T. Rowe Price Equity Index 500 PREIX Sustainability

T. Rowe Price Equity Index 500 Fund is likely to concern sustainability-focused investors given certain substandard ESG attributes.

T. Rowe Price Equity Index 500 Fund's holdings are exposed to average levels of ESG risk relative to those of its peers in the US Equity Large Cap Blend category, thus earning it an average Morningstar Sustainability Rating of 3 globes. Competing funds in the category with ratings of 4 or 5 globes have less ESG risk in their holdings. 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.

T. Rowe Price Equity Index 500 Fund has a Carbon Risk Score of 7.51, indicating portfolio companies face low carbon-related risks in the transition to a low-carbon economy.

One potential issue for a sustainability-focused investor is that T. Rowe Price Equity Index 500 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. The fund's current involvement in fossil fuels reaches 9.19%, surpassing 7.77% for its average category peer. Companies are considered involved in fossil fuels if they derive some revenue from thermal coal, oil, and gas. The fund has relatively high exposure (10.04%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies are incidents that may negatively affect stakeholders, the environment, or the company’s operations.

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.