Morningstar Wades Further into ESG Space with Sustainalytics Acquisition

On Tuesday, Morningstar announced it would acquire the remaining shares of ESG specialist Sustainalytics, rounding out the 40% stake the research giant took in the company in 2017. According to a release, the transaction includes a €55 million ($67.6 million) cash payment (subject to adjustment), “and additional cash payments in 2021 and 2022 based on a multiple of Sustainalytics’ 2020 and 2021 fiscal year revenues,” which Morningstar estimates to be worth €170 million ($209 million). All Sustainalytics employees will retain their places at the company. The deal is expected to close in Q3 2020.   

One ESG research director at an investment management firm, who uses both Morningstar and Sustainalytics, calls the deal “the next logical step” for Morningstar after its 2017 stake.

“It certainly strengthens Morningstar’s own work and—according to one storyline—allows them to integrate this expertise into their fixed income analysis,” they say, as Sustainalytics covers equities and fixed income, and Morningstar has deep offerings in both asset classes. “With [Sustainalytics’] staff staying on, I expect they will continue to provide their level of professional expertise to clients. It certainly is a clear example of the mainstreaming of ESG investing.”

A second head of ESG research and investing at a UK-based asset manager notes that Morningstar’s all-in strategy on Sustainalytics makes sense. “Morningstar has been supporting and leaning into Sustainalytics for many years,” they say. “That additional financial support has allowed [Sustainalytics] to hire, build out their product suite, and acquire Solaron [Sustainability Services] and GES International.”

The second executive notes there’s been considerable consolidation in the ESG space. For example, S&P Global acquired RobecoSAM’s ESG ratings business as well as Trucost; MSCI acquired RiskMetrics, GMI Ratings and Carbon Delta; Moody’s acquired a majority stake in Four Twenty Seven and in Vigeo Eiris; and Institutional Shareholder Services (ISS) has acquired Oekom Research, IW Financial, and South Pole Group’s Investment Climate Data division.

“Given the growth trajectory of ESG related investments and purchasing ESG data, this trend will continue for many more years,” says the manager.

There’s a Reason for It

Sustainalytics offers a range of services, including its flagship ESG Risk Ratings (which uses a 100 to 0 score), research reports, and data analytics. Its ESG ratings and research are available via Bloomberg, FactSet, IHS Markit, Style Analytics, Rimes, Glass Lewis, and Morningstar Direct via an API data feed. A spokesperson for Morningstar says these partnerships will remain in place. “These partnerships are important because they allow a broad array of investors to access ESG information through their preferred platforms, and Morningstar has had long-standing distribution relationships with many of these firms as well,” says the spokesperson.

Sustainalytics—which was created in 1992 as Jantzi Research—offers data on 40,000 companies globally and ratings on 20,000 companies in 172 countries. It has more than 650 people on staff, according to the release. In 2016, Morningstar and Sustainalytics first teamed up to create the Morningstar Sustainability Rating for Funds offering. Sustainalytics’ “company-level ESG data underpins Morningstar’s Sustainability Ratings.”

In a March 2020 report, consultancy SustainAbility released a research report of ESG data providers that included one-on-one interviews with 17 investors and a survey of 25 additional investors to get their views on current ESG ratings providers and the biggest trends facing the market.

Sustainalytics “was one of the most often-mentioned ratings by investors.” Respondents liked its broad range of coverage,” and one end-user noted that the vendor tried to apply “more materiality (and aligning more with the Sustainability Accounting Standards Board), which is a move in the right direction.” In SustainAbility’s investor survey, Sustainalytics’ ESG Risk Ratings was third for ESG ratings quality and first for ESG ratings usefulness; in SustainAbility’s “experts’ survey”, it came in third for ESG ratings quality and third for ESG ratings usefulness. (RobecoSAM and CDP were rated No. 1 or 2 when Sustainalytics came in third.)

The Next Episode

In the wake of the Covid-19 pandemic, trading firms are trying to better understand the ripple effects of the virus. Unlike in past financial crises, ESG is taking center stage, as social and governance data, specifically, is directly relevant to all companies weathering the coronavirus pandemic.

In a webinar interview with reporters after the Morningstar-Sustainalytics deal was officially announced, Kunal Kapoor, CEO of Morningstar, noted that in today’s uncertain, volatile markets, investors are looking for additional forms of insight.

“Obviously, today’s Covid-19 crisis is highlighting the further opportunity that is there for ESG data and research. Investors of all kinds have an interest in it,” he said. “So whether you’re looking for supply-chain data, whether you’re interested in environmental-leaning data, or labor practices, ESG is moving to the mainstream. From the Morningstar perspective, we think it’s a very important way that we can use it to empower investor success.”

As to synergies, Michael Jantzi, CEO of Sustainalytics, noted that the company can expand into the retail and wealth spaces with this acquisition with “new products and insights that the market just doesn’t have at its disposal at this point.”

“I think you’re going to see a lot more opportunities about integrating our ESG—the ESG research and insights—into the equity and credit-ratings work that Morningstar does in ways that we just haven’t seen in the market thus far,” he says. “I think we have a lot of opportunities in the index space.”

In that webinar, Kapoor said that it was “our intent to continue operating the Sustainalytics brand within the wider Morningstar family.”