April 2020

Sustainability and impact report

A dialogue with investors

Dear investors, partners, and friends,

As we compile our 2020 impact report, the world is in the midst of the COVID-19 crisis.

During this period, some things have changed in a meaningful and unwelcome way. Equity and credit markets have been unusually volatile. Our team meetings are held by phone and video as we work from home, instead of in our regular offices. Most sobering, the first numbers we analyze each morning reflect patients and infection rates and mortalities. When times are difficult, both shortcomings and strengths are revealed. Individuals, communities, companies, and societies have the chance to rediscover their most valuable assets. We are reminded daily of the power of good health, of social connection, and of effective systems of care, on both micro and macro scales. Likewise, for our team, many of the investments in time, energy, and resources we’ve made these past years have become meaningful assets that we can lean on in these challenging times. For example, we have crafted several “mental models” like the idea map and materiality map featured in this report, which help us to structure our research priorities. We have created a series of analytical tools that help us to effectively and efficiently assess both financial and sustainability data. Perhaps most important, we have established a strong collaborative spirit within the dedicated sustainable investing team, as well as within the broader Putnam investment team. All of these tools have consistently helped us to identify risks and opportunities, complementing Putnam’s formal risk management processes and our core fundamental research process.

More specifically, in recent weeks we have been able to use these strengths to quickly map potential systemic impacts of the COVID-19 crisis on well-being, social equity, employment, and access to care, which helped us to focus on key issues with a different perspective than many traditional investors have. With our broad network of research connections, we have been able to call upon insights from experts in governmental and non-profit organizations and from scientific research groups, which have helped us calibrate and compare potential long-term systemic effects versus the short-term volatility of the stock market. Perhaps most important, this broader research lens has helped to confirm what is unknown and unknowable at this stage of the crisis, helping us to assess risks of false confidence and false precision in a differentiated way.

All of these processes are also helping us to identify new opportunities for investment in three main types of companies: those that are providing solutions to some of our current challenges, those whose strong long-term prospects have been only temporarily dampened, and those whose businesses are well-positioned for an eventual recovery in a post-COVID-19 world. In all of these cases, our sustainability research links directly to our fundamental and valuation assessments, providing a “through line” to follow during these turbulent times.

This crisis has changed many things, and caused tremendous disruption and suffering worldwide. However, these circumstances also remind us of what is constant. Now more than ever, we believe that sustainable companies could also prove to be more resilient and beneficial than others over the long term. We believe that active management has the potential to add meaningful context and value to sustainable investing. We believe that current conditions will illuminate new opportunities and new solutions that contribute to a thriving society, planet, and economy.

We deeply value your partnership and trust, and continue to work hard and with highest integrity on your behalf, connecting our investing with the world it was meant to serve.

Katherine Collins, CFA, MTS
Head of Sustainable Investing

We are pleased to share our second annual assessment of sustainability and impact for Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund. Against the backdrop of the funds’ goals of long-term capital appreciation, we aim to generate excellent financial performance hand in hand with excellent sustainability and impact performance. We believe that these characteristics can be mutually reinforcing, and that strong and relevant sustainability strategies and solutions-focused innovation often also create the most compelling investment opportunities.

Thoughtful fundamental research is at the heart of our investment process, and the same research-centric approach is reflected in the form and substance of this report. Our intention is for this document to provide meaningful and multidimensional views of our portfolios’ sustainability metrics and of our social and environmental impact. At the same time, we recognize that point-in-time analysis has inherent limitations, especially in a field that is actively growing and developing.

“ Try to love the questions themselves, like locked rooms and like books that are written in a very foreign tongue. Do not now seek the answers, which cannot be given you because you would not be able to live them. And the point is, to live everything. Live the questions now. Perhaps you will then gradually, without noticing it, live along some distant day into the answer.”

— Rainer Maria Rilke, Letters to a Young Poet (Revised edition 1993, M. D. Herter Norton)

We are intense researchers and eager to share the metrics and indicators in this report with you, and we are equally eager to share our still-outstanding questions. Sustainability issues and ESG data continue to evolve and develop, and the answers we have are not always complete or matched with simple empirical indicators. Therefore, we view this report as part of an ongoing dialogue with our investors and part of our research process. For all lines of inquiry, we aim to combine thoughtful analysis with an active and iterative questioning process. In years to come, we look forward to sharing continued progress with you, so eventually we will “live into the answers.”

The report consists of three sections

An in-depth look at our investment process, including our integrated fundamental research and our approach to engagement.

Analysis of our portfolios according to a number of ESG-related metrics.

A description of a few of our investment themes and related company examples and how these translate into social and environmental impact.

Please note that this report is not meant to review the funds’ investment performance, performance of our individual holdings, or the financial performance of our portfolio benchmarks. Content in this report is not intended to be comprehensive, and does not reflect all relevant or recent developments, including but not limited to the impact of COVID-19. For comprehensive information on the funds, their financial characteristics, and performance, please refer to the shareholder reports and prospectuses available at putnam.com.

A note on metrics and measurements

The field of sustainable investing continues to develop at a rapid pace. This means that the data and tools that we have available to analyze relevant sustainability issues are also developing, and they are not yet fully standardized nor complete.

For the purposes of this report, we have chosen several portfolio-level metrics that give an indication of our funds’ sustainability characteristics, recognizing that the range of reportable measures will continue to improve in quality, specificity, and usefulness over time. We believe the metrics reported here are as accurate as possible, and have provided extensive commentary on how and why we use the measures noted, so that readers of this report have additional context for interpreting the information presented. In this regard, the report reflects the nature of our fundamental research, where we always aim to understand data within its relevant setting, and not in isolation. It is also important to note that all investing involves risk, and favorable sustainability or ESG metrics for a portfolio do not guarantee positive investment results.

In order to provide the most straightforward sustainability analysis with the most complete underlying data, we have chosen to compare the metrics for our portfolios with the same measures for the S&P 500. Please note that the financial performance benchmark for Putnam Sustainable Leaders Fund is the S&P 500, and the benchmark for Putnam Sustainable Future Fund is the Russell Midcap Growth Index.1

As noted above, this report is not meant to be a review of investment performance for the funds, individual holdings, or benchmarks. Please refer to the shareholder reports and prospectus information for comprehensive information on financial characteristics and performance at putnam.com/sustainable.