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Sustainability and impact reportA dialogue with investors

APRIL 2020

Putnam Sustainable Leaders Fund

Putnam Sustainable Future Fund

https://www.putnam.com/?ref=ESG004_RE.pdf

April 2020

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

IntroductionWe 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.”

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Sustainability and impact report: Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund

The report consists of three sections

1INVESTMENT PROCESS AND ENGAGEMENTAn in-depth look at our investment process, including our integrated fundamental research and our approach to engagement.

2 PORTFOLIO ANALYSIS AND ESG METRICSAnalysis of our portfolios according to a number of ESG-related metrics.

3INVESTMENT THEMES AND IMPACT ASSESSMENTA 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 measurementsThe 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.

https://www.putnam.com/individual/how-we-invest/sustainable-investing/

Putnam Investments | putnam.com

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SECTION 1 Investment process and engagementResearch is the foundation that supports our products and process, so before reviewing the details of our portfolios, we discuss the context for sustainable investing at Putnam and for our integrated fundamental research process.

Sustainable investing at PutnamPutnam Investments is an active manager with $149 billion in assets under management as of March 31, 2020, and 80 years of investment heritage. In May 2017, Putnam appointed Katherine Collins, CFA, MTS, to the newly created role of Head of Sustainable Investing. She serves as Portfolio Manager of Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund with Stephanie Dobson. A recognized thought leader, Ms. Collins leads Putnam’s sustainable research, investing, and collaboration. She is the author of The Nature of Investing, founder of Honeybee Capital, graduate of Harvard Divinity School, and former Head of Equity Research and Portfolio Manager at Fidelity Management & Research Company.

Over the past three years, our team has continued to grow and now includes:

• Stephanie Dobson — Portfolio Manager of Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund

• Shep Perkins, CFA — Chief Investment Officer Equities and Portfolio Manager of Putnam Global Equity Fund

• Alexander Rickson, CFA — Dedicated quantitative research analyst on the Sustainable Investing team

• Shelby Centofanti — Dedicated equity associate in the Putnam Equity Research group focused on fundamental and thematic research

• Sam Alpert — Dedicated equity associate in the Putnam Equity Research group focused on fundamental and thematic research

• Yolanda Taylor — ESG Integration Manager, leading our ESG investment operations across the firm and coordinating Putnam’s corporate sustainability efforts

Importantly, our sustainable investing team is part of the core equity team, not separate from it.We are investors first and foremost, and an integrated part of Putnam’s investment group. In addition to the dedicated team members above, we include the entire research department and our fellow portfolio managers as colleagues and collaborators.

The sustainable investing team works with the broader 59-person equity research and portfolio management team on a daily basis. Our investment process incorporates sector analysis, stock recommendations from the core research team, and insights from other portfolio managers. Activity that supports Putnam’s collaborative research process includes daily morning meetings, company management meetings, investment conference attendance, and company visits. We are supported by the same risk oversight and trading platforms as the broader team.


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Likewise, our own thematic and company-specific work is shared with the entire investment team, with a goal of benefiting the whole. We focus on research that highlights investment-relevant ESG issues and forward-looking thematic trends, as identified through our materiality map and our idea map. Our company-specific research is intended to complement and extend the fundamental work of the core research team. Activity that supports our sustainable investment team’s work includes all of the elements noted above, plus ongoing dialogue with issue-specific experts, early stage companies with a sustainability focus, and peers who are focused on ESG analysis and sustainable investing. In addition to the supports noted above, our work is also augmented by a series of internally developed tools that help us to assess ESG data and sustainability performance in a fundamentally relevant way.

Our Sustainable Investing work includes three key priorities: research integration, portfolio management, and contributions to the field.

Research and ESG fluency across all of Putnam

Development of dedicated Sustainable

Investing products

Contributions to the field

Research integrationOur greatest priority is to extend Putnam’s long-standing strength in fundamental research to produce deeper insights in context specific, forward-looking ESG, sustainability, and impact analysis.

As noted in Putnam’s ESG policy, we believe that certain environmental, social, and governance factors are relevant and material to long-term business fundamentals, and therefore important to all investors.2 Relevant issues vary by sector, geography, asset class, and company context. Therefore, fundamental research that is tailored to different settings has potential to add meaningful value.

Given this philosophy, 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).3 We believe that this kind of integrated, long-term research has the potential to mitigate risk and to generate alpha. We also utilize data from several third-party resources, including MSCI and Sustainalytics, as part of our broader research process.

Our belief in the power of context-specific analysis can be seen in the map on page 7, which shows that we have different and complementary frameworks for various sectors and issues in equity research. We believe that this kind of forward-looking and customized research focus is a key contributor to long-term investment results.


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Putnam equity materiality map

Consumer Healthcare FinancialsTech

(hardware)

Comm and tech

(software) IndustrialsMaterials

and energy

GOVE

RNAN

CE

Board structure and composition

Management incentives, ownership, pay alignment

Systemic risk management & leadership

Accounting and business ethics

SOCI

AL

Employee diversity, development, and well-being

Safety, labor rights, equity

Corporate culture, purpose, mission alignment

Supply chain, distribution, and marketing management

Product safety

Pricing philosophy and access

Privacy and data security

ENVI

RONM

ENTA

L

Climate change risk

Climate change mitigation & adaptation

GHG emissions

Water intensity and stress

Energy intensity & renewable energy use

Materials sourcing, intensity, and lifecycle management

Biodiversity and ecosystems impact

Sources: Putnam and SASB. Usually relevant Often relevant Sometimes relevant

Portfolio managementOur two equity mutual funds with a dedicated sustainability focus are Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund.

Fund conversion and investment mandatesIn March 2018, Putnam repositioned two existing mutual funds into the new Putnam Sustainable Leaders and Putnam Sustainable Future funds. Combined assets are approximately $4.5 billion as of March 31, 2020, making Putnam one of the 10 largest managers of dedicated sustainable equity mutual fund assets in the United States.* Both portfolios seek long-term capital appreciation. All investing involves risk, and the sustainable investing strategy limits the types and the number of companies available to the funds; this may cause them to underperform other funds that can choose from a broader variety of opportunities. Putnam Sustainable Leaders Fund pursues its goal by investing mainly in common stocks of U.S. companies of any size, with a focus on companies that we believe exhibit a commitment to leadership in sustainable business practices. Putnam Sustainable Future Fund pursues its goal by investing mainly in common stocks of U.S. companies of any size, with a focus on companies whose products and services we believe provide solutions that directly contribute to sustainable social, environmental, and economic development.

1This universe encompasses all mutual funds, including index funds but not ETFs, that satisfy Morningstar’s “Sustainable Investment – Overall” indicator, which are defined as funds that explicitly indicate any kind of sustainability, impact, or ESG strategy in their prospectus or offering documents.


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• Putnam Sustainable Leaders Fund invests in companies with a dedication to leadership in sustainable business practices. The stocks of these companies are typically, but not always, considered to be growth stocks, and often are large-cap in size.

• Putnam Sustainable Future Fund is a growth fund that invests in solutions-oriented companies dedicated to solving our biggest global 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.

Where our portfolios fit in the sustainable investing landscapeSustainable investing offers a range of different approaches and products.

• Exclusionary approaches focus on avoidance of certain companies or industries.

• Integrated approaches seek to combine ESG data and analysis with other investment considerations.

• Impact approaches seek explicit goals for both financial return and social or environmental benefits.

In Putnam’s case, our integrated research process focuses on the value that sustainability analysis can add to fundamental research. The integrated approach of Putnam Sustainable Leaders Fund combines analysis of the growing body of ESG data, relevant sustainability issues, and deep fundamental analysis in its search for companies that are beyond “ESG compliance,” demonstrating leadership in relevant sustainability issues. Putnam Sustainable Future Fund extends this integration even further by seeking innovative, solutions-oriented companies whose products and services produce positive environmental, social, or economic development impact.

Exclusionary approach Integrated approach Impact approach

Investor intention “Not that” Business practices Sustainable solutions

Investment practice Focus on screening out ESG — business processes Impact — business outcome

Research intensity Lower Higher

Tracking error* Lower Increased

Impact potential Bounded Open-ended

Leaders Fund is here Future Fund is here1Tracking error, also known as active risk, measures the difference between a portfolio’s return and that of a benchmark or index.


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Investment processBoth portfolios rely on Putnam’s well-established fundamental research strength to identify companies with attractive sustainability, fundamental, and valuation characteristics. We aim to utilize ESG data within the relevant context of each company and industry, and to incorporate more qualitative research in areas where new issues are emerging, or data is not yet standardized. Throughout the research process, our goal is to identify companies with excellent investment potential and excellent sustainability performance, which results in portfolios with meaningful active weights by industry and sector. We do not use exclusionary screens for the Putnam Sustainable Leaders or Putnam Sustainable Future portfolios; rather, we focus on what deserves to be included in our holdings.

Contributions to the fieldWe recognize that the field of sustainable investing is actively growing and evolving, and each organization in this community has an opportunity to contribute to the field’s advancement. There are three major ways that Putnam and our Sustainable Investing team are helping to advance the field: engaged ownership, thought leadership, and collaboration.

Engaged ownership• Ongoing dialogue: We believe active managers have a particular role to play in working with company

management teams since we are long-term investors and our fundamental research process means that we are already in regular dialogue with company leadership about strategy and execution. For reference, Putnam’s equity and corporate credit research teams hold over 3,000 private meetings with management teams annually.

• CEO letters: In addition to ongoing research-related conversations, we send annual, individually tailored letters to the CEOs of all companies held within Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund, acknowledging efforts to date and encouraging future progress on key sustainability issues specific to each company. Similar letters have been sent in 2020 to the CEOs of Putnam’s overall top equity holdings, representing approximately 50% of equity assets under management.

