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Morningstar

Parnassus Mid Cap Institutional PFPMX Sustainability

Morningstar Medalist Rating
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Sustainability Analysis

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Sustainability Summary

 | Published as of .  Based on data as of

Parnassus Mid Cap Fund has a number of positive attributes that may appeal to sustainability-focused investors.

This fund has a Morningstar Sustainability Rating of 5 globes, indicating that the ESG risk of holdings in its portfolio is rather low relative to those of its peers in the Morningstar US Equity Mid Cap category. ESG risk provides investors with a signal that reflects to what degree their investments are exposed to risks related to material ESG issues, including climate change, biodiversity, product safety, community relations, data privacy and security, bribery and corruption, and corporate governance, that are not sufficiently managed. ESG risk differs from impact, which is about seeking positive environmental and social outcomes.

Based on its latest prospectus, sustainability or ESG factors are a focus in the investment process of Parnassus Mid Cap Fund. Funds with ESG-focused mandates are more likely to deliver positive sustainability outcomes. One key area of strength for Parnassus Mid Cap Fund is its low Morningstar Portfolio Carbon Risk Score of 6.73 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.

Parnassus Mid Cap Fund shows 10.6% involvement in carbon solutions. This percentage surpasses the 7.9% average involvement of its peers in the Mid-cap Blend category. Carbon solutions include products and services related to renewable energy, energy efficiency, green buildings, green transportation, and so on. By prospectus, the fund aims to avoid, or limit its exposure to, companies associated with controversial weapons, tobacco, and and small arms. The fund fulfills this goal by having negligible investment exposure to each of these activities. No companies held by Parnassus Mid Cap Fund are recognized as being involved in controversies at a high or severe level. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that have a negative impact on stakeholders or the environment, which create some degree of financial risk for the company. Severe and high controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, they can damage the reputation of both companies themselves and their shareholders.

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ESG Commitment Level Asset Manager

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Driven by sustainable principles.

Parnassus boasts a time-tested sustainable-investment process that accounts for fluctuating availability, quality, and expectations regarding environmental, social, and governance data. Jerome L. Dodson founded the firm in 1984 on principles of socially responsible investing, and all its strategies are sustainability-focused using both ESG-driven exclusionary screens alongside the firm’s proprietary ESG scoring system. Often, an investment process relying exclusively on avoiding select industries or companies runs the risk of growing stale in the face of evolving norms. However, Parnassus’ exclusion list works as one part of the broader fundamental investment process, and the investment team routinely re-examines it. For example, portfolio managers have re-evaluated the nature of the firm’s nuclear energy exclusion and proposed eliminating it altogether. In this regard, the analyst teams’ focused coverage lists and in-depth fundamental research help them thoroughly but nimbly assess the idiosyncratic ESG concerns associated with its roughly 100 companies held in Parnassus portfolios. The firm also publishes benchmark-relative ESG metrics for most of its funds, providing investors with easy access to each fund’s greenhouse gas emissions, employee engagement, board diversity, and more relative to appropriate benchmarks. Engagement takes a front seat at Parnassus as a tool for facilitating change and improvement in sustainable practices at the portfolio company level. Marian Macindoe assumed the newly formed role of head of ESG stewardship in April 2022 to build a formidable team and drive a more targeted engagement strategy. The team doesn’t shy away from using all the tools at its disposal to escalate failed engagements when necessary. For instance, Parnassus filed two shareholder resolutions in 2022: one at Republic Services related to environmental justice and one at Cerner on the potential for discrimination in artificial intelligence and machine learning. On climate, although Parnassus has not signed on to the Net Zero Asset Managers initiative because of concerns regarding autonomy within the initiative, the firm set its own goal of attaining net-zero carbon emissions in its portfolios by 2050 through company engagement. Despite being a leader, Parnassus still has space for improvement. The firm publishes proxy-voting records in a timely manner, and its proxy-voting policy clearly outlines guidelines for a wide variety of environmental, social, and governance issues. Voting support for ESG-related shareholder proposals is extremely high, with 100% support for key ESG resolutions over the past three years. However, transparency into stewardship activities is lacking. Parnassus does not publish voting rationales for individual votes, nor does it produce substantial thought leadership on sustainable investing, which are useful resources for investors and the broader industry. Nevertheless, the firm’s clear dedication to sustainable investing and ability to dynamically navigate an ever-shifting ESG landscape place Parnassus as a Leader among sustainability-oriented firms.