Our investment approach focuses not only on what a company produces, but also on how it is produced. Every company creates effects that go far beyond its own financial statements or operating footprint, yet many ESG metrics focus mainly on what happens inside a given company, and not as much on outward-facing impact. Our research seeks to extend this view by tracing environmental and social impacts that ripple out from every company, calling to mind the line from Rilke’s poem, “I live my life in widening circles, stretching out across the universe.” This broader view is sometimes hard to quantify, but gives important insights on the more comprehensive value of a company’s products, services, and operations.
For many companies, sustainability goals — and especially environmental goals — have become more specific and measurable in recent years. As this occurs, we see an increased focus on measuring and monitoring, and we also see a growing value for helpers and leaders. Helpers are companies that are assisting others in achieving their sustainability goals, and leaders are companies that are influencing their peers, supply chains, and customers. These activities can result in a wide range of impacts and map to many of the Sustainable Development goals; the specific examples below mainly relate to SDG’s #9 (Industry, Innovation, and Infrastructure), #12 (Responsible Consumption), and #13 (Climate Action).
Two examples of helpers are Ecolab and DocuSign.
Ecolab provides products that improve efficiency, cleanliness, and safety across a wide range of settings. For example, the company’s products help companies to sanitize and sterilize manufacturing plants, help restaurants and healthcare facilities to maintain safe and clean conditions, and help a wide range of customers with water treatment and filtration solutions. For a number of years, Ecolab has tracked “eROI” metrics (exponential return on investment), assessing the environmental improvements in water, waste, energy, and emissions intensity that their products produce for customers. Additionally, the company has developed products and services like smart water sensors that allow for quick and proactive problem solving, instead of addressing issues that have already arisen. Ecolab’s products and services help customers reduce water usage or waste, for example, and its analysis helps customers measure and track progress toward their own specific sustainability goals.
(As of March 31, 2020, Ecolab accounted for 1.48% of Putnam Sustainable Future Fund and 1.11% of Putnam Sustainable Leaders Fund.)
DocuSign provides tools for digital management of agreements and transactions, with services that are likely familiar to anyone who has utilized online legal or business documents in recent years. For DocuSign customers, three elements are critically important: time, cost, and security. DocuSign’s services provide important benefits on all of these dimensions. Where paper forms routinely require more than 24 hours for processing, 82% percent of DocuSign transactions are completed in less than 24 hours, and many are completed in less than one hour. Additionally, the financial cost of digital signature processes is just pennies, and the environmental cost of digital solutions is meaningfully less than paper-based systems. Finally, the company has invested heavily in security and compliance, so that they are able to partner even with customers in complicated and highly regulated settings, like financial services. Solutions like DocuSign create benefits in time savings, lower materials use, and reduced risk exposures for their customers.80
(As of March 31, 2020, Docusign, Inc. accounted for 1.61% of Putnam Sustainable Future Fund and 1.27% of Putnam Sustainable Leaders Fund.)
As these examples illustrate, helper activities demonstrate several common attributes: They are embedded in core products and services; they can be measured and evaluated; and they produce an environmental or social benefit that is of value to customers. In addition to strong fundamental prospects and thoughtful operational management, these solutions-oriented elements represent the qualities we seek for companies that are held in the Putnam Sustainable Future portfolio.
Examples of leaders include Hilton and Walmart.
Hilton, including the Hilton, Hampton Inn, Embassy Suites, and Tru hotel brands under the company’s umbrella, is a well-known name to any traveler. For 10 years, Hilton has been developing its LightStay initiative, which helps hotel operators to track data and improve performance on metrics like water and energy use. Initially these tools were focused on environmental efficiency and the related cost benefits: To date over $1 billion in cost savings have been documented through this platform. In recent years LightStay’s capabilities have grown, and now include programs like environmentally sustainable event management programs and anti-trafficking education for employees. As LightStay expands, the potential benefits of the platform also increase, and they extend beyond the company’s own operating footprint. Hilton’s activity has already had an impact on standards and programs for the broader hotel and hospitality industry, and there is potential for their influence to be even greater in the future.
(As of March 31, 2020, Hilton Worldwide accounted for 0.00% of Putnam Sustainable Future Fund and 1.07% of Putnam Sustainable Leaders Fund.)
Walmart is best known for the merchandise it sells, but for a company of this scale some of the most interesting impact is found behind the scenes. For example, long ago Walmart identified the lack of standardization for sustainable products as a key challenge for both consumers and retailers. Some products branded as “sustainable” might reflect a deep commitment to 100% organic ingredients, for example, while others might just include some portion of recycled packaging material. To clarify definitions and improve transparency to consumers, Walmart has been collaborating since 2009 with The Sustainability Consortium to create a robust and useful Sustainability Index for the products it sells. This effort might sound complicated, and it is, requiring increased disclosures from suppliers, analytics that are specific for each product category, and ongoing evaluations. Over 80% of goods sold in Walmart now come from suppliers that participate in this index, and generally rising scores reflect improved metrics over time for many suppliers. This project illustrates one of many ways that large companies like Walmart can influence broader standards of practice across peers and suppliers.
(As of March 31, 2020, Walmart accounted for 0.00% of Putnam Sustainable Future Fund and 2.34% of Putnam Sustainable Leaders Fund.)
All of these leadership activities have common attributes: They go above and beyond simple ESG metrics to influence the heart of how business is done; they have broad impact on the system of suppliers and customers surrounding each company; and they are helping standards of practice to improve as smaller companies can benefit from the foundation that these leaders have laid. Every large organization creates a complex series of impacts on the world, and the benefits of leadership activities like the ones noted here can be meaningful. In addition to strong fundamental prospects and high standards for their own operational performance, we seek this kind of demonstrated broader influence for companies that are held in the Putnam Sustainable Leaders portfolio.
As products, programs, and processes like the ones above continue, we expect to see more sophistication in metrics and measurements, and more standardization of approaches. This progress will make the net benefit of helpers and leaders more transparent and analyzable, and will enable investors to better assess impact of company products, services, and operations. In many ways this kind of analysis illustrates the essence of what sustainable investing aims to achieve: a more complete view of every company and its contributions — both positive and negative — to the broader environmental, social, and economic systems in which it operates.
As noted at the beginning of the report, this analysis is being completed during the COVID-19 crisis. At this time, we are witnessing intense activity among helpers and leaders of all sorts. Some companies aim to offer solutions to the virus itself, in the forms of testing and treatments and vaccines. Others offer products and services that help in a time of social distancing, like new product delivery options, services that help people to virtually connect, and tools that make working from home easier. With many operations temporarily shut down, we are also seeing new forms of company leadership emerge. Some employers are creating innovative employee support and training programs, while others are extending credit for small suppliers or struggling customers. Manufacturing is being rearranged and logistics are being reprioritized. In terrible circumstances, we are seeing tremendous capacity for caring and innovation, and for resilience and regeneration.
We look forward to reporting on these developments and their implications for our portfolios as the immediate crisis subsides and the recovery takes root.