• Proxy voting: The voting process for Putnam’s mutual funds is overseen by the funds’ Board of Trustees, and we collaborate closely with their governance experts on relevant proxy-related issues.

• Advocacy for improved disclosure: Our ongoing dialogues with company management teams and board members include discussions of corporate strategy, board oversight, and external reporting. Several companies in our portfolios have published inaugural sustainability reports,increased communications on relevant ESG metrics, or made significant progress in identifying material sustainability issues after work with multiple stakeholders, including our team.

You can read details about Putnam’s engagement policy at Putnam.com.


https://www.putnam.com/static/pdf/institutional/esg_engagement_policy.pdf

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Thought leadership• Research: We share reflections on relevant sustainable investment trends in several different formats.

Some of our publicly accessible research can be found online at Sustainable Investing at Putnam and in the Putnam Perspectives blog.4 Additionally, we are members of the Applied Complexity Network of the Santa Fe Institute, where we are especially focused on the intersection of financial systems, social systems, and ecological systems.

• Public speaking and media: We participate in many field-building events, contributing the perspective of active managers in sustainable investing. Over the past two years, we have given guest lectures at a number of colleges and university programs, including MIT Sloan, Brown University, Harvard School of Public Health, and others. We have frequently represented the point of view of sustainable investors at industry meetings hosted by groups like the CFA Institute, the National Investor Relations Institute, the Council of Institutional Investors, the Intentional Endowments Network, and Boston FinTech Week, and at meetings hosted by many financial institutions. Additionally, we have spoken at multiple nonprofit events, including those held by the Santa Fe Institute, the Long Now Institute Boston, Invest in Girls, and PopTech. Also, our sustainable investing has been featured in the media, including Investor’s Business Daily, Bloomberg, GreenMoney Journal, and the Investor’s Field Guide podcast.

• Ongoing pollination: We participate in a number of other ad hoc collaborations, focused on three main areas: research on emerging issues, improving processes for disclosure and analysis of sustainable investing approaches, and contributing to development and transparency of sustainable business practices.

CollaborationAs noted above, Putnam is an advocate for improved and relevant ESG disclosure. We are members of several organizations that support similar goals:

• United Nations Principles for Responsible Investing (UN PRI): Putnam has been a signatory to the UN PRI since 2011. As a UN PRI signatory, Putnam is committed to sustainable investing, including a focus on understanding how ESG factors may influence performance, generate alpha, and/or mitigate risk in client portfolios. Our Head of Sustainable Investing, Katherine Collins, is the chair of Putnam’s ESG (PRI) committee, which also includes senior members of the firm’s operating committee.

• Sustainable Accounting Standards Board (SASB): Putnam joined SASB as an alliance member in 2018, and is currently part of SASB’s Investor Advisory Group. SASB’s mission is to connect businesses and investors on the financial impacts of sustainability. Their work includes the development of an industry-specific taxonomy of financially material sustainability issues.

• CDP (formerly Carbon Disclosure Project): Putnam joined the CDP as an investor signatory in 2020. The CDP is a non-profit that runs a global disclosure system for investors, companies, cities, states, and regions to manage their environmental impacts.

• Boston Association of Institutional Investors: Putnam currently chairs the ESG working group for this association.


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A week in the life of an active managerAs noted throughout this report, our sustainability and impact work are interwoven with our core research process. The form of this integration can be difficult to convey, as we are not simply adding thoughtful sustainability work to Putnam’s core fundamental research. Rather, we are combining the two elements throughout the investment process. In doing so, we aim to create a holistic approach that is greater than the sum of its parts. Here we offer some additional detail from a week of our team’s meetings in December 2019 as a way to bring these processes more vividly to life

Meetings with company management teams:These meetings are typically with CEOs, CFOs, and investor relations representatives, and usually involve our fellow portfolio managers and analysts from Putnam’s core equity research team. In addition to assessing traditional business fundamentals, we aim to discuss key sustainability issues as part of or regular investment discussions, supplemented by deeper topical conversations with corporate sustainability leaders.

An example of a week of company meetings on Sustainability topics (December 2019)Company Sustainability topic

Financial Improvement of next-gen access and strategy for student loan management products

Medical technology (two companies)

Patient benefits of new product innovations

Transportation Efforts to ensure passenger and driver safety

Retail Product mix and consumer trends

Investment Capital deployment strategy and sustainability focus with investee companies

Waste management Increased demands for recycling and environmental improvements in the fleet of equipment

Hotel Environmental programs and focus on employee safety

Industrial Efficiency and environmental benefits of product platforms

Materials Zero-carbon production process and challenges in raw materials mining


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Independent research workIn addition to our conversations with company management teams, we perform a wide range of independent research, including discussions with other researchers, industry experts, non-profit organizations, and other types of investors. This work is in addition to all of our traditional fundamental research and the discussions above.

Examples of a week of independent research events (December 2019)Research event Purpose

Due diligence on a medical benefits company

Verify positive client experience

Meeting with a service provider Assess their approach to measuring impact

Meeting with a nonprofit Learn about structural access to resources women-led businesses

Discussions with an academic researcher Review analysis of gender bias in investment management

Conversation with a philanthropic consultant

Learn more about their client interest in impact investing

Meeting with local impact investors Analyze needs of local food enterprises

Discussion with sell-side researchers Review of their ESG research along with traditional fundamental work

Partnerships within Putnam and beyondOur investment work also benefits from inputs from our colleagues and business partners, within Putnam and beyond.

Examples of a week of partner meetings (December 2019)Partner Purpose

Clients Discuss our work and evolution in the broader sustainable investing field

Putnam’s ESG leadership committee and PRI committee

Set priorities for the coming year

Cross-company collaborative group Review 2019 progress and discuss best practices for organizing ongoing ESG-related workflow


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SECTION 2 Portfolio analysis and ESG metricsIn this section, we provide analysis of several key issues that have relevance for our portfolios and our investors. We have deliberately chosen to include a set of topics that illustrates the range of analysis underway in the field. Some areas have fairly complete underlying data and well-established metrics, while others involve questions and information that are still at an earlier stage of development. As researchers and active investors, our team views this varied landscape as being full of opportunity.

Both of our sustainable investing portfolios seek long-term capital appreciation. Putnam Sustainable Leaders Fund pursues its goal by investing in companies that we believe exhibit a commitment to leadership in sustainable business practices. Putnam Sustainable Future Fund pursues its goal by investing in companies whose products and services we believe provide solutions that directly contribute to sustainable social, environmental, and economic development.

What this means is that both funds aim to own stocks in companies with a demonstrated commitment to sustainability in areas that are relevant and material to their own business and setting. For this type of company, improvements in sustainability and impact often are directly linked to improvements in long-term business fundamentals, and deeply interconnected with the company’s financial success. These links have been substantiated in several academic studies, such as “Corporate Sustainability: First Evidence on Materiality.”5 As always, it is important to note that despite the evidence in these studies, companies with favorable sustainability performance are not guaranteed to outperform other companies with less favorable sustainability performance.

In this section, we compare several important measures of our portfolios’ ESG and sustainability characteristics, noting why we’ve chosen these measures, what they show with respect to our portfolios, how we use each metric, and where we aim to focus future research and attention. Please reference our shareholder reports and regular performance updates on the portfolios for details on the financial characteristics and performance of the portfolios, in order to compile a more complete view of the funds.

Before exploring the details, we’d like to emphasize the principles that we embrace regarding analysis and data representation

• We recognize that this work is ongoing and evolving — for us and for the whole field. Even with perfect data, there is always more to explore, and new questions are constantly emerging.

• We are researchers. We add context and analysis to data. We seek to understand the “how” and the “why” that are underneath the “what.”

• We embrace unanswered questions. We recognize that getting to a better question or to a partial answer is an important form of advancement.


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Metric #1: Portfolio ESG rankings vs. peers (third-party assessment)Why is this relevant? Many investors want to see a snapshot view that shows a portfolio’s aggregate ESG ratings or rankings, and many value the independence of an assessment that is based on third-party data.

What does this measure show, and why? MSCI is one of the third-party data providers we work with as part of our research process, and its analysis includes a scoring system that can be aggregated to compile portfolio-level ESG rankings versus peers.When we compare the aggregate MSCI ranking of our portfolios since they were transformed to sustainable investing products, we see a meaningful improvement, both on an absolute basis and relative to peers. This shift is as might be expected given the change in fund mandates to include an explicit focus on sustainability analysis. While we do not aim for a specific level of third-party scoring in our investment process, the natural outcome of our portfolio construction resulted in high scores.

MSCI ESG portfolio peer relative ranking — Sustainable Leaders

MSCI ESG portfolio peer relative ranking — Sustainable Future

30-Sep-17

31-Dec-19

31-Dec-18

0

20

40

60

80

100

0 20 40 60 80 100

Glo

bal p

eer p

erce

ntile

U.S. equity peer percentile

30-Sept-17

31-Dec-19

31-Dec-18

0

20

40

60

80

100

0 20 40 60 80 100

Glo

bal p

eer p

erce

ntile

U.S. equity peer percentile

This report contains certain information sourced from and/or MSCI ESG Research LLC, or its affiliates or information providers (the “ESG Parties”) and may have been used to calculate scores, ratings, or other indicators.

How do we use this measure? MSCI is a leading ESG data provider, and its process includes a detailed company-by-company scoring system. This company-specific data adds meaningfully to the field and often helps investors to better understand key sustainability issues. By definition, this scoring process is complex, and the aggregate scores reflect a combination of heterogenous factors. (For more information on the MSCI ESG Fund Ratings, please see Appendix 2.) Our own research efforts do not rely on these third-party scores; rather, we focus on putting all third-party data into a more complete fundamental context. We aim to assess not only past and current performance, but future direction as well.


