Moody's Corporation (MCO) Earnings Call Transcript & Summary

Good morning, everyone. Thanks for joining us at the Bernstein Operational Decisions Conference. I'm Christian Bolu. I'm the senior analyst covering U.S. capital market stocks under the Autonomous brand at Bernstein. So kicking off the conference this morning is Moody's. Most of you know the company very well and its stock very well. For those who don't, the company has been a strong earnings compounder over time, anchored by its well-known and leading credit rating agency and supported by fast-growing software and analytics business. Joining us today from Moody's is Chief Financial Officer, Mark Kaye. Welcome, Mark, and thanks for joining us at the Operational Decisions Conference.

Thank you very much, Christian and Autonomous, for hosting me today. It really is a pleasure to be here. I just wanted to call out before we get started that I'm most likely going to refer to some slides from our second quarter investor presentation and third quarter earnings call, and then you'll be able to find both presentations along with the recently published Moody's Moments video on our IR site at ir.moodys.com.

Great. Before we get started, just a reminder for the viewers on the webcast [Operator Instructions] Okay. So we'll get started here. I'd actually like to focus most of this conversation, Mark, on more of the newer growth opportunities. But if you'll indulge me, let's just start with the core Ratings business just because it's top of mind for all of the investors. So let's talk about 2022. We have 2 very strong years of top line -- of really strong top line growth for the Ratings business. I think you spoke on the earnings call last week about some headwinds for issuance falling to 2022. Could you maybe flesh that a little bit? What are the puts and takes? How should we think about sort of 2022?

Christian, thank you. Let me start by saying it's probably a little early for us to provide formal 2022 guidance, but I think your question around headwinds and tailwinds is pretty fair. And I'm going to talk a little bit about some of the factors that we're considering as we develop our forecast for 2022. So let me start maybe with the tailwinds. First, I would say, is the ongoing rebound in economic activity. The second would be a continuation of the pace of M&A transactions as issuers seek to create scale. Third, I would say, is the attractive low rate and default environment, which is going to support tight spreads and thus low all-in financing costs. And then lastly, I'd say we expect sustainability-focused debt financing to grow significantly in 2022. And if we weigh those tailwinds against the potential headwinds, starting with the elevated issuance levels that we've seen in the past 2 years, our most recent forecast for leveraged loans and structured finance activity is for an increase of approximately 100% in 2021, which is going to create a tough absolute comparable in 2022. Also additionally, issuers, particularly investment-grade borrowers, did bolster their balance sheets during the pandemic through liquidity-driven financing. And as a result, they're less likely to need incremental cash in the near term. And then finally, I'm going to say that we also considered the potential impact of new COVID-19 variants or caseloads on supply chain challenges, employment and wage inflation and then market segment. And with that context, there has been a lot of debt issued over the last several years, and that's going to need to be refinanced. You'll see here, for example, on Slide 9, the refunding walls over the next 4 years for the U.S. and European issuers have increased 9% to approximately $4.1 trillion. And that's a great support for our medium-term refinancing needs.

Great, very helpful. Maybe just a follow-up on that question. Most of what you talked about was on the issuance and the volume side. Anything we should be mindful of on the pricing or mix shift side?

Sure. I think this year, we've seen definitely 2 factors that come through. We've seen favorable mix, and you've seen that favorable mix emerge through very strong leverage loan or high-yield issuance. And the way investors can think about this, it is more favorable from a profitability perspective to have $41 billion issuances versus a $140 billion issuance. In addition, leveraged loans themselves serve as a support or a supply chain for securitization activity. And so you could almost see the CLO increase that we have experienced in 2021 as being a contributing result of the very strong leveraged loan issuance that we've had this year. So certainly, mix has played a big part. And some of the factors underlying that will likely continue on into 2022. Stay tuned, we'll provide updates in February.

Yes. Okay, let's move to something more structural on the issuance side, which is China, which has been a long-standing opportunity for Moody's with your JV, CCXI. Can you talk about the state of the China bond opportunity for Moody's? Particularly interested in that post the Evergrande sort of debt issues, has that heightened appetite for whether it's the actual credit rating assessments, better content? I'm just curious how that has impacted the broader opportunity.

