specific, forward-looking ESG (Environmental, Social, Governance), sustainability, and impact analysis.
  • The team believes that certain environmental, social, and governance factors are relevant and material to long-term business fundamentals, and therefore important to all investors.
  • Our ongoing ESG and sustainability research is guided by our internally developed “materiality maps,” which were inspired and guided by the materiality mapping of the Sustainable Accounting Standards Board (SASB).

We are engaged owners as stockholders in portfolio companies

  • Dialogue: We have ongoing dialogue with management teams of companies we research.
  • CEO letters: We send annual letters to all CEOs of companies held in our portfolios, acknowledging efforts and encouraging future progress on key sustainability issues.
  • Proxy voting: The sustainable team collaborates closely with governance experts of Putnam’s Board of Trustees, which oversees proxy voting for mutual funds.
  • Advocacy for improved disclosure: We discuss corporate strategy, board oversight, and external reporting with company management and board members.

We collaborate to advance sustainable investing as members of several organizations

  • United Nations Principles for Responsible Investing (UN PRI)
  • Sustainable Accounting Standards Board (SASB)
  • CDP (formerly Carbon Disclosure Project)
  • Boston Association of Institutional Investors

How we analyze our portfolios versus ESG metrics

  • Metric 1: Portfolio ESG rankings versus peers (Source: MSCI, as of December 31, 2019)

    • Sustainable Leaders Fund ranks above the 95th percentile among U.S. equity and global peer groups.
    • Sustainable Future ranks above the 95th percentile among U.S. equity peers and above the 80th percentile among global peers.
  • Metric 2: Carbon intensity

    • The carbon intensity of the Sustainable Leaders portfolio is somewhat higher (more intensive) than the S&P 500 due to our investment in three utility companies that our research concludes are leading the way in replacing hydrocarbon-derived power generation with renewable energy generation.
    • The carbon intensity of the Sustainable Future portfolio is lower (less intensive) than the S&P 500.
  • Metric 3: Women on boards of directors and organizational diversity

    • Numerous studies of gender diversity on boards have shown that diverse boards are associated with higher financial returns, higher firm value, higher profitability, increased investment in research and development, and lower volatility.
    • The level of gender diversity is increasing in our portfolios. Sustainable Leaders holdings had a weighted average of 31% female board representation, and Sustainable Future Fund had a weighted average of 29% as of December 2019. Both are higher than the board composition of their respective benchmarks.
    • Our research process extends to focus on understanding how companies prioritize diversity in all forms and at all levels of the organization.
    • Teams with diversity of perspective and experiences have stronger decision-making ability, particularly when facing dynamic and complex problems.

Investment themes and impact assessment

Thematic focus 1: Natural ingredients — Sugar consumption and plant-based protein

Challenge 1: Sugar Solution Impact
Consumption of added sugars in processed foods is contributing to poor health and chronic conditions such as diabetes. Many companies offer products as lower sugar or higher protein alternatives, including portfolio holdings McCormick and Simply Good Foods. A reduction in added sugar intake could reduce obesity, diabetes, and coronary heart disease by millions of cases across the U.S. population.

As of March 31, 2020, McCormick & Co. and Simply Good Foods accounted for 2.68% and 1.41%, respectively, of Putnam Sustainable Future Fund, and 0.90% and 0.00%, of Putnam Sustainable Leaders Fund.

Challenge 2: Protein Solution Impact
Raising animals for meat, aquaculture, eggs, and dairy uses 83% of global farmland and contributes about 57% of food’s greenhouse gas emissions, but only provides 37% of global protein and 18% of global calories. Innovation is creating plant-based alternatives to foods like yogurt, cheese, and meat, including a new “green cuisine” plant-based food platform from portfolio holding Nomad Foods. Positive effects could include lower levels of environmental intensity for protein production, potential to reduce waste in frozen food production, and plant-based diets that have health benefits.

As of March 31, 2020, Nomad Foods represented 1.94% and 0.00%, respectively, of Putnam Sustainable Future Fund and Putnam Sustainable Leaders Fund.

Thematic focus 2: Financial inclusion and financial security

Challenge 1: Exclusion Solution Impact
Enabling more individuals to enter the formal banking and credit system is a driver of economic development and financial security. Six and a half percent of U.S. households are considered unbanked, and 18.7% underbanked, limiting access to credit. Financial transactions secured with digital technology help individuals and small businesses gain access to credit and avoid costs of cash. Portfolio holdings Mastercard and Visa prioritize financial inclusion. Increasing financial access generates positive ripple effects. For example, extending access to affordable financial services for underbanked U.S. households could allow for saving over $38 billion check-cashing fees annually.

As of March 31, 2020, Mastercard and Visa accounted for 3.20% and 0.00%, respectively, of Putnam Sustainable Future Fund, and 0.00% and 3.74% of Putnam Sustainable Leaders Fund.

Challenge 2: Healthcare cost Solution Impact
High and rising healthcare costs are contributing to financial instability and inequality. As an example, Americans with diabetes incur nearly $1,200 more in annual out-of-pocket medical costs than others. Digitally enabled healthcare platforms such as portfolio holding Livongo Health help to improve patient outcomes and lower total costs of care through fewer emergency room visits. Participants using Livongo’s diabetes solution averaged 22% lower medical costs. Similar solutions to serve all diabetics could save systemic costs of more than $50 billion per year.

As of March 31, 2020, Livongo Health accounted for 0.64% of Putnam Sustainable Future Fund and 0.00% of Putnam Sustainable Leaders Fund.

Planning future research

Our thematic research is constantly evolving with new ideas centered on the concept of regenerative investing, in which we help to nurture natural systems that support life and reduce any damaging impact. We continually ask, what is our current context, what does the world need to thrive, and how can we invest in resilience and regeneration?

As our process evolves, we organize our idea map of research initiatives with this framework:

  1. Macro conditions and interconnected risks
  2. Leverage points at the key links between human and environmental health
  3. Social health, or the well-being of communities and access to opportunity
  4. Health of physical systems
  5. Efficiency and effectiveness/waste reduction
  6. New questions and capacities