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Where are there opportunities for future research and focus? All ESG data and analysis, including MSCI’s, is evolving rapidly as corporate reporting expands its breadth and depth, and as alternative data sources grow. Investors’ use of this type of data will also continue to develop over time. The ongoing improvements in all forms of ESG data, from all sources, will allow researchers to ask more relevant and informed questions, and this analysis in turn will be able to inform investment decisions in increasingly valuable ways.

Metric #2: Carbon intensity Why is this relevant? Carbon dioxide and other greenhouse gases (GHGs) trap thermal radiation from the earth’s surface, sustaining natural life. However, human activities, such as burning fossil fuels, are increasing the concentration of greenhouse gases and leading to rapid increases in climate-related risks.6 Environmental impact is an important part of our sustainability analysis, and a key focus of the UN’s Sustainable Development Goals (including SDG #7: Affordable and Clean Energy and SDG#13: Climate Action7) and the data involved is complex and nuanced. Standard data disclosures like GHG emissions and carbon intensity offer important insights, particularly when combined with company-specific context and an understanding of potential future change. For example, lower or decreasing carbon intensity means that a company is generating fewer emissions per unit of revenue, which is better for the climate than higher or rising carbon intensity. The aggregate emissions data for any fund often depends heavily on sector allocation, as one would expect: Companies in utility and energy sectors inherently have higher direct emissions (scope 1) when compared with less energy-intensive sectors like healthcare or financials. When we assess potential investments in carbon-intensive sectors, a key consideration is our analysis of the rate of change in those metrics and the magnitude of improvement that we expect given individual company strategies. For the purposes of this report, we focus on carbon intensity, which measures the ratio of carbon emissions (scope 1+2) to revenues. This is one important element of environmental efficiency.

What does this measure show, and why?The carbon intensity measure shows the ratio of scope 1 and 2 emissions to revenues. Scope 1 emissions are direct emissions from owned or controlled sources, and scope 2 emissions are indirect emissions from the generation of purchased energy. The portfolio level score aggregates the company-level intensity measures for all held securities. This metric offers the benefit of normalizing for company size, but in doing so it necessarily obscures the absolute level of emissions, which is important when considering a company’s impact on our climate. The carbon intensity of the Sustainable Leaders portfolio is somewhat higher (more intensive) than the S&P 500, which we use as a representation of the broader market. This metric is considerably lower (less intensive) for the Sustainable Future Fund. The higher carbon intensity of the Sustainable Leaders Fund is primarily due to our investment in three utility companies, as detailed on pages 16–17. Additionally, the key reason this metric has increased in 2019 versus 2018 is that we added to the portfolio’s utility holdings over this time frame. Though these companies are currently large producers of hydrocarbon-based electricity, they are also leading the way in replacing hydrocarbon-derived power generation with renewable energy generation, and it follows that their carbon intensity is expected to fall in the years ahead.


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Portfolio carbon intensityWeighted average carbon intensity 2018 and 2019

0

50

100

150

200

250

300

December 31, 2018

Putnam Sustainable

Leaders

Putnam Sustainable

Future

S&P 500 Index

0

50

100

150

200

250

300

December 31, 2019

Putnam Sustainable

Leaders

Putnam Sustainable

Future

S&P 500 Index

Sources: MSCI ESG Research LLC data as of December 31, 2019, and Putnam analysis. Carbon intensity is measured as a ratio of Scope 1 and 2 CO2e metric tons to sales (USD millions). Portfolio carbon intensity is calculated as the weighted average of the carbon intensity for the stocks held, with uncovered assets dropped and holdings rescaled to 100%. Uncovered assets refer to cash held in the portfolio and holdings for which there is no carbon intensity score available. Uncovered assets represent less than 10% of the funds’ holdings as of December 31, 2019.

How do we use this measure? We do not explicitly exclude or screen out energy or utility holdings (which often have high carbon intensity) in our investment process, though it is unusual for companies in these sectors to meet our investment criteria. As active managers, we have the ability to selectively own and engage with companies that are committed to transitioning away from carbon-intensive energy sources. Therefore, when we assess potential investments in carbon-intensive sectors, a key consideration is our analysis for the future rate of change in those metrics and the magnitude of improvement that we expect given individual company strategies. For example, the Sustainable Leaders Fund is invested in three utility holdings: AES Corporation, Nextera Energy, and Ameren Corporation. While these holdings made up less than 5% of the portfolio as of December 31, 2019, they constituted more than 60% of the fund’s aggregate carbon intensity exposure. Said another way, if these three holdings were not held in the portfolio, the fund’s aggregate carbon intensity would be below that of the S&P 500, and would have fallen further in 2019 versus 2018.

(As of December 31, 2019, AES Corporation, Nextera Energy, and Ameren Corporation accounted for 0.00%, 1.71%, and 0.00%, respectively, of Putnam Sustainable Future Fund, and 2.01%, 1.33%, and 0.47% of Putnam Sustainable Leaders Fund. As of March 31, 2020, AES Corporation, Nextera Energy, and Ameren Corporation accounted for 0.00%, 1.93%, and 0.00%, respectively, of Putnam Sustainable Future Fund, and 2.20%, 1.33%, and 0.64% of Putnam Sustainable Leaders Fund.)


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Why have we chosen to invest in these companies? We believe that climate change is the most pervasive risk of our era, as it is inherently linked to almost all other risks. And, as noted above, fossil fuel use is a key contributor to greenhouse gas emissions and to climate-related risk. One option for investors is to avoid all exposure to fossil fuel generation and use, and this approach has some clear merits. As active managers, though, we believe that part of our role is to support the shift to renewable sources of energy. Some of the most impactful ways to support this shift involve investing in the companies, like the ones discussed here, that are most actively changing the sources of global power generation. We have three main conditions for our selective investments in carbon-intensive businesses: First, there must be a demonstrated and meaningful commitment to shift away from fossil fuels; second, there must be regular reporting on progress, with transparency on relevant metrics; and third, the company must also meet our other investment criteria.

From an analytical perspective, historical emissions data is useful, but it is inherently backward-looking, while our investment research is forward-looking. AES, NextEra, and Ameren each have meaningful strategies underway to reduce their carbon intensity, and we believe these plans represent important improvements in environmental impact, are positive for the companies’ long-term financial prospects, and are well aligned with the UN SDGs referenced above (#7 and #13).

• AES Corporation (AES) is a global power company. The company has plans to reduce carbon intensity by 70% by 2030 (from 2016 levels), and recently announced that they expect to reach a 50% reduction level by 2022, earlier than initially targeted.8 In addition, the company has commercialized a “green, blend, and extend” strategy to convert customers’ coal generating assets to renewable assets. Finally, AES is a joint venture partner in Fluence, a leading global energy storage technology and services provider. Energy storage is a crucial “missing link” for many potential renewable energy projects, and solutions in this area may help to accelerate their deployment.

• NextEra Energy (NEE) is a leading clean energy utility. As of 2017, NextEra had 55% lower CO2 emissions than the average U.S. electric utility. The company has lowered total emissions by half since 2001 and has committed to a decrease of 65% by 2021.9 Additionally, NextEra owns NextEra Energy Resources, LLC, which is the world’s largest generator of renewable energy (wind + solar) and a world leader in battery storage.

• Ameren Corporation (AEE) is a regulated electric and natural gas utility operating in Illinois and Missouri. Ameren is retiring coal-fired energy plants and adding wind generation capacity. In total, the company’s plans should result in a 35% reduction in C02 emissions by 2030, 50% by 2040, and 80% by 2050 (all versus a 2005 baseline). Ameren’s goals are aligned with the Paris Agreement and a 2-degree climate change scenario.10

A closer examination of the high carbon intensity of these holdings illustrates our investment philosophy: We recognize that historical data is most useful when it is linked to thoughtful projections of future performance, and that engagement with companies in the midst of strategic shifts is one way for an active manager to have impact. We will selectively own companies with some poor current metrics if — and only if — our research has convinced us of the commitment to and value of meaningful positive change.


18


Where are there opportunities for future research and focus? We expect to see continued improvements in the accuracy, breadth, and timeliness of environmental data, which will provide new opportunities for relevant and accurate analysis. Additionally, we are increasingly able to consider the vital metric of scope 3 carbon data, which incorporates assessment of a company’s supply chain, investments, and the use of products sold. Many companies are beginning to disclose more complete environmental metrics and to set explicit goals for improvement, while others are moving forward with thoughtful and detailed climate change analysis. All of these developments will give investors more opportunity for analysis and engagement over time.

Metric #3: Women on boards of directorsWhy is this relevant? 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.11 As background, the average board in the S&P 500 has increased female representation from 14% in 2008 to 25% in 2019.12 Gender diversity is also an important goal addressed in several of the UN Sustainable Development Goals (for example, SDG #5: Gender Equality, SDG #8: Decent Work and Economic Growth, and SDG #10: Reduced Inequalities).

What does this measure show, and why? While most of the boards of companies in which we invest are still far from gender parity, the level of gender diversity is increasing. Holdings in the Sustainable Leaders Fund had a weighted average of 31% female representation, and holdings in the Sustainable Future Fund had a weighted average of 29% as of December 2019. As shown on page 19, both measures have steadily risen over the past two years, and both are higher than the board composition of their respective benchmarks. The averages for the Russell Midcap Growth Index are significantly lower than those of the S&P 500, indicating a general trend of better gender parity on the boards of larger companies.

