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ESG Alpha: Bettering the World, Bettering Your Portfolio

Investors looking into the socially responsible theme can focus on ETF strategies that invest in companies aligned with investors’ investment and sustainability goals.

“Sustainable investing has both investment and business merit,” Katherine Collins, Head of Sustainable Investing, Putnam Investments, said on the recent webcast, ESG Principles: How Sustainable Investing Is Changing the World.

Collins also argued that sustainable investing offers alpha generation potential, risk mitigation potential, and provides the ingredients for investing success, such as context-specific investment approaches, a focus on relevant issues, and forward-looking analysis.

Specifically, Collins noted that materiality matters when it comes to alpha generation potential. Material issues are issues that are likely to impact the financial condition or operating performance of a company. According to a Serafeim (2016) study, the highest environmental, social, and governance performance on material issues correlate with excess returns.

Furthermore, sustainable investing helps diminish risk. ESG disclosure can help capture warning signals, according to Collins.

An increasing percentage of investors also agree with the benefits of sustainable investing. For example, 84% are pursuing or considering pursuing ESG integration in their investment portfolios, according to Morgan Stanley Institute research on sustainable investing. Additionally, 78% seek to align with the U.N. Sustainable Development Goals. Looking at the total population, 49% have indicated they are very interested in sustainable investing and 36% said they were somewhat interested, with the millennials group showing a much higher percentage of interest for ESG investments.

Meanwhile, a growing number of companies are also exhibiting an increased focus on sustainability, with 90% of S&P 500 companies reporting on sustainability practices, compared to 20% reporting back in 2011.

Collins explained that Putnam combines sustainability and fundamental research through active management to produce insight and alpha generation.

“We take a research-intensive approach that combines sustainability, fundamental, and valuation analysis,” Collins said. “Relevant sustainability, impact, and ESG analysis is additive and complementary to traditional fundamental analysis. Our sustainability focus is guided by materiality and thematic maps.”

To help investors access sustainable investment opportunities, Putnam has come out with two distinct approaches. Putnam Investments recently entered into the world of ETFs, launching two ESG-related strategies, the Putnam Sustainable Future ETF (PFUT) and the Putnam Sustainable Leaders ETF (PLDR).

The Putnam Sustainable Leaders ETF invests in companies whose focus on ESG issues goes well beyond just basic compliance, and for whom ESG is an integral part of long-term success.

“The portfolio invests in companies that have demonstrated leadership in the sustainability issues that are financially material to their businesses,” Collins said. “We believe these companies often demonstrate potential for strong long-term financial performance.”

The Putnam Sustainable Future ETF invests in companies that provide solutions to future sustainability challenges.

“The portfolio invests in companies whose products and services provide solutions to essential sustainability challenges,” Collins added. “We believe these companies demonstrate potential for strong growth and long-term financial performance.”

Financial advisors who are interested in learning more about sustainable investments can watch the webcast here on demand.

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