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September 23, 2009
Jantzi—Sustainalytics Merger the Most Recent as the Consolidation of ESG Research Sector Continues
    by Robert Kropp

Three representatives from the ESG research sector speak with about the factors contributing to the number of mergers in a rapidly maturing field.

The first of the six Principles for Responsible Investment (PRI), which have thus far been adopted by 573 signatories, states, "We will incorporate environmental, social, and governance (ESG) issues into investment analysis and decision-making processes." Over the years, the need on the part of investors for effective ESG research has led to the founding of dozens of small ESG investment research firms, often focusing on regional considerations.

In recent years, a trend toward consolidation in the industry has been evident, most recently in the merger of Toronto-based Jantzi Research with Sustainalytics, based in Amsterdam. Michael Jantzi, who founded Jantzi Research in 1992, will serve as CEO of the company, which will operate as Sustainalytics globally and as Jantzi-Sustainalytics in North America. spoke with Jantzi about the merger, as well as the trend toward consolidation in the ESG research sector in general.

"We've built a strong business in the Canadian market, and provided global solutions to our clients through the SiRi network," Jantzi said. "From a Canadian perspective, we wanted to become more of a global player. This merger is a result of a relationship with Sustainalytics formed through the SIRI network."

The SiRi Network, which was formed in 2000 as a coalition of eleven Socially Responsible Investment (SRI) research companies, ceased operations in 2008.

"We've had a long relationship with Sustainalytics," Jantzi continued. "We've worked together with their team for ten years, and there's a lot of trust. We share similar cultures and a similar focus in our work."

"We're building a global brand, and are providing global solutions to our clients, which are built upon strong regional knowledge of the market."

Asked about some of the factors common to ESG providers that recommended the merger, Jantzi said, "The merger makes sense from an economic standpoint. If we had remained a regional entity, we might have had problems competing on a global scale five years from now. Today, there are cost rationalizations, but this merger is a growth story."

Jantzi pointed out some of the strengths that the merger would bring to the combined company's services.

"The primary difference between European and North American research providers is their deeper experience with institutional investors and pension plans," he said. "We haven't seen as much movement on ESG by institutional investors in North America, and Sustainalytics has a lot of experience providing institutional investors with research and analysis in line with the UN Global Compact.

The Global Compact is an initiative that assists business in managing the risks and opportunities associated with environmental, social and governance (ESG) factors.

In addition, Jantzi said, "There is a long history of experience with ESG in the fixed income market in Europe, and with the merger we now have a well-developed suite of ESG solutions in that space."

"The world within the ESG sector is consolidating, and I expect the trend will continue," he concluded.

Another significant merger of ESG research providers occurred in February, when RiskMetrics Group acquired Innovest Strategic Value Advisors. asked Ran Fuchs, the global head of the Credit Risk Business for RiskMetrics, about the impact of that merger, months after its completion.

"At RiskMetrics, we see sustainability as one of the long-term risks associated with a company," Fuchs said. "Not looking at the sustainable factors can lead to a huge concentration of risk, as is seen in the current economic crisis."

"Sustainable considerations affect proxy voting as well," Fuchs continued, pointing out that the combined company is the largest provider of proxy research and advisory services in the sector.

"Synergy in evaluating risk and governance, as well as the benefits of economy of scale, made our acquisition of Innovest very attractive."

Asked to elaborate on economies of scale as they factored into RiskMetrics' decision to acquire Innovest, Fuchs said, "In this industry, you see half a dozen large players, another half a dozen slightly smaller companies, and dozens of small players. It's very difficult for the small companies to grow organically. It's very difficult to scale the business without very expensive technology."

"The industry remains fragmented at the moment," Fuchs continued. "One problem that small research providers face is coverage. As an SRI investor, you are already constricting your world. You want to restrict your world because of your policies, not because of coverage."

"As much as they want to, small companies cannot provide breadth of coverage, because of scalability and maximum use of technology," he added. "Just covering a small part of the world requires investing a lot of resources."

One major player in the ESG research field that has not engaged in mergers recently is KLD Research & Analytics. According to Thomas Kuh, Managing Director of KLD Indexes, KLD has sought to expand its global presence by such partnerships as that with FTSE Group. In August, the family of 16 indexes developed by KLD was rebranded as FTSE KLD Indexes.

Kuh talked with about some of the changes that have come about in the ESG research sector, how KLD has responded to those changes, and some of the factors that are driving the trend toward consolidation.

"When companies were reporting very little on ESG factors, a lot of our value came from collecting information that was hard to find," he said. "As the economics of data changed with the willingness of many companies to share more information, our focus has increasingly shifted to the analysis of that information."

Kuh mentioned the entrance of the information industry giant Bloomberg into the field as a factor in KLD's increasing focus on analysis. "KLD is not going to compete with Bloomberg on the acquisition of information, so what we focus on is our analysis of the ESG research data we compile," he said.

Kuh pointed out two primary factors leading to the trend toward consolidation. Inn the aftermath of the economic crisis, he said, "The financial services sector has shrunk as a result, and budgets are limited. Where companies may have sought research from several different sources, their budgets no longer allow them to do so."

Furthermore, according to Kuh, "Key elements of the ESG agenda are now accepted, which has created a growing demand for assessment of risk, broader coverage into such areas as emerging markets, coverage of more asset classes, and a higher quality of research. This puts a lot of pressure on smaller firms, and has placed a greater emphasis on scale."

Common themes that emerged from each of the conversations strongly suggest that consolidation within the ESG research sector is likely to continue. The field grew rapidly in the 1990s, when investors began to increasingly request such research while companies were still reluctant to report on what they claimed were extra-financial issues. As corporate reporting improved, and powerful institutional investors and pension plans called for research on a global scale, many regional providers had to find partners with whom they could broaden their research offerings.

Finally, the current economic crisis has resulted in smaller budgets devoted to ESG research among companies in a shrinking financial industry, leaving the larger ESG research providers better positioned to deliver their services within an effective economy of scale.


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