The directors present the strategic report for the year ended 31 December 2023.
As used in the annual report, "the Group” and "Morningstar" refer to Morningstar, Inc. and its subsidiary including joint ventures and associates. "The Company" and "SUK" refer to Sustainalytics UK Ltd.
Morningstar, Inc., the ultimate parent company, is a leading provider of independent investment research in North America, Europe, Australasia, and Asia, offering an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar serves advisors, asset managers, fixed-income security issuers and arrangers, private market/venture capital investors, workplace/retirement plan providers and individual investors. Morningstar also acquired Sustainalytics on 2 July 2020 leveraging its resources to support the integration of ESG data, research, and insights into products and services across Morningstar.
Morningstar Sustainalytics provides ESG data, research, analysis, and insights to institutional investors globally, covering equity, fixed income, and sovereign asset classes. Our flagship ESG Risk Rating allows investors to assess financially material ESG risks that could affect the long-term performance of their investments. Morningstar Sustainalytics also serves corporate issuers and banking institutions through its corporate solutions products and is a leading provider of green bond Second Party Opinions.
In addition to our risk management products, Morningstar Sustainalytics provides a range of sustainable-investing solutions for investors and financial professionals. We offer products such as our European Union Taxonomy solution, which are designed to enable investors to respond to emerging regulation surrounding sustainability reporting. Our data allows values-based investors to limit their exposure to controversial areas by applying exclusions to personalize their portfolios. Our active ownership data allows investors to understand if their sustainability funds are voting assets under management towards sustainability issues and whether a non-ESG fund is advancing other resolutions.
We’ve also expanded our data coverage and ratings to address specific sustainability themes. In 2023, we launched a Low-Carbon Transition Rating (LCTR) which provides a forward-looking, science-based evaluation of a company’s alignment with a net-zero pathway. The rating examines a firm's current management practices and answers the question: to what degree would the world warm if all companies behaved like the company examined?
In 2023, Morningstar announced a new strategic structure that more tightly connects the index capabilities of Morningstar Indexes with the ESG data, ratings, and research of Morningstar Sustainalytics.
Morningstar Sustainalytics operates on a subscription-based pricing model for its ESG research products, which supports a recurring revenue model. The corporate solutions unit deploys a model that combines one-time revenue with subscription-based recurring licensing revenue.
| 2023 | 2022 |
Revenue (£'000) | 12,407 | 11,082 |
Revenue growth (%) | 12% | 28% |
The Company views the changing regulatory environment and increased scrutiny facing the financial services industry, as a revenue generating opportunity to offer solutions and meet client needs. However, it is important that the Company understands these changes and incorporates them in their latest product offerings.
Given market innovation within our industry, we are aware of the risks associated with competitor advancements. We continue to monitor market trends with regards to new technologies and product development and feel confident that we will invest as needed to keep advancing our offerings within this fast paced industry.
Revenue for the year increased from prior year to £12.4m (2022: £11.1m). At year end, the company had cash at bank of £8.9m (2022: 8.1m) and net assets of £2.9m (2022: £1.4m).
On behalf of the board
The directors present their annual report and financial statements for the year ended 31 December 2023.
The directors who held office during the year and up to the date of signature of the financial statements were as follows:
The results for the year are set out on page 10.
No ordinary dividends were paid. The directors do not recommend payment of a final dividend.
The Company does not have a significant exposure to market or liquidity risk given the nature of the financial instruments currently held.
The Company is exposed to fair value interest rate risk on its fixed rate borrowings and cash flow interest rate risk on floating rate deposits, bank overdrafts and loans. The Company uses interest rate derivatives to manage the mix of fixed and variable rate debt so as to reduce its exposure to changes in interest rates.
The Company’s principal foreign currency exposures arise from trading with overseas companies. Company policy permits but does not demand that these exposures may be hedged in order to fix the cost in sterling. This hedging activity involves the use of foreign exchange forward contracts.
The Company is exposed to credit risk from other group entities and external debtors because any transactions with Group companies will be between entities which are 100% owned by Morningstar, Inc. the directors feel that risks are negligible.
Risk from external debtors is managed through regular credit control and review of debts with management. All clients are well established, and bad debts are minimal. No bad debt provision is recorded on 31 December 2023 (2022: 152k GBP (1.35% of revenue)).
There have been no events of significant affecting the Company since the year end date.
Sustainalytics UK Ltd (‘SUK’) has a clear strategic focus on servicing financial advisers with high quality investment solutions. The strategy across the global group continues to be aligned, with our robust valuation driven long term investment process being at the heart of everything we do.
In 2023 we delivered consistent returns with the industry and consequently protected capital for clients in very challenging market and economic conditions. These returns were the product of our disciplined investment approach supported by Morningstar’s global research capability. These returns coupled with our ongoing support for advisers and end-investors have led to increased capital flows into our funds and managed portfolios.
The Morningstar group has made ESG (Environmental, Social and Governance) a priority for considering in our processes and propositions.
