As ESG investing faces headwinds, MSCI’s CEO says ESG ‘most popular’ topic for clients

Henry Fernandez, chairman and CEO of index and analytics provider MSCI, just completed a six-month road trip through Asia, the Middle East, Western Europe and the US—and all clients wanted to talk about was ESG.

“ESG risks and opportunities are investment risks and opportunities,” as more investors worldwide realize that ESG—despite being a contentious topic in political circles—represents just another form of “fundamental analysis of securities,” Fernandez told investors on MSCI’s Q2 earnings call earlier today.

“We’re not philosophers [and] we’re not ideologues—we’re grounded businesspeople,” Fernandez said, directly addressing political mandates to ban public funds from investing in ESG-focused strategies. “We don’t know anyone in the world who doesn’t want to incorporate ESG into their investment process.”

Even MSCI clients in some parts of the US who might be affected by any pending anti-ESG legislation still want to use ESG data, he said. “These people are saying they need to take it into account because everyone else in the world is going to be taking it into account,” he added.

“Our clients are coming to us and asking for a lot more ESG information,” Fernandez said. “They want more granular data … and they want a significant expansion in coverage of the universe of companies we rate for ESG.”

Indeed, ESG and climate-related data was the fastest-growing segment in MSCI’s Q2 financial results. Total revenues grew 12.6% to $621 million compared to Q2 last year, within which index revenues accounted for $362 million, up 12.9%; analytics grew 5.8% to almost $150 million, and its private assets segment grew 10.7% to $37.4 million.

In comparison, revenues from ESG and climate-related data subscriptions grew by 29.2% over last year to $71.2 million, while adjusted EBITDA grew 59.1% to almost $22.8 million, reflecting growth in its ratings, climate and screening products across all regions and client segments.

In addition, aside from new business, client retention for ESG and climate products was nearly 97%, said MSCI president and COO Baer Pettit.

“Demand for ESG products remains high, fueled by regulatory pressure for high-quality data, MSCI’s comprehensive coverage, and the transparency provided by our solutions,” Pettit said.

The vendor is positioned to take advantage of multiple aspects of ESG investing and compliance. For example, not only does its data fuel indexes and index-linked products—of 20 new ETFs launched during Q2 based on MSCI data, 12 of those are based on MSCI’s ESG data and indexes—but the vendor’s tools also power clients’ ESG reporting. In the first half of 2023, MSCI’s analytics reporting engines delivered more than 47,000 climate reports, Pettit added.

MSCI puts the AI in ESG

To help the vendor better exploit ESG and climate opportunities, MSCI is stepping up its use of generative AI and large language models.

“As MSCI explores new ways to turn raw data into valuable insights, we continue moving forward with our technology transformation—and generative AI and large language models are a big part of that,” Pettit said, adding that after a decade of using AI and natural-language processing to enhance its content, AI is “second nature” to the vendor.

For example, the vendor currently uses AI to analyze and update 7 million data points per month, using inputs from 700 news sources, 150 sources of alternative data, 12,000 corporate websites, and submissions from more than 5,200 corporate issuers, Pettit said. In addition, it was able to identify, extract, and validate EU transparency data for EU regulatory reporting four times faster than it was previously able to as a result of using AI and LLMs. And to support its analytics products, the vendor uses NLP and deep learning in its models to identify securities with similar characteristics, examine emerging industries, and to support quantitative investing. It’s also working to integrate AI into its MSCI One platform to proactively deliver insights on client portfolios.

Finally, MSCI is using AI internally in its corporate finance functions to automate contract renewals, extract information, and process invoices. “We’re embracing generative AI to enhance the client experience and generate more efficiency,” Pettit said. “In particular, we are leveraging AI to evolve our data processing, audit, and quality mechanisms.”