Yes, so we believe the market demand for China and for insight into China credit-based issues is pretty strong. And that's really because the need for investors -- or by investors of high-quality insights continues to grow. From the Moody's perspective, we are engaging with market participants in Greater China through issuer meetings, commercial efforts, events and webinars. We've seen a significant spike up in those, more than, I'd say, 20% up from last year. And that covers a range of topics on key areas of risk. To support our customer base, we've actually just launched a product called CreditView China, which is a platform that's focused on serving international investors and enabling them to assess the credit exposures of the largest Chinese companies. And there really are 4 elements to CreditView China that I think will be helpful to listeners on the call this morning. First is the fact that the platform covers a wide range of MIS-rated Greater China issuers as well as about 1,000 Chinese domestic corporate issuers. It also offers standardized financials and credit metrics, and that is very helpful for allowing a peer comparison across -- comparisons across the global credit markets. And it brings increased transparency across a broad range of information. And it does this by leveraging the financial statement quality scores and some of the interactive scorecards that we've driven or we use within MIS. So we think this is a good differentiator for us. And ultimately, it's important for me to say that we are committed as a company to working through our joint venture partner, CCXI, which is the leading domestic rating agency in China in which we hold a 30% stake to help further develop and grow the Chinese markets in the way that the government and the regulators would like to.

Great. Let's switch over to some of your, I would say, call it, higher growth newer opportunities at Moody's. And maybe just big picture, 2 that stood out to me, KYC and just the broader insurance and asset management segments. I think those 2 segments are growing north of 25%, but still only 10% of your analytics business. Just big picture, how should we think about sort of the long-term opportunity for these businesses?

So we are very pleased with the performance of both our KYC and insurance and asset management businesses. And I'm going to spend a minute just to provide the drivers for both of them. So if I start with the insurance and asset management segment, the market itself is large, and it's growing rapidly. And that's really because insurers are focused on the digital transformation of their businesses in delivering a positive user experience. Moody's has the data, analytics and domain expertise to provide insurers and asset managers the ability to manage a wide range of risks as the industry evolves. And that's going to include our actuarial software that is utilized by global life insurers, ALM and balance sheet solutions and tools that help address new accounting standards, IFRS 17 as an example, and then ESG and climate data. And that's really as insurers are going to look to incorporate those emerging risk factors into their loss models. And then, of course, finally, the acquisition of RMS meaningfully expands our presence in the insurance and reinsurance space. On the KYC side, there are really 3 frequent questions that we hear from our customers. First, is the entity I'm working with creditworthy? Second, are they reputable and sustainable? And then third, who am I ultimately doing business with? In other words, they really want to know who's the beneficial owner. And we feel that Moody's has the analytical capabilities and product sets to really help our customers manage these onboarding and monitoring challenges and to automate their existing processes. And that means in a way, our customer use cases are expanding, which is why we're investing in this high-growth market ultimately to help our integrated risk assessment strategy.

Great. Maybe sticking with KYC, can you just talk about maybe sort of your product road map from here? Sort of what are the key things or the key growth opportunities you see for that business over the next few years to basically sustain what is a fairly high growth rate.

Yes. A significant portion of the organic investments we've made this year have been allocated to KYC, CRE, ESG and climate. And those are all high-growth markets. And as a result of our investments this year, you should expect us to introduce several new product opportunities in 2022, which is going to include tools such as the KYC scores and KYC networks. Additionally, we have started an innovative partner program to work alongside our customers, which is comprised of well-known financial institutions. And Shivani, if you can close your screen. I think your -- thank you very much. Additionally, we have started working on an innovative partner program, which we're going to do alongside our customers, and that's going to be comprised of well-known financial institutions, technology companies and corporates to help really create some of our industry leading. And that's going to generate important commercial opportunities, and provide us with unique insights into some of the industry trends and customer needs. So I think a lot of opportunities here, Christian, in this space.

