Products November 19, 2020

Investment Product and Service Launches

Conning adds Climate Risk Reporting and Scenario Service; Morningstar integrates ESG factors; and T. Rowe Price establishes separate investment management group. 

 

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Art by Jackson Epstein

Conning Adds Climate Risk Reporting and Scenario Service

Conning has launched a new Climate Risk Reporting and Scenario Service, equipping institutional investors with the tools and analytics needed to assess portfolio risk under a range of climate change stresses.

The new modeling service responds to the increasing interest Conning has seen by insurers and pensions on the topic of environmental, social and governance (ESG) investing globally and the evolving frameworks for climate-related risk management.

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“While the need for companies to assess climate risk is clear, there has been little in the way of a well-defined methodology for taking climate risk modeling beyond simple deterministic stress testing until now,” says Matthew Lightwood, global product manager of Conning’s GEMS Economic Scenario Generator software. “Our new Climate Risk Reporting and Scenario Service bridges this gap, combining robust stochastic economic modeling and climate change scenarios to provide insurers and pension plans with greater insights and richer narratives around their exposure to these risks.”

The service produces a Climate Risk Report, powered by Conning’s GEMS Economic Scenario Generator software. As an additional benefit, users of the service have access to the underlying scenario sets for use in their asset and liability modeling systems. In addition, Conning’s climate stress scenarios enable users to explore different pathways in terms of when and how transition and physical climate impacts may occur in the future.

“Climate change poses material risks for investment portfolios and the global economy as a whole, yet we have found that many institutional investors have struggled to measure these risks, mainly because of a lack of a reliable and standardized methodology,” says Woody Bradford, Conning’s CEO and chair of the board. “We are very proud that Conning is taking a leadership role in the industry by helping institutional investors evaluate climate change-related investment risks.”  

Morningstar Integrates ESG Factors

Morningstar Inc. has begun formally integrating environmental, social, and governance (ESG) factors into its analysis of stocks, funds and asset managers.

Morningstar equity research analysts will employ a globally consistent framework to capture ESG risk across more than 1,500 stocks. Analysts will identify valuation-relevant risks for each company using Sustainalytics’ ESG Risk Ratings, which measure a company’s exposure to material ESG risks, then evaluate the probability those risks materialize and the associated valuation impact. Results from this research will inform Morningstar’s assessment of a stock’s intrinsic value and the margin of safety required before assigning a Morningstar Rating for stocks between five stars and one star. Morningstar acquired Sustainalytics, a globally recognized leader in ESG ratings and research, in July.  

Morningstar manager research analysts will analyze the extent to which strategies and asset managers are incorporating ESG factors as part of its new Morningstar ESG Commitment Level evaluation. In conducting the strategy evaluation, the analysts will assess the analytics and personnel committed to each strategy and the extent to which the strategy incorporates those resources into the investment process. To perform the evaluation of asset managers, analysts will consider how clearly the firm has articulated its ESG philosophy and policies, and the degree to which it has driven those policies through its culture and investment processes. The ESG Commitment Level evaluation of strategies and asset managers will follow a four-point scale of Leader, Advanced, Basic and Low.    

Morningstar equity research analysts will use Sustainalytics research to capture ESG risk using a consistent process across industries, and in a manner that aligns with Morningstar’s long-term oriented and fundamentals-focused investment philosophy through two principal channels: the Morningstar Economic Moat Rating and the Uncertainty Rating. These ratings inform Morningstar’s assessment of intrinsic value and required margin of safety, respectively, and, ultimately, are rolled into the Morningstar Rating for stocks.

Additionally, Morningstar will rename the Stewardship Rating to Morningstar Capital Allocation Rating and refine the framework to isolate and evaluate management performance across three key dimensions: balance sheet health, investment efficacy and shareholder distributions. Analysts have identified these three factors as being important in measuring management’s impact on total shareholder returns.

“Integrating ESG directly into the marrow of our research methodology helps us to widen the aperture of the traditional financial analysis and more precisely capture ESG risks that can exert a profound influence on long-term competitive dynamics and the sustainability of a company’s earnings,” says Dan Rohr, head of equity research for Morningstar. 

Analysts will use Sustainalytics’ ESG Risk Ratings as the basis for identifying valuation-relevant risks. The ESG Risk Ratings measure a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks. This approach to measuring ESG risk combines the concepts of management and exposure to arrive at an assessment of ESG risk—the ESG Risk Rating—which is comparable across all industries.

