Originally published 2.23.2021
MSCI, one of the leading providers of indexes for the financial markets, is seeing demand for environmental, social and governance ratings and index products outstripping growth in its traditional index business, Baer Pettit, chief operating officer of MSCI (ticker: MSCI), said in an interview with Barron’s.
Approximately $200 million of the firm’s revenues are now “tied to ESG and climate,” and are growing “in the 30 percentages in this area,” Pettit said. “It’s growing dramatically, faster than even the second major closest category, the index business.” The latter is growing “in the low teens.” MSCI had $1 billion in revenue in 2020, up 10.4% from a year earlier.
MSCI is one of the most prominent firms in ESG ratings and has ridden the growing interest in sustainable investing. Money has flooded into the category, with U.S.-domiciled sustainable investments totaled $17.1 trillion at the beginning of 2020, up 42% from two years earlier, according to trade group US SIF. That number represents about a third of U.S. assets under management.
Index providers generate revenue by creating and licensing indexes to banks, fund companies, and other financial firms for the creation of investment products and internal use. MSCI also sells analytics services. Increasingly, more institutional investors are asking for “ESG-tilted benchmarks” over traditional, market-cap weighted indexes, Pettit said. In addition, executives in the C-suite of the firm’s clients are increasingly interested in sustainability.
According to a recent MSCI survey of 200 institutional investors across the globe, 73% plan to increase ESG investment by the end of 2021. Among the largest firms, or those managing more than $200 billion in assets, the pandemic was a critical driver of plans to boost ESG integration. For the same firms, climate change is a critical risk, with more than 50% saying they actively use climate data to manage risk.
By comparison, smaller firms were more concerned about market volatility. “There’s a sense of precariousness for smaller funds with less staff and less infrastructure, a nervousness and fragility that’s very telling,” Pettit said. “Unless we have perpetually wonderful markets, it will be more challenging.”
The popularity of sustainable investments, especially with the new Biden-Harris Administration pursuing a green agenda, may produce a “brown rally” as the lockdown ends, airlines resume flying and renewed economic growth bolsters share prices of greenhouse-gas emitters, Pettit predicted. Still, he sees that as a short term phenomenon, given ongoing demand for green products and services.