Morningstar is doubling down on its commitment to sustainable investing research and analysis by acquiring the remaining 60% of the ESG analytics firm Sustainalytics that it didn’t already own.
As part of the acquisition announcement Tuesday morning, Morningstar chief executive officer Kunal Kapoor said the company expects environmental, social and corporate governance factors to become the center of client portfolios and a means for helping financial advisers keep clients focused on long-term goals.
“We’ve come a long way and we think the opportunity to continue helping to move ESG to the mainstream is only going to accelerate,” he said. “ESG is a way to allow the common investor and the wealth manager to embrace investing in a way that resonates.”
Morningstar has been working with Sustainalytics since 2016 and acquired a 40% stake in the Dutch-domiciled company in 2017 and has since beefed up its fund globe ratings, which are based on the ESG characteristics of each fund’s underlying portfolio holdings.
Asked why Morningstar, which already has a working relationship with Sustainalytics, decided to buy the whole company, Kapoor responded that, “This is absolutely a growth investment for Morningstar.”
“It puts ESG at the center of the long-term investment decision making process, and it will lead to an enhanced focus on driving ESG across Morningstar,” he added. “We will now have a really big canvas to paint on and opportunity across markets, and we’re going to touch them all.”
For his part, Sustainalytics chief executive Michael Jantzi said, “There is more you can do when you’re a single entity and an aligned firm.”
“It positions us well to take things to the next level,” added Jantzi, who said the ESG research demands are coming from “all corners of the world.”
Citing the ability to “leverage a large infrastructure” of Morningstar, Jantzi said, “The benefits and opportunities just get too obvious to ignore. This is clearly the right step.”
The acquisition, which is expected to close in the third quarter of this year, is expected to lead to new products, according to Jantzi, but he said, “It would be premature to talk about specific products. This is going to touch across a range of things.”
Bud Sturmak, co-chief investment officer at Perigon Wealth Management, said the acquisition of Sustainalytics, “not only completely validates the value of ESG and sustainable investing, it shows the magnitude of Morningstar’s anticipated flow in assets into this space over the next several years.”
In 2019, the net flows into the 300 mutual funds and ETFs categorized by Morningstar as applying ESG criteria exceeded $20 billion, which was nearly four times the net flows of 2018.
During the first quarter of this year, the average performance of funds with the highest globe ratings beat the benchmark and category averages as the Covid-19 pandemic led financial markets on a volatile ride.
“We appear to be in the early stages of a transformation of the investment landscape where ESG integrated products offer one of the only paths to better risk management and the opportunity to enhance long term returns,” Sturmak said. “The recent outperformance of ESG funds and ETFs in the Covid downturn are proving out the thesis. I think Morningstar clearly understands the trend and this certainly appears to be a smart business decision.”
Bob Smith, president and co-founder of Sage Advisory, agreed that Morningstar’s latest move is in line with growing investor appetite for ESG strategies.
“ESG portfolios are a fast-growing sector of the markets and are increasingly outperforming traditional portfolios and this means there is a growing appetite for ESG data as investors are looking for new investment channels during COVID-19,” he said. “Sage has worked with Sustainalytics for the last several years and its ESG data is among the best in the investment landscape.”
Jantzi will remain as CEO of Sustainalytics once the deal is complete, and the companies announced that there would be no disruption to the 650 Sustainalytics employees.