T. Rowe Price QM US Sm&Md-Cp Cor Eq I TQSIX Sustainability

T. Rowe Price QM US Sm & Md-Cp Cor Eq Fd may not appeal to sustainability-conscious investors.

This fund has the second-lowest Morningstar Sustainability Rating of 2 globes, indicating it holds securities with relatively high ESG risk compared to that of its peers in the US Equity Mid Cap category. Investors concerned about ESG risk may be better off with funds in the category that receive 4 or 5 globes as they tend to hold securities less exposed to ESG risk. ESG risk measures the degree to which material environmental, social, and governance issues, such as climate change and inequalities, could affect valuations. ESG risk differs from impact, which is about driving positive environmental and social outcomes for society’s benefit.

One potential issue for a sustainability-focused investor is that T. Rowe Price QM US Sm & Md-Cp Cor Eq Fd 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 rests at 6.43%, which compares favorably with 8.37% 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 exhibits negligible exposure (0.29%) to companies with high or severe controversies. From bribery and corruption to workplace discrimination and environmental incidents, controversies can have significant financial repercussions, ranging from legal penalties to consumer boycotts. In addition, controversies can damage the reputation of both companies themselves and their shareholders.

T. Rowe Price QM US Sm & Md-Cp Cor Eq Fd's asset-weighted Carbon Risk Score of 11.20 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. Such funds invest in companies that tend to operate in sectors less exposed to the transition (such as healthcare and IT) and/or companies in more carbon-intensive sectors (such as industrials and utilities) but that consider climate change in their business strategy and products, and therefore are positively aligned with the transition.

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.