When one thinks of Moody’s, one tends to think of the Investors Service arm, the company’s bond credit rating business. Its sister business, Moody’s Analytics, is working to raise its profile from that narrow perception, primarily through the means of environmental, social, and governance (ESG) research and data.

Moody’s acquired ESG specialists Vigeo Eiris and Four Twenty Seven in 2019, followed by climate and natural disaster risk specialist RMS earlier this month. The company has incorporated these acquisitions under its ESG Solutions moniker, which reflects its goal of being regarded as an integrated risk assessment and data business to rival the likes of MSCI, Bloomberg, and FactSet.

For a large organization such as Moody’s, it’s rare that its customers—which range from financial firms and governments to utility companies—have aligned interests. But that is changing, as the far-reaching effects of global warming have made ESG services a common demand across industries and companies. 

“There are a growing number of perils that [our customers] are exposed to,” says Andy Frepp, executive director leading the Enterprise Risk Solutions business at Moody’s Analytics. “The whole global corporate, for want of a better word, is exposed to these risks in a much more fundamental way than they were before. Or, alternatively, they were always exposed to them but they didn’t know, and now they do.”

In mid-August, a United Nations body of scientists released a report finding that the global temperature was set to rise 1.5 degrees Celsius above pre-industrial levels within the next 20 years, regardless of any climate change and carbon mitigation initiatives. At the same time, the Covid-19 pandemic is stretching into its second year, leaving sectors of the global economy in limbo. Wildfires have scorched America’s Pacific Northwest and Greece this summer, displacing thousands. Surprise flooding killed more than 200 in Europe last month, and intense heatwaves struck the US, Europe, and northern Africa, breaking historic records.

Like a set of dominos falling, climate change risk begets other risks—broken supply chains, real estate losses, insurance claims, and even cybersecurity—areas that Moody’s is focusing on through in-house expertise and its newly acquired ESG businesses.

RMS, Moody’s most recent ESG-related acquisition, has mostly been focused on insurance since its founding in 1989 as a hurricane and earthquake modeling company based out of Stanford University. Over the last 30 years, RMS extended the perils it covers to include wildfires, flooding, cyber security, pandemics, and terrorism.

Cyber attacks are among the top risks to supply chains. Cyber supply chain risks affect the sourcing, vendor management, continuity and quality, transportation security, and other functions, according to the US National Institute for Standards and Technology.

“It’s not climate related, but it’s a natural extension into what we would call catastrophic risks,” Frepp says. “When you speak to customers, there’s a big play on resilience: ‘How resilient am I as an organization against these perils, whether it’s climate or cyber or supply chain?’ We see an opportunity to take what they’ve got and combine it with Moody’s—whether it’s Four Twenty Seven or some of our financial modeling or some of our data—to bring new tools that will allow organizations to manage these kinds of risks, which, to be fair, is not easy and has not been done.”

Paul Sinthunont, a senior buy-side research analyst at Aite-Novarica Group, says many of Moody’s acquisitions position it to become a strong voice in the noisy, overcrowded ESG arena, despite the acquired companies having considerable overlap with one another. He also sees an opportunity for Moody’s to use RiskFirst, a risk analytics vendor for pension funds that Moody’s acquired in 2019, while seeking an ESG advantage over existing providers.

“If you can somehow get the ESG data into this system as well, that could be another add-on giving additional benefits to pension funds worldwide to understand their risks and opportunities long term. Because [pension funds] are about forecasting—five, 10, 20 years—these [climate] issues that we’re talking about can be short term, but they’re much more long-term oriented,” Sinthunont says.

Moody’s is seeking a seat alongside a handful of data, ratings and research providers in the competitive ESG market, including Sustainalytics (acquired by Morningstar), Truvalue Labs (acquired by FactSet), Trucost (acquired by S&P Global), MSCI, and UK-based asset manager Arabesque. In June, WatersTechnology reported the ongoing flurry of M&A activity and consolidation across the ESG vendor space. 

Moody’s doesn’t currently rank as a significant contender among ESG providers, Sinthunont says, but the physical risk dataset that it acquired through RMS is strong and relatively differentiated, which could make the company stand out more.

“But over time, what happens when everyone has the same breadth, covers the same asset classes [and] covers all the same kinds of risk? The differentiator will become: how do we access the data? Is it through APIs? And how is it integrated within the architecture of the client firm? Or is it just down to price, the bundling of the services, and how it impacts the cost of ownership?” he says.

Sinthunont adds that Moody’s should benefit from its experience in editorial oversight from its highly regulated credit ratings division, compared to other ESG providers, which still operate in a “Wild West” environment. Though regulation is likely forthcoming—and there are signs it might arrive soon—there’s currently little to no oversight of ESG ratings companies, and no requirements that they be transparent about their methodologies, changes to those methodologies, or conflicts of interest, such as giving high ratings to companies that pay for them.

Rising tide

Moody’s Frepp won’t provide a precise roadmap for RMS and the ESG solutions business at this point, but he shares some ideas for future use cases. Up until a few years ago, US flood insurance was dominated by the Federal Emergency Management Agency and its National Flood Insurance Program. The past three to four years have a seen a small uptick in private offerings from underwriters like Zurich Insurance, FM Global, and Assurant, though most flood insurance is still covered through the NFIP, which is not without controversy.

“We can now take a portfolio—a mortgage portfolio or property portfolio for an institution—and produce an average annual loss from flooding on that portfolio. Now, if that’s greater than zero, it means the Fema insurance doesn’t cover it. And we know, because we’ve seen some various consulting projects, that that’s true,” Frepp says.

“So, as a simple example, we could speak to many banks and say, ‘Here’s a solution that would allow you to understand the physical property exposure within your portfolio to flood. That’s uninsured, and somebody’s going to have to pick this up when those properties get damaged.’”

The idea could be enticing to Wall Street firms that have recently decided to relocate to Florida. Hedge fund Elliott Investment Management re-established its headquarters in West Palm Beach earlier this year, and Goldman Sachs is reportedly moving a portion of its traders and sales representatives to the same area.

“I think that climate change is probably going to be a leader in those new areas and new risks and perils that we help our customer base with, because the focus on it—and rightly so—is going to be significant and accelerating,” Frepp says. “It’ll be a sad day if the focus on it isn’t accelerating, but I’m working on the basis that it is.”