Analysis: Morningstar underlines its commitment to responsible investment with Sustainalytics stake

Acquisition of 40% stake in ESG research house is a statement of intent

If Morningstar wasn’t quite a member of the sustainable investment fraternity before, it definitely is now with its acquisition of a 40% stake in Sustainalytics.

In fact, at a stroke the NASDAQ-listed household name positions itself at the heart of the sector and the deal consolidates the partnership between the two firms on ESG fund ratings.

As RI has reported, the methodology for these ratings has caused alarm in the sustainable investment sector – but the inconvenient truth (for some) is that Morningstar has now demonstrated beyond any doubt that it is here for the long haul.

Part of the deal will see Morningstar’s Steven Smit join the Sustainalytics board. A former Robeco analyst, he has been on the advisory board of the VBDO, the Dutch sustainable investment body, since June 2015.

He will be rubbing shoulders with a ‘who’s who’ of the sector on the Sustainalytics board. It’s chaired by Glen Saunders, the former interim chairman of the Principles for Responsible Investment who also chaired the responsible investment committee at the New Zealand Super Fund.

Other board members (at the time of writing) include the likes of Else Bos, the PGGM chief who is moving to the Dutch central bank, Toronto-based social investor Alan Broadbent and Triodos Germany MD Georg Schürmann. RI understands that PGGM, the Dutch healthcare pension investment giant, holds around 16% of Sustainalytics.

Also directors are Singapore-based Melissa Brown, the former Executive Director of ASrIA, the Association for Sustainable & Responsible Investment in Asia which merged with the PRI in 2015, and Michael Musuraca, the former PRI director and New York City Employees Retirement System trustee now with middle-market private equity specialist Blue Wolf.

It’s a deal being hailed by founding shareholder Triodos, which said today it has sold its 47% shareholding, as heralding a “new stage of growth” for Sustainalytics.

CEO Peter Blom said the Morningstar link would “significantly strengthen Sustainalytics’ position in the global investment community”.

One industry player told RI it underlined the fact that the ESG research space is now really a two-horse race between Sustainalytics and MSCI and that everyone else is an “also-ran”.

The price of the purchase and the nature of the future relationship between the two companies are not being revealed, which may be of concern in a sector built on transparency and disclosure.But the fact the price isn’t being disclosed may suggest the sum wasn’t “material” for Morningstar, which had $798.6m of revenue in 2016.

The purchase, which no one is suggesting is a merger or acquisition, does however come as Morningstar is digesting its $180m acquisition of the Pitchbook venture capital, private equity, and M&A database business last year.

Morningstar is nothing if not mainstream; it estimates that it reaches some 60% of US-based advisors through Morningstar Advisor Workstation and 9% through Morningstar Office. It all comes as new CFO Jason Dubinsky, who joins from Walgreens Boots Alliance, started this week.

“A new stage of growth”

Chicago-based Morningstar, unusually, holds a monthly investor Q&A where it answers questions via SEC filings. The most recent Q&A, on July 7, tackled its ‘economic moat’ and declining memberships for the site, which the company said reflected the move toward passive investing that has “shifted some investor focus from investment selection” to portfolio planning and asset allocation.

Other challenges that have been highlighted include uncertainty over the US Department of Labor (DOL) Fiduciary Rule, which Morningstar acknowledges saw some clients “freeze”.

And the company has come under pressure recently over its acquisition strategy, with Eugene Krishnan of Lazard remarking during the AGM in May about the Pitchbook deal’s “empty calories”. Morningstar responded saying it’s “growing intrinsic value rapidly and should deliver satisfactory returns to shareholders”.

Also at the AGM, Head of Advisor Solutions Tricia Rothschild expanded on the rationale for entering the sustainability ratings arena, saying it is a way to respond to investors’ needs.

“This has been growing in significance globally with 20% of global AUM invested in sustainable mandates and having a sustainability asset component, and also, in our products, where we have seen just in the past two months, for example, 26% of our Direct users have been screening on our new sustainability metrics,” she said.

It was an area where it has “an opportunity to create a language through which investors can understand”. It will be up to everyone in the sector to makes sure this takes place.