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Consolidation among ESG data providers continues amid COVID-19 pandemic

The rush to acquire companies that provide environmental, social and governance data continues as the COVID-19 pandemic brings corporate sustainability into sharper focus for companies and investors worldwide.

As sustainable investing has become increasingly mainstream in recent years, rating agencies and index providers have been some of the most acquisitive players buying up smaller firms that provide ESG ratings and research — a trend that experts say is likely to continue.

"It does seem to be moving toward an oligopoly," said John Quealy, chief investment officer of Trillium Asset Management LLC, a firm that uses ESG factors to manage about $3.2 billion in assets. "It's a large opportunity."

The latest move in the space came April 21, when Morningstar Inc. announced that it was acquiring the 60% of Sustainalytics BV that it did not already own in a deal that values the Netherlands-based ratings and research group at about €170 million.

Chicago-based Morningstar first took a 40% stake in Sustainalytics in 2017. Its latest deal is expected to close in the third quarter, putting it in charge of a platform that has ESG-related data on more than 40,000 companies worldwide and ratings on 20,000 entities.

"We think the opportunity to continue to help ESG move to the mainstream is only going to accelerate," Morningstar CEO Kunal Kapoor said in a recent webinar to discuss the deal. "Obviously, today's COVID-19 crisis is highlighting the further opportunity that is there for ESG data and research."

Several big financial companies have looked to build out their ESG data offerings through M&A in recent years. Moody's Corp. struck three separate ESG deals in 2019, including acquisitions of Vigeo Eiris, Four Twenty Seven Inc. and a minority stake in SynTao Green Finance. Institutional Shareholder Services Inc., the U.S.-based proxy advisory giant, has purchased four separate ESG data and research providers since 2015. And MSCI Inc. and S&P Global Inc., the parent company of S&P Global Market Intelligence, have each announced several ESG-related purchases of their own.

For years, investors have been paying increasing attention to ESG issues like corporate board diversity, climate change and the way companies treat their employees. Sustainably invested assets under management swelled to $12 trillion at the beginning of 2018, according to the U.S. Forum for Sustainable and Responsible Investment.

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ESG is taking on newfound importance as the coronavirus crisis upends businesses and workers, said Jeff McDermott, managing partner of sustainable investment bank Nomura Greentech Capital Advisors LLC. In an interview, McDermott described the COVID-19 crisis as a potential watershed moment as companies realize the importance of how they treat their workforces and investment managers acknowledge the risks of fossil fuel investing.

"If you look at oil and gas right now, I just think this was the nail in the coffin for fossil fuel investments," McDermott said.

The appetite for ESG data is fueled in part by a continued lack of standardization. The U.S. has no federally mandated regulations that specify how a company is supposed to report ESG data. Organizations like the Sustainability Accounting Standards Board have attempted to fill that void by creating ESG reporting guidelines for companies, but adoption remains spotty across corporate America. As a result, the ESG data that companies report can be inconsistent, difficult to compare and, in some instances, greenwashed.

ESG data and ratings providers have acted as standard-bearers of sorts by taking in company-specific data and streamlining that for clients. However, a growing portion of the investment community has complained in recent years that ESG research and ratings vary substantially across providers.

If a reporting framework was introduced in the U.S. like the one the European Commission rolled out last year, McDermott said ESG research would likely shift in-house for many companies.

"As ESG data becomes more transparent, investment managers will be able to do ESG ratings more directly," McDermott said. "Those people who are providing the data will need to pivot their business models."