Saffery LLP have expressed their willingness to continue in office.
Basis for opinion
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or collectively, may cast significant doubt on the company's ability to continue as a going concern for a period of at least twelve months from when the financial statements are authorised for issue.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
Other information
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of our audit:
the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and
the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.
As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the directors are responsible for assessing the company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or have no realistic alternative but to do so.
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The specific procedures for this engagement and the extent to which these are capable of detecting irregularities, including fraud are detailed below.
Identifying and assessing risks related to irregularities:
We assessed the susceptibility of the company’s financial statements to material misstatement and how fraud might occur, including through discussions with the directors, discussions within our audit team planning meeting, updating our record of internal controls and ensuring these controls operated as intended. We evaluated possible incentives and opportunities for fraudulent manipulation of the financial statements. We identified laws and regulations that are of significance in the context of the company by discussions with directors and by updating our understanding of the sector in which the company operates.
Laws and regulations of direct significance in the context of the company include The Companies Act 2006 and UK Tax legislation.
Audit response to risks identified:
We considered the extent of compliance with these laws and regulations as part of our audit procedures on the related financial statement items including a review of financial statement disclosures. We reviewed the company's records of breaches of laws and regulations, minutes of meetings and correspondence with relevant authorities to identify potential material misstatements arising. We discussed the company's policies and procedures for compliance with laws and regulations with members of management responsible for compliance.
During the planning meeting with the audit team, the engagement partner drew attention to the key areas which might involve non-compliance with laws and regulations or fraud. We enquired of management whether they were aware of any instances of non-compliance with laws and regulations or knowledge of any actual, suspected or alleged fraud. We addressed the risk of fraud through management override of controls by testing the appropriateness of journal entries and identifying any significant transactions that were unusual or outside the normal course of business. We assessed whether judgements made in making accounting estimates gave rise to a possible indication of management bias. At the completion stage of the audit, the engagement partner’s review included ensuring that the team had approached their work with appropriate professional scepticism and thus the capacity to identify non-compliance with laws and regulations and fraud.
There are inherent limitations in the audit procedures described above and the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely we would become aware of it. Also, the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting one resulting from error, as fraud may involve deliberate concealment by, for example, forgery or intentional misrepresentations, or through collusion.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.
Use of our report
This report is made solely to the company's member in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's member those matters we are required to state to the member in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's member, for our audit work, for this report, or for the opinions we have formed.
The income statement has been prepared on the basis that all operations are continuing operations.
Sustainalytics UK Limited is a private company limited by shares incorporated in England and Wales. The registered office is 71 Queen Victoria Street, London, EC4V 4BE.
The financial statements are prepared in sterling, which is the functional currency of the company. Monetary amounts in these financial statements are rounded to the nearest £.
This Company is a qualifying entity for the purposes of FRS 102, being a member of a group where the parent of that group prepares publicly available consolidated financial statements, including this company, which are intended to give a true and fair view of the assets, liabilities, financial position and profit or loss of the group. The Company has therefore taken advantage of exemptions from the following disclosure requirements:
Section 7 ‘Statement of Cash Flows’: Presentation of a statement of cash flow and related notes and disclosures;
Section 11 ‘Basic Financial Instruments’ and Section 12 ‘Other Financial Instrument Issues: Interest income/expense and net gains/losses for financial instruments not measured at fair value; basis of determining fair values; details of collateral, loan defaults or breaches, details of hedges, hedging fair value changes recognised in profit or loss and in other comprehensive income;
Section 26 ‘Share based Payment’: Share-based payment expense charged to profit or loss, reconciliation of opening and closing number and weighted average exercise price of share options, how the fair value of options granted was measured, measurement and carrying amount of liabilities for cash-settled share-based payments, explanation of modifications to arrangements;
Section 33 ‘Related Party Disclosures’: Compensation for key management personnel.
The financial statements of the Company are consolidated in the financial statements of Morningstar Inc. The consolidated financial statements of Morningstar Inc are available from 22 West Washington Street, Chicago, Illinois, United States, 60602.
Where contracts are performed for services provided over a period of time ("recurring contracts"), revenue is recognised on a straight-line basis over the term of the contract.
The gain or loss arising on the disposal of an asset is determined as the difference between the sale proceeds and the carrying value of the asset, and is credited or charged to profit or loss.
Basic financial assets, which include debtors, are initially measured at transaction price including transaction costs and are subsequently carried at amortised cost using the effective interest method unless the arrangement constitutes a financing transaction, where the transaction is measured at the present value of the future receipts discounted at a market rate of interest. Financial assets classified as receivable within one year are not amortised.
Other financial assets, including investments in equity instruments which are not subsidiaries, associates or joint ventures, are initially measured at fair value, which is normally the transaction price. Such assets are subsequently carried at fair value and the changes in fair value are recognised in profit or loss, except that investments in equity instruments that are not publicly traded and whose fair values cannot be measured reliably are measured at cost less impairment.
