Sustainable Leaders Fund (Class A)  (PNOPX)

Katherine: The outperformance is the result of our continued focus on high-quality, well-managed companies that exhibit excellent sustainability performance. If an investor is focused on a narrow approach — valuation or momentum, for example — performance can be more vulnerable when the market shifts. What has worked with our process, we believe, is that we always aim for a combination of three key elements: strong fundamental prospects, reasonable valuation, and sustainability leadership. In our portfolios, all three of these requirements must be present. We won’t, for example, own a company with superior sustainability qualities but poor business prospects. By requiring strength in all three areas, we are more likely to find companies that can do well regardless of the macroeconomic environment.

Stephanie: Putnam Sustainable Leaders Fund focuses on companies that excel in management of material sustainability issues, and Putnam Sustainable Future Fund seeks companies that provide solutions to key sustainability challenges. Many of these leadership activities and product solutions have become even more relevant during the COVID-19 crisis. Examples include technology companies that provide work from home capabilities, consumer companies that provide alternatives to traditional retail outlets, and health-care companies that provide testing, diagnostics, and remote access to care. For many of these businesses, the shifts brought on by the pandemic accelerated prior trends and enhanced their growth potential. Our exposure to high-quality businesses in a number of these areas has been beneficial to fund performance in 2020.

Katherine: We are proud of this comprehensive report, which is available to read or download at putnam.com. It provides an in-depth look at our investment process; an analysis of our portfolios according to a number of ESG-related metrics; and a discussion of the positive social and environmental impact of some of our investment themes and portfolio holdings.

Stephanie: This type of detailed reporting is important, not just for our team, but also for the broader field of sustainable investing as it continues to advance. Reporting on sustainability and impact is still evolving and is a challenge for investment managers across the industry. Our ultimate goal is to have reporting in these areas that is just as robust and complete as reporting on financial metrics, so that the links we see between sustainability issues and long-term company success are clear.

Katherine: One important — and timely — topic is our examination of U.S. health-care costs and their impact on financial security. The COVID-19 pandemic is causing serious and widespread health consequences, creating personal financial insecurity for tens of millions of people, revealing continued racial inequity in health outcomes, and costing trillions of dollars in economic impact for world economies.

In our work as sustainable investors, we are looking for companies that are creating thriving businesses by improving current health-care systems and shaping the systems of the future. In the report, we highlight health-care innovations that can have a positive impact, such as telemedicine and digital health platforms, and companies that we believe are leaders in providing solutions.

Katherine: We are experiencing the intersection of four related systems in simultaneous crisis: the COVID-19 health crisis and related economic crisis have set conditions that illuminate the long-term crisis of racial injustice and the ongoing climate crisis in new and profound ways. These conditions have caused widespread suffering in many dimensions, and at the same time they have reminded us of what is constant. Now more than ever, we believe that sustainable companies could prove to be more financially resilient and more beneficial than others over the long term, creating meaningful value. While highlighting current fragilities, this period will also reveal new opportunities and solutions that contribute to a thriving society, planet, and economy.

We are identifying new investment ideas 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 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.

Stephanie: With this fund, we seek companies with excellent sustainability leadership in areas that are relevant and financially material to their businesses. The stocks of these companies are typically, but not always, considered to be growth stocks, and in most cases, they are large cap in size. We look for performance that demonstrates true leadership — not just compliance — in areas such as clean and efficient materials use, reductions in carbon or water intensity, improvements in workplace equality and diversity, and alignment of management incentives with the company’s sustainability objectives. We always aim for a combination of three key elements: strong fundamental prospects, reasonable valuation, and sustainability leadership. By focusing on material ESG issues for each individual business, we aim to identify companies with durable financial performance and potentially lower risk profiles.

Katherine: Our emphasis for this fund is on solutions-oriented companies — those that offer innovative ways to address our greatest sustainability challenges. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are mid-cap or small-cap in size. We seek to invest in products and services that result in positive environmental, economic, or social impact. By providing these solutions, the companies in the portfolio offer potential for strong financial growth and profitability, in our view. Again, we always seek a combination of three attributes: strong fundamental prospects, reasonable valuation, and positive impact.

Stephanie: From an environmental perspective, positive impact could mean improving water quality or reducing greenhouse gas emissions. Positive social impact could include improvements in health and well-being or better access to information and opportunity. We monitor these potential social or environmental benefits, as well as potential financial returns, as part of our investing discipline. Throughout our research process for both portfolios, we take a tailored, company-specific approach, including first-hand interactions with management teams of companies and ongoing collaboration with Putnam’s research analysts.