T. Rowe Price Mid-Cap Value TRMCX Sustainability

T. Rowe Price Mid-Cap Value Fund may not appeal to sustainability-conscious investors.

The ESG risk of T. Rowe Price Mid-Cap Value Fund's holdings is comparable to its peers in the US Equity Mid Cap category, thus earning an average Morningstar Sustainability Rating of 3 globes. Funds in the same category rated 4 or 5 globes tend to hold securities less exposed to ESG risk. Unlike impact, which measures positive environmental and societal outcomes attributable to an investment, ESG risk reflects the degree to which investments could be affected by material ESG issues like climate change and inequalities.

Currently, the fund has 12.56% involvement in fossil fuels, which compares favorably with 15.46% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas.

One potential issue for a sustainability-focused investor is that T. Rowe Price Mid-Cap Value Fund doesn’t have an ESG-focused mandate. A fund with an ESG-focused mandate would have a higher probability to drive positive ESG outcomes.

T. Rowe Price Mid-Cap Value Fund's asset-weighted Carbon Risk Score of 11.70 is at the lower end of the medium carbon risk band. This suggests the fund’s investee companies are adequately positioned to transition to a low-carbon economy. Investors concerned about the transition risks may prefer to consider funds with negligible or low carbon risk. Funds with a lower carbon risk classification may be more favored by investors concerned about transition risks, as such funds often tilt toward companies that operate in sectors less exposed to the transition (for example, healthcare and IT) or companies in more carbon-intensive sectors (for example, materials and utilities) that consider climate change in their business strategy, and therefore are positively aligned with the transition. The fund has a modest level of exposure (4.94%) to companies with high or severe controversies. Companies with high or severe controversies are involved in incidents such as corruption, employee abuses, environmental incidents, and corporate scandals that pose serious business risks to the company.

T. Rowe Price incorporates environmental, social, and governance criteria into its fundamental research process because it believes they impact an investment’s risk/return profile. The firm has long focused on matters of corporate governance but has paid more attention to social and environmental issues over the past decade. It signed the United Nations-supported Principles for Responsible Investment in 2010, incorporated third-party ESG data into the research process in 2014, and developed in-house ESG research capabilities in 2017. The firm has grown its responsible investing and governance teams to support the broadening of its effort, which now total more than 20 members combined.

In 2018, the firm developed a proprietary ratings system to underpin its sustainable-investing effort. The model supplements third-party ESG data from numerous vendors with its own data sets, culminating in a multitiered ESG rating for a given company. While portfolio managers aren’t compelled to avoid companies with potential ESG concerns, they must consider them and meet with the firm’s responsible-investing team quarterly to review their portfolios. Directors of research and a central ESG committee oversee ESG implementation. The firm could be more transparent by making ESG data for its numerous mutual funds easily accessible for investors. T. Rowe Price has the resources and scope to be an influential advocate of sustainability, but its reluctance to vote in favor of key ESG issues and vague proxy-voting and engagement policies are key drawbacks. In each of the last three proxy seasons, the firm voted for less than half of key ESG resolutions as defined by Morningstar. T. Rowe Price prefers to engage companies through board letters and private meetings rather than through public-facing methods. The firm’s engagement guidelines stop short of clear directives on topics such as decarbonization targets and instead let company management address issues as it sees fit. Aside from advocating more detailed and standardized ESG disclosures from companies, T. Rowe Price lacks meaningful sustainability goals in its proxy-voting policy.