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Investor interest in ESG spurs rating agency acquisitions

Investing products and derivatives tied to climate change are in high demand

23 March 2020

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Even as politicians debate how or even whether to incorporate the costs of carbon into the economy, three of the biggest rating agencies – S&P Global, Moody's, and MSCI – made deals in 2019 that make it easier for investors to factor environmental risk into their strategies. 

The three firms snapped up specialist providers of information used to assess corporate performance on Environmental, Social, and Governance factors. The sudden surge in acquisitions was a response to growing interest in using ESG factors in investment strategies, index providers say.  

"In the past, ESG indices were primarily used for highlighting the sustainability performance of companies," said Reid Steadman, managing director and global head of ESG at S&P Dow Jones Indices. "But increasingly, ESG indices are also used for management of assets by institutional and individual investors."  

The rapid growth of ESG-focused investment products illustrates this trend. In exchange-traded funds, the value of assets under management in ESG-focused products grew from $22.1 billion at the end of 2018 to $56.8 billion at the end of 2019, according to S&P analysts. S&P expects those numbers to increase in 2020, not just for ESG-related ETFs but in mutual funds and other investment vehicles as well. 

Climate risk is only one element of ESG, but it is particularly important to the rating agencies because of the potential threat to many corporate assets. MSCI analysts note, for example, that nearly 62% of the companies in its MSCI All Country World Index have at least one facility in a flood-prone zone, and this number is likely to grow.  

Climate risk is also being incorporated into the indices published by S&P and MSCI. Both companies have rapidly expanded the range of stock market indices that filter out companies with low scores on climate change or do the opposite, limiting the index to companies with high scores on climate change. This in turn is giving exchanges such as Eurex, Intercontinental Exchange and CME Group more ways to offer index-based futures and options for climate-oriented investors. 

Moody's trifecta 

Moody's was the most aggressive deal-maker in tackling this trend, making investments in three companies that specialize in ESG research.  

Moody's bought a majority stake in Four Twenty Seven, a Californian research agency focused on physical climate risks; a majority stake in Vigeo Eiris, a Paris-based research, data, and assessments firm that specializes in helping investors and issuers assess ESG-related factors; and a minority stake in SynTao Green Finance, a Chinese rating agency that specializes in ESG ratings of companies operating in the world's largest economy.  

Four Twenty Seven focuses on granular-level climate data, scoring equities and fixed income securities on the basis of their physical assets' precise geographic locations. It also tracks the relative climate risks of 761 U.S. cities and assesses exposure to heat stress, wildfires, extreme rainfall, hurricanes and typhoons, sea level rise, and water stress.    

Vigeo Eiris' expertise covers 40 different industries and offers services for investors across all asset classes. The company manages two families of ESG indices, the Euronext Vigeo Eiris indices, which rank listed companies according to ESG performance, and the Ethibel Sustainability Indices, selected by the Belgium-based Forum Ethibel sustainable investing group. 

SynTao Green Finance (STGF) is an offshoot of SynTao, one of China's leading corporate social responsibility consultancies. The firm provides ESG data and ratings, green bond verification, and green finance solutions to Chinese financial institutions and corporations. 

Moody's executives said its minority stake in STGF will strengthen the global agency's presence in China, and STGF said the investment will make it easier for the firm to expand quickly. "Moody's investment will help STGF accelerate its data coverage, adoption and ability to further serve Chinese market participants," said Guo Peiyuan, chairman of STGF. 

MSCI's climate change scenario planner

MSCI bought Carbon Delta, a Zurich-based environmental fintech and data analytics firm focused on providing climate change risk scenarios and company-level climate change-related risk assessments for institutional investors.    

MSCI executives plan to use the Swiss unit's analytics to power a new offering – MSCI Climate Value-at-Risk – a tool intended to help institutional investors understand the impact of climate change on their portfolios and to make it easier for those investors to model the impact of climate change on their investment strategy, according to a press release.  

"We believe climate change will become one of the most important investment factors over the long term. Institutional investors should be able to analyze the exposure of their portfolios to climate risk while also being able to report on their climate strategy," said Remy Briand, managing director of ESG at MSCI. 

S&P buys ESG ratings specialist  

S&P stepped up its ESG capabilities through the acquisition of the ESG ratings business of Robeco SAM, a subsidiary of the Dutch investment manager Robeco. The deal, which was announced in November 2019 and closed in January, includes the company's Corporate Sustainability Assessment service, an annual evaluation of the sustainability practices of more than 4,700 companies. 

S&P executives say the CSA assessments will become the foundation of the ratings giant's ESG research all of its divisions, including S&P Global Ratings, S&P Dow Jones Indices, S&P Market Intelligence and S&P Global Platts. 

CSA data incorporates 1000+ ESG-related data points on each of the 4,700+ public companies it tracks, many of which SAM has collected now for 20 years or more. 

The CSA assessments push companies "to articulate the link between sustainability and business strategy and the impact on growth drivers like cost, risk and market share," said Manjit Jus, executive director and global head of ESG research and data for S&P Global. 

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