Our portfolios also have a higher-than-market representation of companies where women comprise 30% or more of total board membership. This level is important because, around the 30% mark, the inputs a woman might give shift from being perceived as “a woman’s point of view” to “a different point of view.”13 In short, this level of participation allows women’s inputs to be more fully incorporated into corporate governance. As shown in the charts on page 19, this measure improved for both of our portfolios in the past year, with nearly half of corporate boards passing this crucial 30% threshold. Perhaps more important, there was also meaningful progress on this measure for S&P 500 companies over the past year.

Despite the improvement in the metrics above, S&P 500 boards in total are composed of almost 5,500 male board members versus just 1,500 female board members. The progress thus far is notable, yet there is clearly still more work to be done to achieve gender parity on corporate boards.


19

Percentage of board members who are womenWeighted average percentage; 50% represents parity

05

101520253035404550 (parity)

Putnam Sustainable Leaders

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Dec-

19

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Dec-

19

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Dec-

19

Dec-

18

Mar

-19

Jun-

19

Sep-

19

Dec-

19

Putnam Sustainable Future

S&P 500 Index Russell Midcap Growth

(parity)

Source: Data from MSCI ESG Research LLC, as of December 31, 2019. Calculations by Putnam.

Percentage of portfolio/index companies with women comprising at least 30% of board

Putnam Sustainable

Leaders

Putnam Sustainable

Future

RussellMidcapGrowth

S&P 500 Index

December 31, 2018

3327

39

18

Perc

enta

ge ex

posu

re

December 31, 2019

Putnam Sustainable

Leaders

Putnam Sustainable

Future

RussellMidcapGrowth

S&P 500 Index

49

40

47

32

Source: Data from MSCI ESG Research LLC, as of December 31, 2019. Calculations by Putnam.

How do we use this measure? Our research process extends beyond this specific metric of women on boards 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, and so this is a relevant set of issues for all types of companies and all investors.14

Where are there opportunities for future research and focus? Analysis of women on boards in combination with broader considerations of board health — including diversity of perspectives and skills, accountability to stakeholders, and transparency — has meaningful implications for understanding long-term governance. The association between diverse boards and strong financial outcomes highlights the potential benefits of investing in diversity, and serves as a starting point for incorporating a more complete assessment of the composition of all company teams, beyond the boardroom.


20


SECTION 3 Investment themes and impact assessmentIn this section, we aim to illustrate the connections between our investments and the real world. Many companies held in the portfolios are creating innovative products or services that have social and environmental benefits; here, we show how this product and company impact ties to broader themes. In some cases, these impacts link directly to the United Nations Sustainable Development Goals, the most widely referenced global framework for tracking progress in sustainable development. Our research process is constantly seeking opportunities like these, where positive social and environmental impact is linked to positive financial performance.

One challenge for any point-in-time presentation of data is that it can freeze activity midstream. Writing about this phenomenon in the natural sciences, Goethe said, “The corpse is not the creature.” He was specifically referencing the study of butterflies, noting that you can measure every leg segment and model every wing shape, but if you’ve never seen them fly, you are missing the whole point.

Here, we aim to show our funds in flight.

Thematic focus: Natural ingredients — Sugar consumption and plant-based proteinBackgroundIn our 2019 impact report, we wrote about the increasing demand for natural ingredients in both food and household products, presenting analysis of antibiotic use in raising livestock and chemical use in household products. This year, we extend our natural ingredients theme to look at two important parts of human nutrition: sugar consumption and plant-based protein.

Food, beverage, and even pharmaceutical companies have added sugars to their products for decades to improve taste, lengthen shelf life, add texture and color, and fuel fermentation processes.15 16 In recent years, consumers (and regulators) have begun to question this practice, as the health consequences of added sugars have become more apparent.

Another shift in consumer focus can be seen in the increased popularity of plant-based proteins. The rise of consumption of plant-based proteins in the United States is fueled by multiple motivations, including health, ethical, and environmental reasons. This transition has been enabled by a meaningful increase in the number of plant-based product offerings.

These developments have important impacts on human health and the environment, and link to several of the UN Sustainable Development Goals, including #3 (Good Health & Well-Being), #13 (Climate Action), and #15 (Life on Land). Changing preferences also have important implications for food and beverage companies, as well as for investors. Several of the companies we own in our portfolios, like McCormick, Nomad Foods, and Simply Good Foods, address these shifts through their product offerings.

(As of March 31, 2020, McCormick & Co., Nomad Foods, and Simply Good Foods accounted for 2.68%, 1.94%, and 1.41%, respectively, of Putnam Sustainable Future Fund, and 0.90%, 0.00%, and 0.00%, of Putnam Sustainable Leaders Fund.)


21

CHALLENGE #1: Sugar consumptionDiet has meaningful implications for health in both the short and long term, and added sugar is a key area of consumer focus. Added sugars are just that, sugars that do not naturally occur in primary ingredients like fruit or milk.17 Though the CDC recommends that added sugars be no greater than 10% of daily calories, 71% of U.S. adults exceed this guideline.18 A diet high in added sugars can be a major contributing factor in weight gain and several chronic conditions, such as type 2 diabetes, hypertension, and obesity.19 20

The health impacts above are some of the reasons we do not own conventional soda manufacturers in our portfolios, since soft drinks contribute an estimated 33% to Americans’ added sugar intake.21 Less-obvious product categories contribute to sugar consumption as well: For example, one leading energy bar contains 19g of added sugars per serving, which is more than half of the AHA’s recommended daily levels for women, and not much less than the 27g in a typical candy bar.22, 23 Condiments are another common source of added sugars, with 3–10g per serving in products like ketchup, teriyaki sauce, and barbeque sauce.24 In the following section, we highlight two portfolio holdings that offer healthier alternatives.

SOLUTION: Lower-sugar foodsThough interventions like taxes and regulation can be important influences on consumption, our portfolio holdings focus on a more straightforward form of impact: companies whose products offer lower sugar, higher protein alternatives to high sugar snacks and meals.

McCormick and Simply Good FoodsIn response to shifting consumer preferences, food manufacturers are creating more low-sugar, high-protein food and snack options. Two companies that are creating solutions in this area are McCormick and Simply Good Foods. McCormick produces spices, flavors, and seasonings that are largely sugar-free. Simply Good Foods produces snack foods like low-sugar bars and shakes.

McCormick’s portfolio of spices and natural flavorings can be used as substitutes for sugar-heavy sauces and processed foods. Roughly half of the company’s sales are made up of these spice and seasoning products.25 McCormick’s products also encourage cooking at home, a practice that is associated with meaningful health benefits. Just over 60% of the business is consumer-facing, selling through grocery stores to customers who use spices and flavoring to cook at home. A Johns Hopkins study found that people who cook most of their meals at home consume fewer carbohydrates, less sugar, and less fat than those who cook less or not at all.26 Finally, some spices may also offer additional health benefits: For example, several studies have shown positive effects of cinnamon consumption on insulin sensitivity, cholesterol, and blood pressure.27 28 As one of the world’s leading suppliers of cinnamon and other spices, a number of McCormick’s products are linked to these types of potential positive impacts.

Another option for individuals who want to lower sugar intake is to replace some sugar and carbohydrate consumption with protein. Low-carbohydrate (low-sugar) diets have been shown to help reduce the risk of heart disease and diabetes.29 This approach has been popularized in many types of diet plans over time, including currently popular “keto” diets and the Atkins diet, which was developed in the 1970s and further popularized in the 1990s. Though specific diets can be fads (and are sometimes unwise), the overall positive health implications of lower sugar consumption are clear.


22


In its new form (and under new management), the Atkins brand is now a part of Simply Good Foods Co. The company is broadening its appeal beyond the programmatic Atkins diet and toward more flexible (but still low-sugar) eating habits by offering bars and shakes meant to supplement meals. Additionally, the company’s newly acquired Quest Nutrition expands the portfolio of nutritional snacking brands. When compared to other types of energy bars, Quest bars offer high protein with much less added sugar: An average Quest bar has under 1g of added sugar and 20g of protein.30 Similarly, Atkins branded meal-bars have 0g of added sugars and 16g of protein. 31i

IMPACTGiven the associations noted above between a diet high in added sugars and chronic disease, several studies have suggested positive health implications from simply reducing sugar intake. For example, a study using data from the U.S. National Health Surveys found that a 50% reduction in sugar intake could lead to a decrease in the obesity prevalence rate by roughly 6 percentage points, the type 2 diabetes prevalence rate by a full percentage point, and the coronary artery disease prevalence rate by nearly 0.3 percentage points.32

When viewed in isolation, these predictions might be difficult to fully appreciate, and to be sure, broad-based improvements from consumption shifts tend to accrue over many years. However, the potential impact could be dramatic: Using the implications from the above study, if a 50% reduction in added sugar intake could produce the changes indicated, the U.S. population could have nearly 20 million fewer cases of obesity, over 3 million fewer cases of diabetes, and about 1 million fewer cases of coronary heart disease.

