A quick reminder folks: the FT’s annual Weekend Festival is on Saturday. A couple of the panels I will be following include “Are cut flowers harming the planet?” and “Beauty, biodiversity, or both?” The day concludes with a special performance by the London Symphony Orchestra’s brass ensemble. Your last chance to register is here.
Now let’s get on with it.
MSCI’s Henry Fernandez sees riches in the need for corporate climate information
As companies race to prove their ESG credentials, hard numbers validating those claims are becoming essential. For index provider MSCI there is serious revenue to be made in data involving environmental, social and governance (ESG) metrics.
MSCI’s longtime chief executive, Henry Fernandez, talked to Moral Money on Monday about the opportunities he is eyeing in ESG, and especially climate data. Fernandez started his career as a diplomat in the Nicaraguan embassy in Washington. And, as you will see clearly below, Fernandez disdains the boardroom jargon and platitudes that so easily afflicts his chief executive peers.
The following has been edited for length and clarity.
Moral Money: ESG and climate-related products comprise about 8 per cent of MSCI recurring revenues. Where do you see opportunities for growth in this space?
Henry Fernandez: We are increasingly breaking out the climate as its own product line. Climate feeds into Paris-aligned equity and fixed-income indices. A big part of what we’re doing in analytics is to make climate be a large part of risk management and risk reporting.[Our climate work] is going to be a lot about estimating data and the models that give you a trajectory of the data going forward.
So I believe that climate is going to be much bigger than ESG. That doesn’t mean ESG is not good. We are pushing ESG. The other thing about climate is that ESG is a necessity today. But we don’t have it on climate. In a matter of years, not decades, we’re going to be in trouble.
Because the Paris agreement calls for 2050 targets, there are a lot of people that think that we have 30 years to go and that the progress will be like a hockey stick. And I tell them, ‘No, no, no.’
There will be a reallocation of capital and a repricing of assets in the next few years. This thing is happening now and it will accelerate.
MM: Talk a little about the type of customer that you see for climate. Can you give us examples of who you see as existing or potential customers for climate analysis?
HF: Our client base traditionally has been the providers of capital: the asset owners and the managers of capital — whether it is active or passive — wealth managers, and the intermediaries of capital, such as the banks, brokers and the exchanges.
What is happening right now with respect to climate at MSCI is that we have strategically decided to expand our client base to be the users of capital as it relates to ESG and climate.
The users of capital starting with public companies around the world, and then private companies.
The heavy lifting on solving the climate change problems of the world is going to be at the operating company level.
If we want to help solve this problem for the human race, and of course, have a good profit opportunity for MSCI, we need to expand our remit, our strategy, our client base, to the users of capital.
MM: Can you talk a little bit more in any more specifics about the services that you can provide? And to that point, how it is profitable?
HF: Let me give an example. You take a company, and let’s say in the mining industry. You gather a lot of data as to the size of the company, the operations, the type of mining that they do, the number of employees they have.
A lot of that is going to give us — on a company-by-company basis — a good estimate of what their likely carbon emissions are.
The second part of that is to say, ‘Let’s gather all the data of the companies that have pledged net zero.’ To what year? And what are the interim goals? The ones that haven’t, you continue to project the same rate of carbonising in the world.
Then you do another layer of that, which is implied temperature rise metrics, or warming potential metrics per company. And that is a company’s rate of carbon emissions. Is that consistent with a three-degree world, two-degree world, one-and-a-half degree world? So we are going to have these metrics for every company in the world: public, private and real estate. We are working on that.
If you aggregate all of that into a portfolio you say your portfolio is consistent with a 2.8-degree world. So what are you going to do to bring it down to a two-degree world? A one-and-a-half-degree world?
You could go to a bank and say, we are going to take your portfolio of loans, and we are going to estimate how much carbon [emissions] that portfolio of loans does.
Now, these metrics are not going to be very precise, but they’re going to be within 10 or 20 per cent of range. At this point, it is almost who cares how precise you are. You are trying to establish a direction of things.
