Breakingviews - Deutsche Boerse jumps on ESG train with ISS deal

Traders prepare before the opening of the German stock exchange in front of the empty DAX board, at the stock exchange in Frankfurt, Germany, June 24, 2016 after Britain voted to leave the European Union in the EU BREXIT referendum.

MILAN (Reuters Breakingviews) - Deutsche Boerse Chief Executive Theodor Weimer has finally clinched a big deal. After several false starts, the German exchange operator on Tuesday announced it is buying 80% of Institutional Shareholder Services, for about $1.8 billion. While the U.S. group’s business advising investors on how to vote at shareholder meetings is unexciting, its ability to score companies on their environmental, social and governance credentials offers growth potential. It’s also an increasingly crowded field.

The acquisition is Deutsche Boerse’s biggest since 2007, and the largest clinched under Weimer’s watch. Despite a promise to expand through M&A, the $30 billion company this year missed out on Borsa Italiana, which went to rival Euronext. Last year’s attempt to buy foreign exchange trading platform FXall from Refinitiv for around $3.5 billion also went up in smoke after the London Stock Exchange Group swooped on the data company.

The ISS purchase does not come cheap. Deutsche Boerse’s offer values the U.S. company at $2.3 billion, or about 8 times this year’s expected revenue of $280 million. That’s more than three times the $720 million current owner Genstar Capital paid for the business in 2017, though ISS has made acquisitions since then. There’s not much scope for cost savings, but the German group expects to bring in additional revenue which will add 15 million euros ($18 million) to EBITDA by 2023. That’s equivalent to 18% of ISS’s expected EBITDA this year.

Much of that revenue will come from using ISS’s intelligence on corporate sustainability to tap into the vogue for socially responsible investing. Assets held in exchange-traded funds and index trackers that meet ESG criteria will boom from $170 billion in May to $1.3 trillion by 2030, predicts State Street Global Advisors. Deutsche Boerse could use ISS data to build green and socially responsible indexes, as well as investment products that trade on its platforms.

However, Deutsche Boerse faces stiff competition. The likes of MSCI, Sustainalytics and S&P Global already compile indexes that identify stocks with high ESG marks. U.S. fund management behemoth BlackRock is also looking to build portfolios based on ethical criteria, rather than just market capitalisation. For Deutsche Boerse, jumping on the ESG train looks sensible. But it won’t be an easy ride.


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