For super funds and their advisers

… as Morningstar buys Sustainalytics

Kunal Kapoor

by David Chaplin

Morninstar, formerly a minority shareholder in the world’s largest ESG research house, Sustainalytics, has bought the whole company for an extra A$300 million. The deal gives Morningstar a leg-up into the institutional space, which has been a weakness for the firm.

Morningstar announced last week that it was acquiring the outstanding 60 per cent of Sustainalytics, which has an Australian and New Zealand presence, thanks to Morningstar’s support. Sustainalytics provides ESG research on both stocks and managed funds. It is having increasing competition, however, from the likes of West-Australian company ‘Sustainable Platform’.

Kunal Kapoor, Morningstar’s chief executive, said in a release that the Sustainalytics takeover would “fast track our ability to put independent, sustainable investing analytics at every level – from a single security through to a portfolio view – in the hands of all investors”.

“Morningstar helped democratise investing, and we will do even more to extend Sustainalytics’ mission of contributing to a more just and sustainable global economy,” Kapoor said.

Based in the Netherlands, Sustainalytics has grown from scratch more than 25 years ago to a global enterprise with more than 650 employees spread across 16 locations. The firm has been one of the major beneficiaries of the now-mainstream ESG trend that is driving an insatiable appetite for appropriate data among investors.

But the proliferation of ESG data vendors – and subsequent ratings systems – has not been without critics. For instance, a recent study by European consultancy firm, Opimas, found inconsistencies between ESG methodologies, diverse ratings models and flawed data could provoke a “backlash”.

Similarly, this February a Research Affiliates report comparing about 70 ESG ratings firms labelled the sector “highly heterogenous”.

According to the Morningstar release, Sustainalytics “offers data on 40,000 companies worldwide and ratings on 20,000 companies and on 172 countries”. The purchase, to be funded by a mixture of cash and debt, would have a “minimal” bottom line impact, Morningstar says, bar the effect of “purchase accounting and deal-related expenses, as the company expects to incur costs to integrate certain capabilities and fund growth opportunities”.

Morningstar has been in an acquisitive mood of late, snapping up the Canadian financial planning software firm PlanPlus Global (which owns the Finametrica risk-profiling tool) this March after adding a similar Australian business, AdviserLogic, to its stable last November.

The group also picked up niche Australian investment trade publication, Cuffelinks, in December 2019, and US annuity research firm, Heuler Analytics, this February. Earlier in 2019, Morningstar paid almost US$670 million for DBRS – the world’s “fourth-largest credit ratings agency”.

As at the end of 2019, the Nasdaq-listed research business reported cash holdings of about US$370 million against total liabilities of US$1.3 billion. Morningstar generated free cashflow of close to US$250 million during calendar year 2019, according to published accounts

Also last week, the world’s fifth-largest custodian, BNP Paribas Securities Services, inked a deal with the world’s largest fund manager, BlackRock, to collaborate on a “fully integrated end-to-end investment management solution”.

According to a joint statement, under the arrangement, BNP Paribas would combine its “middle office, fund administration and custody services” with the BlackRock investment risk management platform, Aladdin.

“As part of the alliance, BNP Paribas Securities Services will be leveraging Aladdin to perform middle office outsourced services maintaining Aladdin’s Investment Book of Record as the trusted source of data,” the release says.

BNP Paribas already works with BlackRock on the eFront Invest alternative assets platform. BlackRock bought eFront last year.

Aladdin is BlackRock’s highly influential “end-to-end investment management and operations platform”, with about US$20 trillion flowing through its veins.

Earlier in April, BlackRock also signed an agreement with the world’s biggest software firm, Microsoft, to host Aladdin on the Azure cloud platform.

“By bringing Aladdin to the cloud, Microsoft will support BlackRock in further enhancing its client experience while also enabling continuous innovation in the financial services industry,” Judson Althoff, Microsoft executive vice president worldwide commercial business, said in a release.

The respective software and investment behemoths would further “work together on initiatives that leverage technology to improve and expand sustainability data and analytics”, the joint statement says.

“The lack of standardized, high-quality data remains a significant hurdle in understanding the impact of sustainability-related risk on investment portfolios and company performance,” the release says. “Big data, machine learning and AI can all play a critical role in improving access to and the impact and quality of sustainability data.”

– Investment News NZ, with Investor Strategy News

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