CHALLENGE #2: Animal proteinAs consumers focus more on the health and environmental impacts of their food choices, there is increased attention on animal meat consumption and the livestock agriculture industry. These are resource-intensive industries: 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.33 In contrast, protein that comes from plant-based sources is fairly resource efficient, as reflected in the chart on page 23.34 In part due to this lower environmental intensity, there has been a quickly growing movement in the United States and the United Kingdom toward plant-based protein. Increased consumption of plant-based proteins can be seen across multiple demographics (not only vegetarians), suggesting the trend could have lasting duration and a large potential market.35

In addition to environmental concerns, many consumers are focused on the health benefits of a plant-based diet. Animal products contain more saturated fat and higher levels of cholesterol than plant-based sources of protein, and several studies have shown that high consumption of animal-based protein is associated with more chronic disease than a primarily plant-based diet.36 37


23

Resource intensity per ton of protein consumed:

0

500

1,000

1,500

2,000

2,500

3,000

0

20

40

60

80

100

120

0

30

60

90

120

150

180

BeefDairyPoultryPorkEggsFish(farmed)

Roots andtubers

PulsesMaizeRiceWheat

ha 1,000 m3 t CO2ePLANT-BASED ANIMAL-BASED

Pasture

Cropland

LAND USE (ha)

Rainwater

Irrigation

FRESHWATER CONSUMPTION (1,000 m3)

Pasture

Cropland

GHG emissions (t CO2e)

Source: World Resources Institute.

SOLUTION: Plant-based foods

Inspired by the potential for environmental and health benefits, consumers are displaying a growing interest in plant-based foods, and particularly in plant-based protein. Producers are responding with new products, new brands, and even entirely new categories and companies. Recent Nielsen studies have suggested that 39% of Americans are actively trying to eat more plant-based foods to improve health and nutrition, and to contribute to a better environmental footprint.38 39

While certain plant-based foods are ancient, we are also seeing a burst of innovation in this area. For instance, in 2018, the plant-based yogurt category grew 31%, cheese alternatives grew 45%, and meat alternatives grew 30%, year over year.40 Some of this new category growth is due to increased marketing focus, but there is also true innovation in product offerings. As an example, though products like veggie burgers have been around for decades, products like Beyond Meat and Impossible Burger are meant to mimic the taste and texture of meat, aiming to appeal to the majority of the population that is not vegetarian or vegan. A wide range of restaurants, including fast-food companies like McDonald’s, Burger King, and Qdoba, have moved to include some of these newer plant-based meat offerings on their menus.


24


One company that has created a new plant-based food platform is Nomad Foods. Nomad is the largest frozen food company in Europe and sells frozen fish and vegetables under brands such as Birds Eye, Findus, and Iglo. The company has invested heavily behind their new “green cuisine” launch, which includes various plant-based meals. This push is based on consumer demand, as nearly one-third of evening meal occasions in the UK are now meat-free, and over 90% of plant-based meals are eaten by non-vegans.41 Nomad expects this trend to carry across Western Europe, and the company is offering new products like meat-free meatballs, sausages, burgers, and “veggie bowls.” 42

IMPACTThere are three main sources of positive impact from products like Nomad’s “Green Cuisine”: the lower levels of environmental intensity in protein production, the food waste improvement potential of frozen food products, and the health benefits of plant-based diets.

Like other popular beef substitutes, Nomad’s “Green Cuisine” is made from pea protein. As one might expect, the environmental intensity of producing plant protein is meaningfully less than beef protein, one study showing that replacing meat with plant alternatives can be 35%–50% more efficient in use of cropland and fertilizer.43 Additionally, pulse crops like peas and some other legumes improve soil health by adding nitrogen to it naturally and are less water intensive to raise than grains or oilseed crops.44 45

In addition to Nomad’s new product offerings, there are some environmental benefits to frozen food as a category, including impact on food waste. A British Food Journal study found that participants wasted almost six times as much fresh food purchased as frozen food, totaling over 30kg of additional waste per household per year.46 This is important given the magnitude of food waste: About one-third of all food production is wasted annually. This waste contributes about 2% to CO2 emissions in the United States and costs $198 billion.47 A 50% reduction in global food waste would result in a nearly 5% reduction in GHGs.

In terms of health impact, all plant-based diets are not created equal. For example, a “healthful plant-based diet” emphasizing plant foods such as whole grains, fruits, vegetables, nuts, legumes, and healthy oils, has been associated with lower risk for heart disease.48 However, an “unhealthful plant-based diet” emphasizing fruit juices, pasta, French fries, and sugar-sweetened beverages has, unsurprisingly, been associated with a significantly higher risk of heart disease. High adherence to a healthful plant-based diet can reduce cardiovascular mortality risk by about 30%, according to a 2019 study.49 Following the implications of this study, if just 10% of the U.S. population were to switch to a plant-based diet, over the long term, deaths from cardiovascular disease could fall by nearly 26,000 annually.50

The examples above illustrate several important points: First, issues like human health and environmental impact are intertwined in many ways. Second, product developments and consumption patterns can impact both health and the environment. And third, our investment decisions can consider these same issues and use this analysis to identify potential solutions.


25

Thematic focus: Financial inclusion and financial security BackgroundMany governments and nonprofit organizations have focused on financial access — enabling more individuals and businesses to enter the formal banking and credit system — as an important driver of economic development and financial security. On a global scale, financial inclusion underpins many of the United Nation’s SDGs (#1: No Poverty, #4: Quality Education, #8: Decent Work and Economic Growth, and #10: Reduced Inequalities), and it is also a direct goal of the World Bank and IMF’s Universal Access by 2020 Campaign (UFA2020). In our 2019 impact report, we addressed two potential root causes of financial insecurity: student debt and healthcare costs. This year, we update our work on healthcare costs and examine an additional element: how exclusion from the formal financial system can contribute to financial instability and creates barriers to wealth creation. Several of the companies owned in Putnam Sustainable Leaders and Putnam Sustainable Future address these key challenges with innovative solutions.

CHALLENGE #1: Exclusion from the formal financial systemAccording to the FDIC’s 2017 survey, 6.5% of U.S. households are considered unbanked and 18.7% underbanked, though these figures have been improving over time.51 Unbanked refers to people who do not have access to any banking services, including debit cards or savings accounts, while underbanked refer to those who have some access but are unable to take full advantage of banking services. An example of an underbanked individual might be someone who has a checking account but does not have enough of a credit history to open a credit card account or receive a loan. Access challenges are even more pronounced on a global basis. Globally, 1.7 billion adults remain unbanked, though interestingly, two-thirds of these adults have mobile phones, which can increasingly be used as tools for financial transactions.52

Those who are unbanked and underbanked face numerous challenges. For one, lack of a credit history and lower credit scores can limit access to credit. This can lead to reliance on very high-interest payday lending or other expensive loans in a financial emergency. Lack of access to banking also makes it difficult to save, to earn returns on savings or investments, and to access capital for any type of new business endeavor. There are direct costs too, as financial institutions often charge fees for cashing checks and other basic services. Some estimates peg the lifetime costs of these fees at $40,000, or ~$100 per month, which is over 10% of the U.S. poverty income threshold for a single person.53

SOLUTIONMastercard and Visa both prioritize financial inclusion, using their global reach and relationships with a range of key stakeholders to help address the global unbanked population. At their core, both of these businesses enable secure financial transactions, which can help individuals and small businesses to gain access to credit and avoid some of the costs of cash and check-based transactions. For example, new technologies like Visa Direct help provide on-demand, gig economy workers with immediate and safe pay for their services, and can also help employees access wages early, when they need funds. In collaboration with the World Bank, the United Nations, and other stakeholders, both Mastercard and Visa announced commitments in 2015 to provide access to financial services to 500 million people by the end of 2020.54 55 The companies are well on their way to these goals, each reaching around 400 million people through 2018.56

Both have also created programs that support micro and small businesses, empower women, and enable social disbursements.57 58

(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.)


26


At the heart of all of these efforts is the use of digital technology to enable financial access. For example, one of Mastercard’s 750 global programs is called Jaza Duka (“fill up your store”); this program, in partnership with Unilever and Kenya Commercial Bank, offers lending programs for kiosk owners in Kenya with an interest-free credit line that is serviced by digital payments via mobile phones.59 Similarly, Visa partners with Mexican multinational baking company, Grupo Bimbo, to enable 70,000 corner stores in Mexico to process digital payments, including supply chain orders.60 This has allowed storeowners, who otherwise would not have easy access to credit, to improve their business prospects while accessing formal credit services.

Additionally, Mastercard has pledged $500 million for inclusive growth programs and established the Mastercard Impact Fund, which has committed grants to recipients like Benefits Data Trust (BDT). This program is helping to improve access to benefits for 5 million low-income people in the United States.61 Visa launched the Visa Foundation in 2017, and its inaugural grant to Women’s World Banking is focused on supporting women-led small and micro businesses.62

IMPACTEvidence has shown that increasing financial access generates positive ripple effects across economies. These gains come from businesses being brought into the formal financial system and accessing credit, in addition to increased productivity in using digital payments instead of cash. One study has estimated that digital finance in emerging countries could potentially lead to a $3.7 trillion increase in global GDP by 2025.63 Small and medium enterprises (SMEs) are a key part of this equation, contributing 40% of GDP and 7 out of 10 jobs in emerging markets.64

In the United States as well, providing support to the unbanked and underbanked could have major implications for families and the economy. As noted earlier, the costs for cashing checks could be as much as $100 per month for many unbanked and underbanked U.S. households (about 32 million households in total).65 Extending access to more affordable financial services for these households could allow for saving over $38 billion of annual check-cashing fees annually, and these funds could be reallocated towards other expenses or to savings.

