This fund lands in the 10% of strategies with the lowest ESG risk in the Target Date category, earning it the highest Morningstar Sustainability Rating of 5 globes. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change, biodiversity, human capital, as well as bribery and corruption, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.
One key area of strength for Putnam Sustainable Retirement 2025 Fund is its low Morningstar Portfolio Carbon Risk Score of 6.09 and very low fossil fuel exposure over the past 12 months, which earns it the Morningstar Low Carbon Designation. Thus, the companies held in the portfolio are in general alignment with the transition to a low-carbon economy. The fund aims to avoid or minimize holdings in companies breaching international norms, including the UN Global Compact or the Universal Declaration of Human Rights.
One potential issue for a sustainability-focused investor is that Putnam Sustainable Retirement 2025 Fund doesn’t have an ESG-focused mandate. Funds with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and thermal coal. Yet this goal is far from achieved, as the fund exhibits 0.14%, 0.13%, and 0.34% exposure to controversial weapons, tobacco, and thermal coal, respectively. This compares with 1.17%, 0.55%, and 1.04% for its average peer in the Target Date category.
The fund has a modest level of exposure (3.32%) to companies with high or severe controversies. Companies with controversies are involved in incidents such as corruption, employee abuses, and that pose some degree of business risks to the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they controversies can damage the reputation of both companies themselves and their shareholders.