The last piece is technology. We have a partnership with Microsoft to take in all this data and take all these models. Hopefully, at some point, we can give you a subscription of that. You could look at any company in the world, you go through what are the estimated carbon emissions of this company? Do they have a net zero [target]? What are their plans to do this?
If you’re a company, you can compare yourself to others. Am I lower or higher? How much am I deviating from the mean? Am I sticking out? What else can I be doing? A lot of this is peer pressure in a particular industry.
MM: How important are government regulations for what you want to do here? Do you need a government push to get companies to disclose the information that you’re looking to collect?
HF: There’s been a lot of talk about regulating ESG ratings. I’m sure there will be talk about regulating implied temperature rise metrics.
And that is not very appropriate because ESG ratings are not credit ratings. When you are evaluating an ESG rating, some people may want to put a lot more weight on the social [aspects], some people may want to put a lot more weight on the environment. All of that is going to give you different ratings. It is going to give you two completely different ratings. So if you have the government come in, and say ‘No, we’re going to prescribe exactly how these ratings work.’ That’s a problem. What they should be prescribing is the disclosure. If your funds are not really ESG compliant you should not be calling them by that [name].
MM: Last year, with the Boohoo scandal, MSCI had notoriously rated the company very highly. Have you rejuvenated how you rate when it comes to social criteria? Or is climate the largest focus for MSCI?
HF: The social issues about [corporate] working environments, and diversity and inclusion, on a day-to-day basis are more important today than the climate change issues, which are being viewed as longer term. Now, MSCI will give you one perspective, this is our own view of what is material in the ESG rating. And we were very proud of that model or that methodology, but there will be somebody else who has a different angle and a different weight on the materiality. So that is what I mean by it is OK to have diversity of views [on] the various ESG ratings.
People say it is an alphabet soup, it is a lot of distraction, we would like the world to be a lot better organised, we would like to have one-size fits all. Well, that would be the equivalent of all of us wearing the same shirt. I think this whole argument about conformity of ESG rating is misplaced.
MM: Where do you see opportunities for bolt-on M&A in the ESG space or the climate space?
HF: The biggest opportunities in M&A for MSCI in bolt-on acquisitions is actually the private assets.
The other piece on acquisitions is what we call workflow software applications that help you on the private assets. That will be probably the majority of our focus in bolt-on acquisitions.
But the second part will be climate and ESG because of the data. Data about climate and the impact of climate on assets, including financial losses, are very precious. So we then want to buy those data sets or partner up with those people.
MM: You talked about ESG ratings as not being a credit rating. There has been a call from companies (such as ExxonMobil) for ESG ratings to be regulated by the SEC as solicitations. Can you talk a little bit about how those rules would affect ESG raters and MSCI?
HF: We are not afraid of any regulation in any part of what we do. We always caution the regulator that more regulations give competitive advantage to people like us and create barriers to entry.
Secondly, with a lot of these entities that are calling for regulation, they don’t like the [ESG] ratings that they’re getting.
They don’t want to change. They want to hide behind the old mantras and the old norms and the old models. They are trying to throw rocks on the way toward progress in order to slow down the pressure that they face.
Every time I see [this] I say, ‘OK, that’s the message. Let me look at the messenger.’ Let me try to understand who the messenger is and what are the motivations of the messenger. This is coming from oil and gas companies because they don’t want to change and we are always telling them that they have to change.
The problem with regulations are in the areas of opinions. Think of an equity analyst. An equity analyst has an opinion as to the value of a company as what’s important in valuing the company and what’s less important, you cannot regulate that. So that’s what I was saying, ESG ratings are more like opinions about what is important and what is not important.
China says US tensions threaten fight against climate change (FT)
As firms focus on ESG, landlords behind greenest London offices could see higher rents (Evening Standard)
ECB warns banks of climate-test risks that could hit capital (Bloomberg)
Electric utility groups are wary of Democrats’ clean power ambitions (FT)
Sustainable investing faces the beginnings of a backlash (The Economist)
Allbirds/ESG: test of wool power (FT)