CHALLENGE #2: Healthcare costsHigh and rising healthcare costs are contributing to financial instability and inequality in the United States. According to the Centers for Medicare & Medicaid Services, healthcare spending in the United States grew to $3.6 trillion in 2018, or almost 18% of GDP.66 On an individual basis, the numbers are perhaps even more daunting: in 2019, an average American family of four with an employer-sponsored healthcare plan incurred annual medical costs of over $28,000.67 Employees are responsible for more and more of their own healthcare expenses as employers cover less of this cost, and the growing popularity of high deductible plans in the United States can further increase out-of-pocket expenses for some consumers. These costs can be even higher for self-employed individuals or those employed by small businesses. Overall, as of 2018, employees covered approximately 44% of their healthcare costs, compared with approximately 20% in 2001. This means that employees are contributing over $12,000 to their annual healthcare costs today, versus just $1,400 in 2001.68 Additionally, out-of-pocket expenses can be especially burdensome for individuals with chronic conditions: For example, the average individual with diabetes incurs out-of-pocket expenses of nearly $2,000.69 The current COVID-19 situation is making these challenges even more visible, as we are witnessing the combination of a health care crisis plus an economic downturn.


27

Number and percentage of U.S. population with diagnosed diabetes, 1958–2015

Percentage with diabetesNumber with diabetes

Perc

enta

ge w

ith d

iabe

tes

Num

ber w

ith d

iabe

tes (

mill

ions

)

Year

0

1

2

3

4

5

6

7

8

’15’12’09’06’03’00’97’94’91’88’85’82’79’76’73’70’67’64’61’58

0

5

10

15

20

25

Source: Centers for Disease Control and Prevention. Diabetes Home. PowerPoint slides on Diabetes (article online), 2017. Available from https://www.cdc. gov/diabetes/data/center/slides.html. Accessed October 19, 2017.

Within this landscape, the costs of chronic conditions like diabetes are of particular concern. The direct and indirect cost associated with diabetes in the United States is staggering. There are currently over 30 million Americans that have diabetes, and another 84 million are believed to have pre-diabetes.70 The American Diabetes Association estimates that Americans with diabetes have 2.3x greater healthcare costs than others, which results in an estimated $237 billion in annual direct medical cost. Moreover, these costs are rising, with a 26% increase over the past five-year period. In addition, indirect costs are significant, and include increased absenteeism, reduced productivity and ability to work, and early mortality. Financial barriers and lack of health insurance can further exacerbate the challenge of diabetes-related expenses.

SOLUTION: Healthcare innovationWhile the U.S. healthcare system is effective at treating acute conditions like broken bones and cardiac surgeries, successful management of chronic conditions such as diabetes, obesity, and hypertension often benefits from a more hands-on, continuous approach to care. Physicians may lack the time and resources required to help patients with chronic conditions to make lasting lifestyle changes. Several healthcare innovations may offer solutions to these structural challenges.

One type of solution is digitally enabled healthcare platforms such as Livongo Health, which are helping to improve patient outcomes and lower total costs of care through improved patient adherence and fewer surprise trips to the emergency room. Livongo seeks to help people better manage their chronic conditions by providing live coaching and digital “nudges” that encourage choices like daily activity and healthier eating. The service provides members with wirelessly connected devices, such as scales, blood pressure cuffs, and blood glucose meters. The company analyzes and interprets a user’s biometric readings to send helpful and personalized feedback in the form of text messages, emails, and live calls. Peer-reviewed studies have found that, on average, people using Livongo’s solutions have achieved meaningful improvements in blood glucose levels, coronary heart disease, stroke, and weight loss.71

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


28


Several other potential solutions focus on improved access to care. For example, Teladoc Health is one of the leading telemedicine platforms that enables patients and clinicians to connect virtually in a secure and HIPPA-compliant manner. One Medical (1Life Healthcare) aims to transform access to care by offering a membership plan that allows for same-day primary care appointments and quick turnaround on testing services. Walmart has also begun to introduce clinics attached to existing retail stores that offer a range of primary care, dental, vision, and psychiatric services. All of these solutions provide patients, in particular those with chronic disease, greater access to care.

(As of March 31, 2020, Teladoc Health, One Medical (1Life Healthcare), and Walmart accounted for 2.61%, 0.21%, and 0.00%, respectively, of Putnam Sustainable Future Fund, and 0.00%, 0.00%, and 2.34% of Putnam Sustainable Leaders Fund.)

IMPACTUsing just one chronic condition, diabetes, as an example, patient-centric digital platforms could have meaningful impact on improving human health and reducing overall U.S. healthcare costs. As noted above, the American Diabetes Association (ADA) estimates that one in every seven dollars of total U.S. healthcare expenditures are diabetes-related expenses.72 On average, participants using Livongo’s diabetes solution were able to lower their total medical costs by 22%. If similar solutions were found to benefit all diabetics, total systemic cost savings could be more than $50 billion annually.

In addition to improved health outcomes and systemic cost savings, healthcare service innovation could directly benefit financial well-being for patients. People with diabetes have higher medical costs per capita as well as higher out-of-pocket costs, with one study concluding that they spent nearly $1,200 more annually for deductibles, copays, and coinsurance.73 If the reduction in average medical spend from programs like Livongo were proportionally transferred to out-of-pocket costs, the average program participant could save more than $400 annually.

Telemedicine can be an especially powerful tool for providing care when mobility and distance may limit access. Through the end of 2019, Teladoc Health increased the utilization rate of members using telemedicine services to over 9%.74 If the U.S. population were to mirror this same adoption rate of telemedicine over time, nearly 30 million visits could be offered virtually, saving both time and resources.

Other companies have been able to demonstrate improved health outcomes and lower costs by improving how people interact with their primary care providers. For example, One Medical has been able to demonstrate a 41% reduction in emergency room visits for its client populations by providing easy-to-schedule appointments. According to the CDC, there were 139 million U.S. emergency room visits in 2017, with nearly 19% of U.S. adults visiting the ER at least one time.75 If One Medical or similar primary care models could expand membership to 10% of the U.S. population over the longer term, more than 5 million ER visits could be avoided per year, resulting in easier access to care and over $10 billion in potential annual cost savings.76

Building clinic capacity in more user-friendly locations is another way that some companies are helping to improve access to care. For example, Walmart plans to open clinics adjacent to their existing retail stores. Ninety percent of the United States population lives within 10 miles of a Walmart store, and about 140 million customers visit U.S. Walmart stores every week.77 78 79 Additionally, many Walmart locations are in geographic areas with higher proportions of uninsured residents, who often have more limited access to healthcare. If the company chooses to build out clinics across all stores over the long term, and just 1% of regular customer trips include a clinic visit, over 70 million annual clinical care sessions could result — in convenient and easily accessed settings.


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As we can see through these examples, there are meaningful challenges to financial access and access to healthcare, as well as important connections between these two areas. Our investment process finds companies that are improving existing systems, as well as many that are creating innovations that will shape the systems of the future.

Travel time to hospital can affect access to healthcare Average minutes of car travel time to nearest hospital by census region

New England13.0

East NorthCentral

12.4

East SouthCentral

14.2

Middle Atlantic11.7

South Atlantic13.3

16 minutes1514131211

West NorthCentral

15.8

West SouthCentral

12.3

Mountain13.7

Pacific11.4

Pacific11.4

Sources: Survey of U.S. adults conducted September 24, 2018–October 7, 2018, and Homeland Infrastructure Foundation-Level data, Pew Research Center, pewresearch.org.

Thematic focus: Helpers and leadersOur 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).


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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.)


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• 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.


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Planning future researchThe preceding thematic review explored just a few of the sustainability themes and opportunities that our team is researching on an ongoing basis. As you can see below, our thematic research map is expansive both in breadth and depth, and is constantly evolving as new ideas emerge.

Capacity for reflection

Capacity for adaptation and change

Capacity for translation

Use of new technologies

Alignment of incentives

Graceful post-growth models

Regenerative investment structures and tools

Community and connection

Health care

Nutrition

Education

Information

Financial security

Meaningful work

Flexible work

Supported work

Employee well-being

Supplier standards

Value to customers

Benefits to communities

Physical security

Data security

Data privacy

Data use

Obesity and diabetes

End-of-life care

Regional ecosystems

Corn and soy agriculture

Industrial meat

Water use in agriculture

Soil health

Cement emissions

Energy storage

Mega-ship emissions

Methane

Weather volatility

Water. heat, and fire extremes

Climate-driven migration

Renewable energy

Energy storage

Carbon capture

Transportation

Packaging

Distribution

Advertising

Services

Preventative care• Food and nutrition• Exercise and fitness• Mental, emotional, spiritual well-being• Sleep!

Treatment and intervention• Medtech, pharma, services - Cardiac care - Diabetes care - Cancer treatments

• New platforms and technologies - Telemedicine and digital access to care - Personalized diagnostics and treatment - Virtual reality therapies - Robotics - Genetic therapies - Plant based medicine - Non-invasive therapies

Demographic shifts• Aging U.S. and European populations• Wealth shift to women and millennials• Population growth in Africa, S. E. Asia

Unity and fragmentation• Widening definitions of human rights• Increased polarization and isolation• Peak globalization

Transparency and opacity• Mistrust of institutions• Increase in data volume and access

Evolving capitalism

• Call to purpose for companies• From liability to responsibility — widening circles

Rise of ESG, impact investing, B corps... more expansive view of business and finance

Soil healthOcean healthAir qualityWater qualityProteins, microbes,

enzyme, fungiBioengineeringBioplastics and packagingBioenergyBiotechnology

Automation and efficiency• Blockchain• Additive manufacturing• SaaS and shared infrastructure - Cloud computing - Data integration - Shared transportation - Shared real estate

Decentralization and disintermediation• Personalized goods and services• Indie brands/DTC

Physicalsystems

Socialsystems

Financialsystems

Communityhealth/thriving

of the commons

Equity and access/Resourcesand opportunity

Securityand privacy

Stakeholderwell being

Circular economy,

post-use, re-use, recycling

Logistics andmarketing Decarbonization

Precisiontechnology

Humanhealth and holistic care

Planetaryhealth

Wisdom of nature:

bio-everything

HEALTHOF PHYSICAL

SYSTEMS

EFFICIENCY ANDEFFECTIVENESS/

WASTEREDUCTIONNEW

QUESTIONS AND CAPACITIES

SOCIALHEALTH

LEVERAGE POINTS

MACROCONDITIONS AND

INTERCONNECTED RISKS

REGENERATIVEINVESTING


33

To create this map, we do not start with a list of technological innovations or observable trends in the stock market. True to our research process, we start with questions: What is our current context? What does the world need to thrive? How can we invest in resilience and regeneration? Our themes sprout from these essential questions.