Financial assets are derecognised only when the contractual rights to the cash flows from the asset expire or are settled, or when the company transfers the financial asset and substantially all the risks and rewards of ownership to another entity, or if some significant risks and rewards of ownership are retained but control of the asset has transferred to another party that is able to sell the asset in its entirety to an unrelated third party.
Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.
Basic financial liabilities, including creditors, bank loans, loans from fellow group companies and preference shares that are classified as debt, are initially recognised at transaction price unless the arrangement constitutes a financing transaction, where the debt instrument is measured at the present value of the future payments discounted at a market rate of interest. Financial liabilities classified as payable within one year are not amortised.
Debt instruments are subsequently carried at amortised cost, using the effective interest rate method.
Trade creditors are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Amounts payable are classified as current liabilities if payment is due within one year or less. If not, they are presented as non-current liabilities. Trade creditors are recognised initially at transaction price and subsequently measured at amortised cost using the effective interest method.
Derivatives, including interest rate swaps and forward foreign exchange contracts, are not basic financial instruments. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured at their fair value. Changes in the fair value of derivatives are recognised in profit or loss in finance costs or finance income as appropriate, unless hedge accounting is applied and the hedge is a cash flow hedge.
Debt instruments that do not meet the conditions in FRS 102 paragraph 11.9 are subsequently measured at fair value through profit or loss. Debt instruments may be designated as being measured at fair value through profit or loss to eliminate or reduce an accounting mismatch or if the instruments are measured and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy.
Financial liabilities are derecognised when the Company’s contractual obligations expire or are discharged or cancelled.
Equity instruments issued by the company are recorded at the proceeds received, net of transaction costs. Dividends payable on equity instruments are recognised as liabilities once they are no longer at the discretion of the company.
In the application of the Company’s accounting policies, the directors are required to make judgements, estimates and assumptions about the carrying amount of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised where the revision affects only that period, or in the period of the revision and future periods where the revision affects both current and future periods.
There are no critical accounting judgements or sources of estimation uncertainty.
An analysis of the Company's turnover is as follows:
The average monthly number of persons (including directors) employed by the company during the year was:
Their aggregate remuneration comprised:
In the prior year, all employees were transferred to Morningstar UK Limited and Morningstar Europe Limited.
Wages and salaries in the current year relate to temporary staff costs.
The actual charge for the year can be reconciled to the expected charge for the year based on the profit or loss and the standard rate of tax as follows:
In the Spring Budget 2021, the UK Government announced that from 1 April 2023 the corporation tax rate would increase to 25% (rather than remaining at 19%, as previously enacted). This new law was substantively enacted on 24 May 2021. For the financial year ended 31 December 2023, the current weighted averaged tax rate was 23.52%.
Deferred taxes at the balance sheet date have been measured using these enacted tax rates and reflected in these financial statements.
In October 2021, the Organization for Economic Co-operation and Development (OECD) agreed to a two-pillar approach to global taxation focusing on global profit allocation (Pillar One) and a global minimum tax rate (Pillar Two). In December 2022, the EU member states agreed to implement the OECD’s global corporate minimum tax rate of 15% under Pillar Two which is effective from 1 January 2024. Consequently, on 11 July 2023, Finance (No. 2) Act 2023 was enacted in the UK, introducing a global minimum effective tax rate of 15%. The legislation implements a domestic top-up tax and a multinational top-up tax, effective for accounting period starting on or after 31 December 2023. This legislation represents a significant change in the international tax regime and could result in increases to the Company’s effective tax rate as a result of the imposition of minimum taxes. The Company is one of several UK affiliates under common ownership of Morningstar, Inc; the ultimate parent based in the United States (the ‘Group’). The Company and Group are continuing to monitor developments and further administrative guidance by OECD and the United Kingdom in addition to evaluating the potential impact of the Pillar Two tax rules on the financial statements of the Company for future periods.
The following are the deferred tax liabilities and assets recognised by the Company and movements thereon:
The shares have attached to them full voting, dividend and capital distribution (including on winding up) rights; they do not confer any rights of redemption.
Transfers from other reserves to profit and loss reserves are related to share options that were settled in 2020.
Sustainalytics UK Limited may be involved from time to time in commercial disputes and legal proceedings that arise in the normal course of its business. While it is difficult to predict the outcome of any particular dispute or proceeding, Sustainalytics UK Limited does not believe the result of any of these matters will have a material adverse effect on its business, operating results, or financial position.
The following amounts were outstanding at the reporting end date:
The following amounts were outstanding at the reporting end date:
The Company is wholly owned subsidiary of Sustainalytics BV, a company registered in The Netherlands. The director considers that the ultimate parent company is Morningstar Inc, a company registered in the United States, following the acquisition of Sustainalytics Holding BV on 2 July 2020. There is no ultimate controlling party.
Copies of the accounts of Morningstar Inc are available from 22 West Washington Street, Chicago, Illinois, United States, 60602.