Morningstar will begin to roll out the equity research rating enhancements on December 9 and apply them to Morningstar’s global equity research coverage universe of more than 1,500 companies. The incorporation of ESG factors will update on a rolling basis through 2021. 

The new methodology for Morningstar’s equity research is available here. Further details on how ESG information will be integrated into each component is available here and more specifically for the Capital Allocation Rating here. 

T. Rowe Price Establishes Separate Investment Management Group

T. Rowe Price Group Inc. has announced that it will establish T. Rowe Price Investment Management Inc. (TRPIM), as a separate U.S.-based Securities and Exchange Commission (SEC)-registered investment adviser (RIA). TRPIM will have its own investment platform and veteran leadership, with more than 100 associates, including at least 85 investment professionals.

The firm intends to move the US Capital Appreciation, US Mid-Cap Growth Equity, US Small-Cap Core Equity, US Small-Cap Value Equity, US Smaller Companies Equity and US High Yield Bond Strategies into TRPIM. There are no planned portfolio manager changes associated with this transition and no change is expected in the day-to-day management of client assets. Pending all approvals, the transition of these strategies from T. Rowe Price Associates Inc. (TRPA) to TRPIM is expected to take place in the second quarter of 2022. As of September 30, the six strategies represented $167 billion in assets under management (AUM).  

There will be no impact to the structure or approach of the firm’s target-date portfolios or other multi-asset products.

To support the build-out of the research platforms, the firm has been on an accelerated pace of analyst hiring for the past two years and has been integrating these investors into their respective teams. While the majority of hiring has taken place, the firm plans additional hires over the next year. Average portfolio manager and analyst tenure for TRPIM and TRPA is expected to be similar.

Stephon Jackson, currently associate head of U.S. equity and a 13-year veteran of T. Rowe Price’s Equity Division, will become head of TRPIM and will join the T. Rowe Price Group Management Committee as of January 1. The directors of research for TRPIM will be Steven Krichbaum and Thomas Watson, both of whom joined the firm in 2007 and are currently directors of equity research, North America. Tammy Wiggs, who also joined the firm in 2007 and is currently an equity trader, will be head of equity trading for TRPIM. Ric Weible, who has been with the firm for 18 years and is currently director of operations for the U.S. Equity Division, will become director of operations and business management for TRPIM.

The portfolio managers moving to TRPIM include Brian Berghuis (US Mid-Cap Growth Equity Strategy) and David Giroux (US Capital Appreciation Strategy). Giroux will also serve as the chief investment officer (CIO) for TRPIM. Other portfolio managers include Frank Alonso (US Small-Cap Core Equity Strategy), Kevin Loome (US High Yield Bond Strategy), Curt Organt (US Smaller Companies Equity Strategy) and David Wagner (US Small-Cap Value Equity Strategy).

The firm does not expect the transition to be deemed a change of control or management of TRPA, nor does the firm expect any changes to fees or services provided to the funds and client accounts.

Benefits November 19, 2020

What Happens When Student Loan Payment Deferral Ends?

Employers can steer employees to help when they have to restart student loan debt repayments, and there is hope that more government help is on the horizon.

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The Coronavirus Aid, Relief and Economic Security (CARES) Act included two provisions that were critical to helping Americans with student loan debt. One allowed borrowers to suspend payments through September 30, and that relief was later extended to December 31.

Laurel Taylor, founder and CEO of FutureFuel.io, a company that supports student loan borrowers, explains that the payment suspension in the CARES Act allowed anyone who had a federal student loan to get a reprieve. Borrowers could pause their payments through the end of year. Anyone who did make payments had the opportunity to double the impact of those payments because they were all applied to principal; there was 0% interest. She says about 90% of all student loans are federal student loans.

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As of January 1, employees with student loan debt will need to get back on their payment schedules. Taylor says payments student loan debtors are submitting are on average $350 each month.

A recent TIAA survey found that student loan debt is a significant burden for employees, especially for those in the nonprofit sector. Among survey respondents, 58% reported having more than $50,000 in debt. Sixty-one percent identify it as a significant source of stress, and 75% associate negative feelings with their loans. Forty-one percent feel frustrated, 34% feel hopeless, 26% feel angry and 22% feel ashamed.

According to Snezana Zlatar, senior managing director and head of financial wellness and innovation at TIAA, 80% of survey respondents said they benefitted from the CARES Act provision allowing them to defer payments until 2021. “They said that without the provision, it would have been difficult to impossible to make payments during the coronavirus crisis, given that one-quarter experienced either job loss, a loss of hours, changes in work assignments or a change from full-time to part-time [work],” she says.

