Insights
Morningstar’s Globe Sustainability Rating
Not quite the whole picture
When Financial Advisers compare KiwiSaver providers, Morningstar’s KiwiSaver Report is one of the most trusted resources they turn to. It is a popular guide used to better understand for fund performance, fees, and sustainability credentials for a range of products.
However, there’s something surprising about it: Pathfinder’s KiwiSaver funds do not receive ticks for Morningstar’s “Earned a Four or Five Globe Sustainability Rating” criterium.
As a provider consistently recognised for being a leader in ethical investing, we wanted to explain why our products don't have this rating.
What’s behind Morningstar’s Sustainability Rating?
Morningstar uses an algorithm powered by their own product Sustainalytics (a data and research tool) to measure portfolio-level risk from environmental, social, and governance (ESG) factors.
The methodology is based on an absolute risk assessment, making scores comparable across sectors and industries. A fund must have at least 67% of its qualified holdings eligible to receive a rating.
Qualified Holdings: Securities in a portfolio that carry material ESG risk, such as equities, fixed income, commodities, real estate, and alternatives. Excludes short positions, cash, currency, derivatives, and synthetic holdings.
Eligible Holdings: A subset of qualified holdings that fall under an ESG risk rating framework (corporate or sovereign) and can contribute to the fund’s ESG Risk Rating.
Corporate entities are categorized into five risk levels—Negligible, Low, Medium, High, Severe—with most companies falling in Medium risk. The final rating combines corporate and sovereign scores proportionally and rounds to the nearest whole number. (1).
Morningstar takes these ESG risk scores then creates a single overall ESG risk score for the whole portfolio. A fund with high ESG risk relative to its Morningstar Global Category would receive 1 globe. A fund with low ESG risk would receive 5 globes.
The three original Pathfinder KiwiSaver Funds currently do not meet the 67% threshold of qualified, eligible holdings. This means our Funds do not have a Globe Sustainability Rating and therefore do not receive a tick for Morningstar’s “Earned a Four or Five Globe Sustainability Rating” criterium. We hope that, after March 2026, our High Growth Fund will be eligible for a rating (as it will have over the 67% threshold).
We think it’s important to note that these ratings are based solely on ESG risk exposure, and not on the kinds of product or services a company might produce. In other words, the system measures how much risk a company faces from ESG factors, and not whether their product is positive for people, animals or the planet.
ESG isn't the same as ethical
Advisers and investors may assume that these ticks are a shorthand for the best ethical options in market. In reality, they reflect ESG risk management and compliance as judged by Morningstar.
This creates a communication challenge: how to differentiate Pathfinder's process of ethical investing from funds with the tick?
We would recommend explaining to clients that Ethical investing has a higher threshold than ESG investing, with the addition of guiding principles that orient investment decisions towards better outcomes for people, planet and animals. If ESG is all they're after then be guided by the tick; but if they're looking to ESG metrics to drive real world positive outcomes, or at least, limit negatives ones, they should look beyond the tick.
What can advisers do?
When guiding clients, do not rely solely on Morningstar’s sustainability ticks. Look deeper:
- Review the provider’s investment philosophy (usually found in an Investment Policy called 'Sustainable' or 'Responsible')
- Explore whether they have any positive outcomes goals, not just risk or harm avoidance.
- Consider other independent sources that assess ethical leadership, like Mindful Money and RIAA.
As an advisor, consider the following: ESG risk ratings ask: ‘Is this company exposed to ESG-related financial risks?’ Ethical investing asks: ‘Is this company improving the world or harming it?
If you have any questions about this or other ESG related queries, we'd happily set up a time to speak with our ESG analyst.
by Simon Quirke
Corporate & Community Relationships Manager
Simon is committed to creating meaningful impact through collaboration and strategic relationship management. With substantial experience at not-for-profits like UNICEF NZ and WWF Australia, Simon believes in the power of stakeholder capitalism - helping to connect business, communities and charities to drive lasting change.
Simon’s role at Pathfinder is dedicated to helping employers and individuals align their financial investments with their ethical values. He holds an Executive MBA from Massey University.
