Column: MSCI shares will show the future of ESG: Ross Kerber

Moodys

11/09/2024 13:00

(The opinions expressed here are those of the author, a
columnist for Reuters. This column is part of the weekly Reuters
Sustainable Finance newsletter, which you can sign up for here.)
    By Ross Kerber
       Sept 11 (Reuters) - For those with a strong view on
whether environmental, social and governance factors will remain
a major investment trend, buying or shorting shares of MSCI
 MSCI.N  looks like a good way to express your conviction.
    The New York company known for its big index business also
operates a major "ESG and Climate" segment that provides things
like ratings on key issues companies face and research to help
investors pick holdings within their guidelines. 
    But growth of the segment's operating revenue fell to 12% in
the second quarter, down steadily from 50% in the first quarter
of 2022. 
    Analysts attribute the slowdown to the broader challenges
facing sustainable finance including pushback from U.S.
Republican politicians, and questions about whether new
regulations will come into force.
    The lesser revenue growth has dampened enthusiasm for MSCI
shares, said analyst Craig Huber of Huber Research Services.
"Investors used to give a big multiple to that business," he
said of the segment. "Now that it's decelerated to around the
growth rates of the rest of MSCI's business, there's less
excitement about it," Huber told me.
    Cost pressures on companies are also rising, squeezing their
research budgets, said analyst Keith Housum of Northcoast
Research. And, he noted, many ESG-related investments have
underperformed. "I think the bloom is coming off the rose for
ESG-related investments, as investors are looking at performance
first," he said.
    Shares in MSCI are basically unchanged so far in 2024, while
the S&P 500 Index  .SPX  of which it is part is about up 15%.
    Yet MSCI isn't pulling back from ESG. Speaking at the
Barclays Global Financial Services Conference on Monday, MSCI
CFO Andrew Wiechmann said big opportunities remain. 
    Markets, he said, "need common frameworks to think about
sustainable investing. They need the underlying data to
understand where those risks are and how they navigate them. And
then they need the tools and ultimately, the products that allow
them to put money to work to take advantage either to manage
risk or capitalize on opportunities."
    "We think there's a long way to go," although
quarter-by-quarter growth will not be linear, he said.
    For instance he cited a partnership that MSCI struck in July
that gives Moody's  MCO.N  access to MSCI data for products
aimed at banking, insurance and corporate customers. Moody's
will replace some of its own proprietary content with MSCI's ESG
content, Wiechmann said. 
    European Union regulations have pressed companies for more
precision about their ESG claims, heightening the need for good
data. But U.S. regulators have stayed a long-awaited rule on
corporate climate disclosures pending a court challenge, and
have yet to finalize ESG disclosure rules for funds and
financial advisors.
    It's fitting for MSCI to serve as a proxy for the future of
ESG investing. A March report from researcher Opimas found MSCI
had 25% of the $1.9 billion market for ESG data providers last
year, the largest share in the space where it competes with the
likes of S&P Global and ISS.
    MSCI says it has 6,059 employees serving some 7,000 clients
globally as of June 30. Asset manager BlackRock  BLK.N  alone
accounting for 10% of MSCI's operating revenue mostly through
fees on ETFs and other products based on MSCI indexes.
    At Monday's conference, Barclays analyst Manav Patnaik told
Wiechmann that many people are skeptical MSCI can boost its ESG
growth rate to 25% or more.
    Wiechmann was unbowed. "We can't lose sight of how big the
opportunity is in sustainable investing and climate investing,
and climate considerations across broader financial services.
And we're early in that journey," he said.

 (Reporting by Ross Kerber; Editing by David Gregorio)
 ((ross.kerber@thomsonreuters.com; (617) 412 0093;))