Morningstar, the Chicago-based financial research and fund ratings firm, has taken control of Sustainalytics, the ESG research firm, buying the 60% of shares it didn’t own in a transaction valuing Sustainalytics at €170m ($184m).
Morningstar, led by CEO, Kunal Kapoor, will pay an up-front €55m in cash for the remaining equity and make additional cash payments in 2021 and 2022 based on a multiple of Sustainalytics’ previous fiscal year revenues. It will fund the transaction with a mix of cash and debt and expects the deal to close early in the third quarter of 2020.
Michael Jantzi, one of the founders and current CEO of Sustainalytics and the rest of the company’s management team and 650 employees will stay with the company.
Morningstar bought 40.3% of Sustainalytics in July 2017. At the time, the Sustainalytics executive team took a minority equity stake in the company.
The two firms had been working together prior to that via a strategic collaboration announced in August 2015 to produce the Morningstar Sustainability Rating for mutual and exchange-traded funds.
The new majority buy-out means that long-term Dutch shareholders in Sustainalytics, PGGM, the €252bn pensions asset manager, and ABN Amro MeesPierson Private & Trust Holding, sell stakes of 9.5% and 4% respectively. Both were founder companies of Dutch Sustainability Research (DSR) started in 2002 which merged in 2006 with Jantzi Research, launched by Michael Jantzi in Toronto back in 1992, forming the two main entities of Sustainalytics.
Other block shareholders selling include a 17.6% stake held by related equity partners of Jantzi Research including Michael Jantzi, and a 14.5% block held by senior management and executives at Sustainalytics under the name of Stichting Administratiekantoor Sustainalytics Holding.
An employee stock option plan (ESOP) held 8.1% of the stock.
Other shareholders include Melissa Brown, a board member at Sustainalytics and a well-known sustainable finance investor, who is selling a 0.6% stake taken when Sustainalytics bought Singapore-based, Responsible Research, back in 2012.
Kapoor said Morningstar’s buy-out of Sustainalytics, despite the coronavirus crisis and market downturn, reflected a long-term strategy of pursuing growth in secular trends that are “shaping the investment landscape and investor behavior”.
He said: “The coronavirus crisis is teaching us a lot of lessons, but one of them is that ESG data will become even more relevant, particular in areas like supply chain management and the environment.”
He said Morningstar’s expected debt leverage at the close of the transaction will not be materially different than on a standalone basis.
Kapoor said it was important that Sustainalytics CEO Michael Jantzi, the company leadership and staff were all staying in place, and this was first priority.
However, he noted that the company was exploring potential tie-ins with its Toronto-based DBRS Morningstar credit ratings business: “ This is a wonderful chance to apply ESG further into the area of credit ratings where it is still fairly novel.”
Another area of business development, he said, would be retail investor engagement with savings: “Investment needs to resonate more personally with people, and we see ESG as another huge area of opportunity in the personalisation of finance.”
Michael Jantzi told RI that areas for expansion were clearly in the private wealth, retail and wholesale investment client segments.
And he sees potential in applying ESG more deeply in private markets, noting that Morningstar owns Pitchbook, the private market deal research platform: “We’re excited to see what we can do there.”
Sustainalytics is a Dutch-domiciled company, headquartered in Amsterdam and Toronto, Canada, with offices in 16 locations.
Morningstar has operations in 27 countries and also offers investment management services through its advisory subsidiaries for approximately $233bn in assets.