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Sustainability Matters

3 Fund Firms That Meet ESG Expectations

A peek behind the curtain of the Morningstar ESG Commitment Level.

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Some asset managers have progressed in their environmental, social, and governance journeys, but in a competitive field, they land in the middle of the pack. Among this group are BlackRock, Brown Advisory, and State Street Global Advisors.

Since Morningstar embarked on rating money managers’ commitment to ESG in 2020, it has become clearer what separates the leaders from the laggards. This is the third article in a series of four that seeks to delineate those differences by profiling firms from each tier of the Morningstar ESG Commitment Level—Leader, Advanced, Basic, and Low.

Blending in With the Crowd

The exhibit below shows how BlackRock, Brown Advisory, and SSGA—three firms that earn ESG Commitment Levels of Basic—stack up versus the other nine firms this series profiles on key metrics. The chart includes total firm assets, percentage of assets in ESG-focused funds (as defined and classified by Morningstar), and asset-weighted average Morningstar Sustainability Rating (a peer-relative measure of ESG risk).

More than half of Brown Advisory's assets are in ESG-focused funds.More than half of Brown Advisory's assets are in ESG-focused funds.

Although it’s a small sample size, the scatterplot reflects the variety of the U.S. ESG marketplace, which includes large, diversified asset managers as well as pure-play ESG firms. Unlike the three Leaders recently profiled—Boston Trust Walden, Calvert Research & Management, and Parnassus—most of SSGA’s and BlackRock’s assets are in non-ESG funds. That said, a greater percentage of ESG-focused funds does not necessarily drive a higher Morningstar ESG Commitment Level. On this measure, Brown Advisory ranks higher than AllianceBernstein, TIAA/Nuveen, and Amana—three firms that receive ESG Commitment Levels of Advanced.

Some Strengths, but Not Enough to Stand Out

BlackRock, Brown Advisory, and SSGA have made efforts to integrate ESG into their cultures by boosting resources and increasing transparency into their practices, but various hurdles have prevented sustainability from becoming core to the firms’ investment philosophies. Because the majority of BlackRock’s and SSGA’s assets are held in passive strategies that track plain-vanilla market-cap indexes, their ability to integrate ESG criteria into the investment process is limited. Brown Advisory systematically considers ESG factors in its research but relies on financial materiality in its non-ESG funds. Furthermore, although the trio provides ESG metrics for ESG-focused funds, neither Brown Advisory nor SSGA provide this information for their non-ESG offerings in the United States. Publishing ESG metrics for all funds (not just ESG-focused funds) empowers investors to make well-informed choices.

Each firm structures its ESG resources according to the investment strategies they support, but that’s where the similarities end. Brown Advisory’s actively managed, predominantly equity fund lineup benefits from collaboration between ESG specialists and fundamental analysts. SSGA has less need for fundamental ESG research, instead allocating resources to its active ownership and stewardship efforts. BlackRock, on the other hand, has worked to unite and centralize multiple disparate ESG resources to power its diverse fund offerings and data science capabilities.

Each of the firms has taken strides to improve transparency into their active ownership activities through publicly available stewardship reports, but they tend to avoid the more enthusiastic stewardship approaches. For example, none of the firms has filed or co-filed an ESG-focused shareholder resolution to date. BlackRock’s size may prevent it from this action, but all three firms tend to stick with the softer touch of ongoing dialogue with companies. When it comes to voting on ESG-focused shareholder proposals, Brown Advisory has the strongest record of support, having voted for 87% in 2021. BlackRock and SSGA voted for more than 70% of proposals, but this doesn’t stand out next to peers.

BlackRock/iShares

BlackRock’s sheer size gives it a level of firepower that few competitors can match. Although BlackRock wasn’t among the earliest asset managers to offer ESG funds in the U.S.—its first U.S.-domiciled ESG fund (then termed socially responsible), iShares MSCI USA ESG Select ETF SUSA, launched in 2005—its ability to ramp up its resources and fund offerings has been impressive. Still, its relatively recent adoption of ESG principles means that ESG is not central to the firm’s culture, and its size and asset mix hamper its ability to deepen this cultural integration.

Brown Advisory

Brown Advisory has ramped up its ESG resources to support its deeply fundamental ESG research and investment process, and it has taken care to integrate ESG seamlessly into its investment philosophy. A dozen ESG-focused investment professionals lead the firm’s efforts, but every employee undergoes ESG training. Brown Advisory has taken steps to improve transparency into active ownership efforts through engagement and impact reports, but it shies away from escalating company engagements through sponsoring shareholder proposals or divesting from the laggards.

State Street Global Advisors

SSGA made a big splash with its Fearless Girl campaign in 2017 and carried this momentum to launch the Responsible Factor (R-Factor) in 2019, but it has stalled in recent years. Most of the assets SSGA oversees track indexes that do not systematically account for ESG factors. This means the firm’s primary avenue for integrating sustainability is through company engagement and proxy voting, but it eschews more activist tactics such as filing or co-filing shareholder proposals for change. Despite efforts to strengthen its ESG credentials, SSGA’s asset mix creates a persistent hurdle.

ESG Risk & Impact

The three firms have diverse offerings that cater to different investor preferences in terms of ESG risk and impact. While these metrics are not a formal input to the Morningstar ESG Commitment Level methodology, they complement one another.

Bar chart showing more than 80% of Brown Advisory's funds earn High or Above Average Morningstar Sustainability Ratings.More than 80% of Brown Advisory's funds earn High or Above Average Morningstar Sustainability Ratings.

As shown in the exhibit above, Brown Advisory’s funds do a topnotch job of mitigating exposure to ESG risks, as more than 80% of its funds earn High or Above Average Morningstar Sustainability Ratings (5 or 4 globes, respectively). Meanwhile, funds from BlackRock and SSGA show a more normal distribution, albeit tilting slightly toward higher sustainability ratings.

While ESG risk weighs the effect ESG factors might have on a business’ success, impact measures a company’s contribution to positive societal change. Sustainalytics’ Impact Metrics calculate the percentage of a given company’s revenues that are associated with one of five impact themes, and Morningstar’s Portfolio Impact Metrics aggregate those revenue exposures to the fund level.

BlackRock and SSGA each offer climate-themed funds, which contributes to their offerings’ exposure to the Climate Action impact theme. For example, SPDR Kensho Clean Power ETF CNRG holds Enphase Energy ENPH and SolarEdge Technologies SEDG—two of the largest public companies involved in solar energy.

BlackRock and SSGA offer climate-themed funds which drive high levels of exposure to the Climate Action impact theme.BlackRock and SSGA offer climate-themed funds that drive high levels of exposure to the Climate Action impact theme.

These three firms may not tick the box for every sustainability-focused investor, but bright spots remain.

Raj Modi contributed to this story.

Alyssa Stankiewicz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.