The survey found that those 80% who benefitted from the CARES Act said they will have difficulty meeting their payment obligations when the forbearance ends.

How Employers Can Help

One thing employers can do is shift a benefit budget item to help student loan borrowers, Taylor says. She explains that many employers offer tuition assistance or reimbursement programs, but most see low take-up for this benefit. According to Taylor, 95% of employees don’t use these programs. She recommends that employers not let those dollars go to waste in 2021. “They can use that budget to offer student loan debt repayment help to employees,” she says.

Even those employers that don’t have a tuition reimbursement budget, or that used to have one but no longer do, can provide access to a platform or tool to help employees understand ways they can pay down or reduce their student loan debt. “Integrating student debt repayment benefits in the workplace is a core action employers can no longer ignore,” Taylor says. “Employees may have spent that money to get the job they’re doing. We’ve seen a 5,000% increase in searches for options to help with student loan debt.”

Taylor says there are many types of income-driven repayment programs and there’s not enough awareness of them among employees. “Employers can educate employees about them and help make it easy to enroll in them. That way, if employees feel they cannot get back into their regular payment plans, they can lower their payments commiserate with income,” she says.

“For employers that are furloughing or laying off employees, the education should be integrated into furlough packages and exit paperwork,” Taylor adds. “Some employees can reduce payments to $0 when they become unemployed.”

Zlatar says that as employers re-evaluate benefits packages for 2021, TIAA recommends they focus on topics that cause the most stress for their employee base, and student loan debt is certainly one of those.

For example, TIAA partnered with social impact technology startup Savi to offer a benefit that will help employees sign up for an income-driven payment plan, which can lower their payments. The tool also helps employees find out whether they are eligible for forgiveness programs. The issue with the Public Service Loan Forgiveness (PSLF) program is that employees find it difficult to understand and to fill out paperwork, Zlatar says. The TIAA and Savi solution can also help with that.

Zlatar notes that when employees were asked what they would do with money they saved on student loan debt repayment, some indicated they would contribute to their retirement plan and 60% reported they would use the money to pay off other debt. “Such a student loan debt benefit will help improve employees’ overall financial wellness,” she says.

Zlatar adds that offering a student loan repayment benefit also helps employers because it makes employees feel more loyal and gives them peace of mind, which makes them more engaged.

More Help May Be on the Way

“We have been studying all of [President-elect Joe] Biden’s policies in depth, including his proposal to cancel $10,000 in student loan debt,” Taylor says. “What he has actually proposed is forgiveness for each year of national or community service. It’s an expansion of the PSLF program.”

She explains that if a borrower is in the PSLF program, he has to work for 10 years before his remaining student loan debt is forgiven. Taylor says only 1% of borrowers actually had loans forgiven on the anniversary of the program. “So what Biden is proposing, which I think will drive more to work for public school systems, is that for every year of service, $10,000 in student loan debt is forgiven,” she says.

Though she mentioned the benefit for school systems, the PSLF program is for any qualifying institution, including Internal Revenue Code (IRC) Section 501(c)(3) nonprofits. Employees of a number of different entities could qualify.

Taylor says she recently spoke at Johns Hopkins Hospital and found that one of the challenges for employees is that it is difficult to work for below-market salaries when they have student debt, so there is a depletion of employees within teaching hospitals and 501(c)(3) institutions. “With the Biden proposal, employees will be able to see progress on paying off student loan debt each year,” she says. Taylor adds that she’s not sure how Biden would get his proposal enforced in the new administration.

Taylor says there is broad bipartisan support for the recently introduced legislation called the Securing a Strong Retirement Act of 2020, which includes a provision that would allow retirement plan sponsors to offer matching contributions on employee student loan repayments. She notes that 31% of employees who have access to retirement savings don’t participate in the program, and the Massachusetts Institute of Technology (MIT) AgeLab found that, of those who have student loan debt, 86% said that is the No. 1 reason they don’t participate. Taylor adds that those who are younger than 30 have half the savings as those without student loan debt.

“The provision would liberate some $13 billion to $14.5 billion dollars of savings for workers paying student loan debt,” she says.

In addition to the payment deferment in the CARES Act, the provision allowing employers to make a $5,250 tax-free payment toward employees’ student loan debt is also sunsetting at the end of the year. Taylor says she is meeting with senators about potential next steps.

“What’s exciting to see is when I spoke with the Ways and Means Committee this week, the one issue that both sides of the aisle can agree on is helping workers save for retirement while paying down student loan debt,” Taylor says.

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