Capacity for reflection

Capacity for adaptation and change

Capacity for translation

Use of new technologies

Alignment of incentives

Graceful post-growth models

Regenerative investment structures and tools

Community and connection

Health care

Nutrition

Education

Information

Financial security

Meaningful work

Flexible work

Supported work

Employee well-being

Supplier standards

Value to customers

Benefits to communities

Physical security

Data security

Data privacy

Data use

Obesity and diabetes

End-of-life care

Regional ecosystems

Corn and soy agriculture

Industrial meat

Water use in agriculture

Soil health

Cement emissions

Energy storage

Mega-ship emissions

Methane

Weather volatility

Water. heat, and fire extremes

Climate-driven migration

Renewable energy

Energy storage

Carbon capture

Transportation

Packaging

Distribution

Advertising

Services

Preventative care• Food and nutrition• Exercise and fitness• Mental, emotional, spiritual well-being• Sleep!

Treatment and intervention• Medtech, pharma, services - Cardiac care - Diabetes care - Cancer treatments

• New platforms and technologies - Telemedicine and digital access to care - Personalized diagnostics and treatment - Virtual reality therapies - Robotics - Genetic therapies - Plant based medicine - Non-invasive therapies

Demographic shifts• Aging U.S. and European populations• Wealth shift to women and millennials• Population growth in Africa, S. E. Asia

Unity and fragmentation• Widening definitions of human rights• Increased polarization and isolation• Peak globalization

Transparency and opacity• Mistrust of institutions• Increase in data volume and access

Evolving capitalism

• Call to purpose for companies• From liability to responsibility — widening circles

Rise of ESG, impact investing, B corps... more expansive view of business and finance

Soil healthOcean healthAir qualityWater qualityProteins, microbes,

enzyme, fungiBioengineeringBioplastics and packagingBioenergyBiotechnology

Automation and efficiency• Blockchain• Additive manufacturing• SaaS and shared infrastructure - Cloud computing - Data integration - Shared transportation - Shared real estate

Decentralization and disintermediation• Personalized goods and services• Indie brands/DTC

Physicalsystems

Socialsystems

Financialsystems

Communityhealth/thriving

of the commons

Equity and access/Resourcesand opportunity

Securityand privacy

Stakeholderwell being

Circular economy,

post-use, re-use, recycling

Logistics andmarketing Decarbonization

Precisiontechnology

Humanhealth and holistic care

Planetaryhealth

Wisdom of nature:

bio-everything

HEALTHOF PHYSICAL

SYSTEMS

EFFICIENCY ANDEFFECTIVENESS/

WASTEREDUCTIONNEW

QUESTIONS AND CAPACITIES

SOCIALHEALTH

LEVERAGE POINTS

MACROCONDITIONS AND

INTERCONNECTED RISKS

REGENERATIVEINVESTING


34


ConclusionThese past years have seen rapid and positive development for Putnam’s sustainable investing work and for the Leaders and Future portfolios. We are encouraged by progress to date with respect to our research, portfolio composition, engagement, and impact, and we also recognize that our efforts are still new, and that there are many challenges yet to be addressed.

Throughout this report, one essential element shines through: All of our endeavors require partnership and connection. Our research process involves collaboration with colleagues at Putnam, with other research and investment firms, and with the companies in which we invest. Our portfolio analysis involves partnership with external data providers, academic researchers, and governmental and nongovernmental organizations. Our thematic and impact-centered activity requires connection at all levels of systems, from community inputs to consultation with scientific experts to discourse with policymakers. Investing is often perceived as a purely competitive endeavor, but our portfolios and our shareholders benefit from the broad and deep community that supports our work.

Thank you for taking the time to understand the research process that informs our investing, the ways that we assess our progress, and the potential impact that our portfolios’ investments have in the world. In these first years of practice, we are encouraged by the increasingly evident and relevant links between sustainability strategy, environmental and social impact, and long-term business fundamentals. We are grateful for your engagement and eager to continue in our shared endeavors — to reconnect investing with the world it was designed to serve.


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Appendix 1: Sustainable Development GoalsThe Sustainable Development Goals (SDGs) are a set of global priorities developed by countries, NGOs, businesses, the scientific communities, and other stakeholders from around the world. The SDGs were not explicitly devised as an investment framework but serve as a guide for companies’ and investors’ long-term sustainability efforts and as a mandate to address the eminent challenges facing our world.

Per the United Nations, the SDGs “are a call for action by all countries, poor, rich, and middle-income, to promote prosperity while protecting the planet. They recognize that ending poverty must go hand in hand with strategies that build economic growth and address a range of social needs including education, health, social protection, and job opportunities, while tackling climate change and environmental protection.”81

The 17 SDGs are at the heart of the 2030 Agenda for Sustainable Development, which was adopted by all United Nations Member States in 2015. These goals “provide a global blueprint for dignity, peace, and prosperity for people and the planet, now and into the future.” 82

Sustainable Development Goals

50

17 ICONS: COLOUR VERSION INVERSED

ICONS

NOPOVERTY

AFFORDABLE ANDCLEAN ENERGY

CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND

PARTNERSHIPSFOR THE GOALS

DECENT WORK ANDECONOMIC GROWTH

INDUSTRY, INNOVATIONAND INFRASTRUCTURE

SUSTAINABLE CITIESAND COMMUNITIES

ZEROHUNGER

GOOD HEALTHAND WELL- BEING EDUCATION

QUALITYEQUALITYGENDER

AND SANITATIONCLEAN WATER

PEACE AND JUSTICESTRONG INSTITUTIONS

RESPONSIBLECONSUMPTIONA N D P R O D U C T I O N

ICONS

Each icon can ONLY be used inversely over a white background.

The icon may not be used inversely over a black nor a coloured background.

Do not alter the colours of the SDG icons.

End poverty in all its forms everywhere

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Reduce inequality within and among countries

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




End hunger, achieve food security and improved nutrition, and promote sustainable agriculture

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Make cities inclusive, safe, resilient, and sustainable

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Ensure healthy lives and promote well-being for all at all ages

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Ensure sustainable consumption and production patterns

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Take urgent action to combat climate change and its impacts

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Achieve gender equality and empower all women and girls

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Conserve and sustainably use the oceans, sea, and marine resources

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Ensure access to water and sanitation for all

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Sustainably manage forests, combat desertification, halt and reverse land degradation, halt biodiversity loss

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Ensure access to affordable, reliable, sustainable, and modern energy

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Promote just, peaceful, and inclusive societies

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Promote inclusive and sustainable economic growth, employment, and decent work for all

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Revitalize the global partnership for sustainable development

50


ICONS

NOPOVERTY


CLIMATEACTION

LIFE BELOWWATER

LIFE ON LAND





ZEROHUNGER






ICONS




Build resilient infrastructure, promote sustainable industrialization, and foster innovation


36


Appendix 2: MSCI ESG Fund RatingsThis report contains certain information (the “Information”) sourced from and/or ©MSCI ESG Research LLC, or its affiliates or information providers (the “ESG Parties”) and may have been used to calculate scores, ratings or other indicators. The Information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy, and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. None of the Information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast, or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data or Information herein, or any liability for any direct, indirect, special, punitive, consequential, or any other damages (including lost profits) even if notified of the possibility of such damages. For information on the MSCI ESG Fund Ratings methodology, visit msci.com.


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Endnotes 1 Putnam Sustainable Leaders Fund changed its benchmark in August 2019 to the S&P 500 from the Russell 3000 Growth Index.2 See Putnam’s engagement policy at https://www.putnam.com/static/pdf/institutional/esg_engagement_policy.pdf3 https://materiality.sasb.org/4 https://www.putnam.com/individual/how-we-invest/sustainable-investing/ and https://www.putnam.com/individual/

how-we-invest/sustainable-investing/5 Khan, Mozaffar, George Serafeim, and Aaron Yoon. “Corporate Sustainability: First Evidence on Materiality.” SSRN Electronic

Journal, 2015. http://www.sustainablefinance.ch/upload/cms/user/CorporateSustainability_Firstevidenceonmateriality_Khan_ Serafeim_Yoon_February2015.pdfdoi:10.2139/ssrn.2575912

6 Pages 4-5 https://www.ipcc.ch/site/assets/uploads/2018/02/SYR_AR5_FINAL_full.pdf7 https://sustainabledevelopment.un.org/#8 AES Environmental Performance Update 2018 (https://s2.q4cdn.com/825052743/files/doc_downloads/sustanaibility/2018/02-07-

18-Environmental-Performance_FINAL.PDF)9 http://www.nexteraenergy.com/pdf/Executive_Digest_Final.pdf10 All #s in this paragraph from Ameren’s public investor relation presentation/site: https://s21.q4cdn.com/448935352/files/doc_

presentations/2020/03/Investor-Meetings-Mar.-30-Apr.-1-FINAL.pdf11 http://english.ckgsb.edu.cn/sites/default/files/files/Board%20Diversity_20160201.pdf12 McKinsey, Women Matter Time to accelerate, October 2017, for 2008 data, and Putnam for 2019 calculation.13 https://www.wcwonline.org/pdf/CriticalMassExecSummary.pdf14 Hong and Page, Groups of diverse problem solvers can outperform groups of high-ability problem solvers

https://www.pnas.org/content/101/46/1638515 https://www.mayoclinic.org/healthy-lifestyle/nutrition-and-healthy-eating/in-depth/added-sugar/art-2004532816 https://onlinelibrary.wiley.com/doi/full/10.1111/1541-4337.1215117 Both refined white sugar and brown sugar are produced from sugarcane or sugar beet plants through an extraction, purification,

and heating process. A centrifuge machine is then used to separate sugar crystals from molasses. Relative to brown sugar, white sugar has additional processing that removes any remaining molasses and forms even smaller sugar crystals. Unrefined brown sugar simply undergoes less processing than white sugar and retains some of its molasses content creating a natural brown color. While brown sugar has slightly higher amounts of calcium, iron, and potassium and slightly fewer calories per serving than white sugar, these differences are insignificant.

