Morningstar to offer ‘first’ pooled ESG fund for US workplace schemes

The investment arm of financial services giant Morningstar has announced today that it plans to launch what it describes as the first ESG pooled fund for US workplace pension schemes.

The Morningstar ESG Pooled Employer Plan is a joint venture with US retirement plan administrator PAi and is described by Morningstar Investment Management, a subsidiary of Morningstar, as the first Pooled Employer Plan (PEP) “intentionally designed to limit exposure to material environmental, social, and governance (ESG) risks”.

PEPs are investment products that allow employers to band together to participate in a single retirement plan, helping reduce administrative burdens and, importantly, costs. 

Morningstar Investment Management will be responsible for the selection of funds and investment strategies used in the new offering. And, according to the press release, its investment team will rely on “both the Morningstar Sustainability Rating and interviews with fund managers to ascertain the ESG risk of investments under consideration”.

The launch of the pooled product, which is expected to take place in early 2022, is, however, dependent on final guidance from the US Department of Labor (DoL) on the use of ESG factors in the investment decisions of retirement plans.

Yesterday, the DoL put forward its long-awaited proposed rule change, which if taken up, would remove the Trump-era obstacles that have prevented workplace pension schemes from considering ESG. 

Morningstar Investment Management said that it also plans to create a “custom ESG target-date portfolio” for the new pooled plan, “designed as an option for the Qualified Default Investment Alternative [QDIA]”. 

In the DoL’s proposal yesterday, the regulator clarified that there is “no reason” to prevent retirement plans from selecting funds that “expressly [consider] climate change or other ESG factors” as their defaults, referred to as QDIAs. 

“Sustainability is the new face of long-term investing, and we believe every company should be considering ESG risk when designing a retirement plan for their employees,” said Brock Johnson, President of Global Retirement and Workplace Solutions at Morningstar Investment Management. “The Morningstar ESG Pooled Employer Plan is designed to empower forward-thinking companies with an opportunity—perhaps for the first time—to offer their workers a retirement plan truly built for the modern era.”