How extreme weather worries are driving revenue growth at data giant MSCI #NewsMarket

Florida residents are reeling today from the impact of Hurricane Milton, which tore through coastal communities, killing at least 10 people and leaving more than 3mn without power.

The disaster came just two weeks after the devastation of Hurricane Helene, which killed more than 225 people in North Carolina and other southern US states. It’s highlighted the grave risk to people and property posed by extreme weather events — a threat that, climate scientists warn, is being exacerbated by climate change.

And as we highlight in today’s newsletter, institutional investors are paying increased attention to this subject — helping to drive revenue growth for a global financial data giant.

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MSCI’s ESG and climate business growth rate has peaked. What’s next?

Over the past quarter-century, Henry Fernandez has built MSCI into one of the world’s largest financial data and index providers through an obsessive focus on what’s drawing the attention of global investors.

Fernandez took charge of the business, then a division of the investment bank Morgan Stanley, in 1998, and oversaw its spin-out as an independent company in 2007. Now with a market capitalisation of $46.5bn, it’s best known for the market index products it compiles, which still provide the lion’s share of its revenue.

During much of the past five years, however, its fastest-growing business has been providing ratings and metrics around environmental, social and governance risk. That growth has slowed more recently, Fernandez told me when we met in New York during Climate Week NYC. But it’s still expanding at a fair clip — now driven, he said, largely by investors’ growing concern about extreme weather.

In the first quarter of 2022, the year-on-year growth rate in operating revenues for MSCI’s ESG and climate business peaked at 50 per cent. In the second quarter of this year, that rate was 13 per cent — far below the long-term growth target of “mid to high 20s” that MSCI has set for this division (these figures refer to organic growth, excluding the impact of acquisitions, asset disposals and currency fluctuations).

“For sure, our rate of growth for climate tools has slowed down,” Fernandez said. “That’s a major deceleration.”

The slowing growth in demand for these tools might reinforce suspicions that financial investors are slacking off in the attention they pay to climate and sustainability issues, after a peak in enthusiasm roughly three years ago.

But the 13 per cent growth rate for ESG and climate tools outstripped MSCI’s overall organic increase in operating revenues in the second quarter, which was 10 per cent. That means this unit has continued to grow as a proportion of MSCI’s broader business. ESG and climate tools accounted for 11.2 per cent of MSCI’s $708mn revenue in the second quarter of this year, up from 7.9 per cent three years earlier.

MSCI’s rivals in the space are also experiencing continued growth in demand for these types of data. S&P Global said its revenue from sustainability and energy transition-related services grew 24 per cent to $301mn last year. The London Stock Exchange Group said in its latest earnings update that its FTSE Russell subsidiary’s “focus on climate transition is adding to growth”, though it did not provide detailed figures.

But Fernandez highlighted an interesting shift in investor focus. He’s seeing a particular slowdown in demand growth for transition-related tools and data — that is, related to companies’ carbon emissions and other metrics that show their risks around the global move to cleaner energy. Instead, Fernandez said the balance of demand was shifting towards tools that help investors to gauge and manage physical risks — for example, around their assets’ exposure to hurricanes, droughts or floods.

As south-eastern US falls under the latest of a brutal series of hurricanes, this attention seems well merited. Last year was the fourth consecutive year in which insured losses topped $100bn, as US home insurers suffered their worst net underwriting loss this century. A recent report from analysts at Verisk warned that insurers should expect to cover annual losses of more than $150bn in the years to come.

Unsurprisingly, Fernandez said much of the demand for MSCI’s physical risk products was coming from insurance companies, which have to manage risks in their vast investment portfolios as well as in the policies they offer to homes and businesses. But banks were also showing rising interest in these products, he said. And so too are investors in private markets — leading Fernandez to hope for some useful dovetailing between two of the fastest-growing parts of his company.

Fernandez has been expanding MSCI’s business in providing tools for the increasingly buzzy private markets space, from real estate and infrastructure to the booming private credit funds that are eating into banks’ commercial lending business. Last year MSCI paid $697mn to acquire Burgiss, a private assets data and analytics provider. This drove a jump in the contribution of MSCI’s private assets division to group revenues, which reached 9 per cent in the second quarter of this year.

So far, Fernandez pointed out, much analysis of ESG and climate risks has focused on publicly traded securities — in part because it is generally easier to access data on them. But when big diversified investors are looking at the risk in their portfolios, these assets — given how easily they can be traded — may give less urgent cause for concern than illiquid physical assets in real estate and infrastructure, Fernandez suggested. “So people are beginning to say: ‘Maybe I should instead of focusing on public equities, maybe I should focus on that bridge, maybe I should focus on that airport.’”

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The leaders of more than 100 companies including AstraZeneca, Nestlé and Hitachi have published an open letter urging government action on climate change, ahead of next month’s COP29 summit in Baku.