18 https://www.cdc.gov/nutrition/data-statistics/know-your-limit-for-added-sugars.html19 https://www.healthline.com/nutrition/too-much-sugar#section1020 https://jamanetwork.com/journals/jamainternalmedicine/fullarticle/181957321 https://www.ahajournals.org/doi/10.1161/CIRCULATIONAHA.109.19262722 Cliff bar nutritional info and American heart Association (https://www.heart.org) 23 Snickers website: www.marschocolate.com/snickers/snickers-original-single24 https://www.heinz.com/product/00013000001243 25 McCormick investor presentation: https://www.ir.mccormick.com/static-files/7d05db22-a686-4a0f-90fd-0e67433b3136826 https://www.cambridge.org/core/services/aop-cambridge-core/content/view/B2C8C168FFA377DD2880A217DB6AF26F/

S1368980014001943a.pdf/is_cooking_at_home_associated_with_better_diet_quality_or_weightloss_intention.pdf27 https://care.diabetesjournals.org/content/26/12/3215 28 https://ncbi.nlm.nih.gov/pmc/articles/PMC2901047/ 29 https://www.healthline.com/nutrition/10-benefits-of-low-carb-ketogenic-diets#section1030 https://www.questnutrition.com/products/quest-low-carb-protein-bar-chocolate-brownie 31 https://www.shopatkins.com 32 https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5577881/#SP133 https://josephpoore.com/Science%20360%206392%20987%20-%20Accepted%20Manuscript.pdf34 https://www.pnas.org/content/111/33/1199635 https://news.gallup.com/poll/238328/snapshot-few-americans-vegetarian-vegan.aspx 36 https://www.medicalnewstoday.com/articles/322827#which-is-better-for-building-muscle37 Colin Campbell and Thomas Campbell The China Study: The Most Comprehensive Study of Nutrition Ever Conducted and the

Startling Implications for Diet, Weight Loss, And Long-term Health38 https://www.nielsen.com/us/en/insights/article/2018/plant-based-food-options-are-sprouting-growth-for-retailers/39 https://www.nielsen.com/us/en/insights/article/2017/plant-based-proteins-are-gaining-dollar-share-among-north-americans/40 https://www.nielsen.com/us/en/insights/article/2018/plant-based-food-options-are-sprouting-growth-for-retailers/


38


41 https://www.nomadfoods.com/wp-content/uploads/2020 42 https://www.nomadfoods.com/wp-content/uploads/202043 https://www.nature.com/articles/s41598-019-46590-144 https://www.nature.com/articles/srep1462545 https://www.nature.com/articles/srep1462546 In a study of 2800 Austrian households, participants wasted 9.3% of total fresh food purchased as compared to 1.6% of total

frozen food purchased, adding up to 37.48kg of fresh food thrown away per household per person each year as compared to 6.46kg for frozen food. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5868547

47 https://centmapress.ilb.uni-bonn.de/ojs/index.php/fsd/article/view/247 48 https://www.ncbi.nlm.nih.gov/pubmed/2872868449 https://www.ahajournals.org/doi/epub/10.1161/JAHA.119.01286550 https://professional.heart.org/idc/groups/ahamah-public/@wcm/@sop/@smd/documents/downloadable/ucm_505473.pdf51 https://www.fdic.gov/news/news/press/2018/pr18077.html52 https://www.worldbank.org/en/news/press-release/2018/04/19/financial-inclusion-on-the-rise-but-gaps-remain-global-findex-

database-shows 53 https://publicpolicy.wharton.upenn.edu/live/news/1895-financial-exclusion-why-it-is-more-expensive-to-be54 https://www.worldbank.org/en/news/press-release/2015/04/17/world-bank-group-coalition-partners-make-commitments-

accelerate-universal-financial-access55 https://usa.visa.com/about-visa/financial-inclusion.html56 https://usa.visa.com/dam/VCOM/download/corporate-responsibility/visa-2018-corporate-responsibility-report.pdf57 https://www.mastercard.us/en-us/about-mastercard/corp-responsibility/financial-inclusion.html; 58 https://usa.visa.com/dam/VCOM/download/corporate-responsibility/visa-2018-corporate-responsibility-report.pdf59 https://www.mastercard.us/content/dam/mccom/global/documents/financial-inclusion/catalyzing-microbusinesses-for-

economic-growth-09172019.pdf60 https://usa.visa.com/about-visa/financial-inclusion.html61 https://newsroom.mastercard.com/press-releases/the-rockefeller-foundation-and-mastercard-announce-grants-to-benefits-

data-trust-totaling-7-5-million/62 https://usa.visa.com/about-visa/newsroom/press-releases.releaseId.11016.html63 https://cidadaniafinanceira.bcb.gov.br/forum/Documents/2016/Apresentacoes/II_Forum_CF_MGI_Tim_Kudo.pdf64 https://www.worldbank.org/en/topic/smefinance65 https://www.fdic.gov/news/news/press/2018/pr18077.html66 https://www.healthaffairs.org/doi/pdf/10.1377/hlthaff.2019.0145167 https://www.milliman.com/insight/2019-Milliman-Medical-Index68 www.cms.gov/resarch-statistics-data-and-systems/statistics-trends-and-reports/nationalhealthexpenddata/

nationalhealthaccountshistorical.html 69 https://khn.org/news/cost-of-diabetes-drugs-often-overlooked-but-it-shouldnt-be/70 https://www.cdc.gov/chronicdisease/resources/publications/factsheets/diabetes-prediabetes.htm71 On average, individuals using Livongo’s various solutions have achieved ADA recommended ranges for HbA1c blood glucose

levels, reductions in blood pressure associated with 22% reduction in coronary heart disease and 41% reduction in stroke, and 7% total weight loss after 12 months of using the solution. https://www2.livongo.com/

72 https://www.diabetes.org/resources/statistics/cost-diabetes73 https://khn.org/news/cost-of-diabetes-drugs-often-overlooked-but-it-shouldnt-be/74 https://s21.q4cdn.com/672268105/files/doc_presentations/2020/03/InvestorDay2020.pdf75 Rui P, Kang K. National Hospital Ambulatory Medical Care Survey: 2017 emergency department summary tables. National Center

for Health Statistics. Available from: https://www.cdc.gov/nchs/data/nhamcs/web_tables/2017_ed_web_tables-508.pdf.76 Health Care Cost Institute and hfma.org/topics/news/2019/02/63247.html 77 https://corporate.walmart.com/media-library/document/2020-investment-community-meeting-transcript/_

proxyDocument?id=00000170-5dc5-d590-ad71-7dcf3f37000078 https://corporate.walmart.com/newsroom/business/20161003/the-grocery-list-why-140-million-americans-choose-walmart79 https://www.sec.gov/Archives/edgar/data/104169/000010416916000079/wmtform10-kx1312016.htm80 https://investor.docusign.com/investors/home/default.aspx81 https://www.un.org/sustainabledevelopment/development-agenda/82 https://outreach.un.org/ngorelations/content/sdgs-report-2018


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Request a prospectus or summary prospectus from your financial representative or by calling 1-800-225-1581. The prospectus includes investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.

Putnam Retail ManagementPutnam Investments | 100 Federal Street | Boston, MA 02110 | putnam.com ESG004_RE 321346 4/20

This material is prepared for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Putnam product or strategy. The information presented in this report has been developed internally and/or obtained from sources believed to be reliable; however, Putnam Investments does not guarantee the accuracy, adequacy or completeness of such information. Unless otherwise noted, Putnam is the source of all data. Any references to securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice. This material does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. Past performance is not a guarantee of future results. As with any investment there is a potential for profit as well as the possibility of loss.

Consider these risks before investing: Stock values may fall or fail to rise over time for several reasons, including general financial market conditions, changing market perceptions, changes in government intervention in the financial markets, and factors related to a specific issuer, industry or sector. These and other factors may lead to increased volatility and reduced liquidity in the funds’ portfolio holdings. Growth stocks may be more susceptible to earnings disappointments, and the market may not favor growth-style investing. Investments in small and/or midsize companies increase the risk of greater price fluctuations. International investing involves currency, economic, and political risks. Emerging-market securities have illiquidity and volatility risks. The funds’ sustainable investment strategy limits the types and number of investment opportunities available to the funds and, as a result, the funds may underperform other funds that do not have a sustainable focus. The funds’ investment strategy of investing in companies that exhibit a commitment to sustainable business practices may result in the funds investing in securities or industry sectors that underperform the market as a whole or underperform other funds that do not invest with a similar focus. Due to changes in the products or services of the companies in which the funds invest, the funds may temporarily hold securities that are inconsistent with sustainable investment criteria. You can lose money by investing in the funds.