Can I just ask about KYC scores a little bit more? Is that -- would that be a similar road map to what you've done on the credit rating side to establish benchmarks? And how would you think about monetizing that opportunity? That seems like a pretty meaningful opportunity over time.

I think you've nailed it in the way that you described it. I think the opportunity for KYC scoring is really to facilitate and enhance the way that companies are able to evaluate their supplier base. And in some sense, they're supplier of suppliers. And they can do that certainly through the analytics that we provide today. But if you're screening tens of thousands of companies on an annual basis, understanding sort of the ordinal ranking of those firms is very powerful. As I mentioned earlier, we hear from customers those 3 questions around credit, around KYC, around ESG. But ultimately, customers just want to get a sense of who they are doing business with. And the big part of what we're focused on here at Moody's is making it easier and more digestible for them to do that. And KYC score is just really an opportunity based on feedback that we've received from customers to be able to do that.

And then on the partnership side, I would imagine what will be very useful would be to just embed this into existing systems for greater distribution, just help clients do things quicker. So any sort of like news you can give us in terms of who the partnerships are with or any flavor of what type of partnerships you could embed these sort of scores in to accelerate distribution?

There are several areas that we're looking at on the KYC side to enable growth across the sectors. Let me maybe talk about 2 in particular. So research and data feeds are incredibly important to us, and that's an area where we have seen significant growth. And that base is also looking for us to include and embed sort of a know your customer and know your supplier, and in a sense, know your everything. We've seen significant demand from the customer base from banking solutions, predictive analytics as well as insurance and CRE. And they view those domain expertise or those domain areas as requesting insight because entity and ownership linkage data is so important to them. The GRID, what we think of as, G-R-I-D, GRID risk profiles allow those companies then to monitor both at an entity level and at an individual level, the KYC exposures they take. And Moody's is well positioned to do this because we really have that sort of preeminent database on companies and corporate hierarchies. And combining that with our database on adverse media, politically exposed persons and sanctions allows us to provide sort of that best-in-class insight across those various domains and sectors.

Great. I think every company has talked about COVID accelerating digital transformation, basically. And I'd be curious if that happened as well in the KYC business in 2021 and 2020, quite frankly, as well. Is there any pull forward, do you think? And as you sort of normalize from an economic perspective into the next few years, any prospects of that business slowing down?

So Christian, normally, we get the slide for issuance, so it's really great to get it for MA. The industry is in a process of digitally transforming. This transformation really started prior to COVID and the pandemic has accelerated the time lines for many companies, including Moody's. And I really feel that, that means the pandemic has led companies to reevaluate how they measure and manage different types of risks like KYC and financial crime. We're encouraged by this trend that we're seeing in the KYC market. And demand for our solutions is now broadening beyond banks and into corporates and other sectors. And so now as the economy recovers, we believe the strong demand for some of our offerings is going to continue. Companies need a trusted partner to help them manage risk and to measure sort of risk resilience, and Moody's, we feel is very well positioned in that space.

Great. As a reminder to the audience, [Operator Instructions] Can we switch over to the insurance business? You did make a sizable acquisition in a company called RMS to bolster that. Just remind us again what RMS does, the thesis behind the acquisition and then how it fits into the overall sort of Moody's strategy?

So RMS is the leading global provider of climate and disaster risk modeling and analytics. And their models range from physical risks like climate change, floods, wildfires and earthquakes to more emerging risk types like cyber terrorism and pandemics, just to name a few. They have over 400 models covering 820 countries, and RMS does enable insurers, insurance brokers and reinsurers in the P&C market to understand, measure, underwrite, price and manage risk. So RMS in a way firmly aligns with our integrated risk assessment strategy because our customers are seeking better tools to identify, measure and manage an increasing array of complex and interrelated risks really across every sector that we serve. And by acquiring RMS, we have accelerated our expansion in the insurance risk segment as the combination of RMS and Moody's creates a global scale player in the market. And that's going to generate nearly $500 million in revenue in the full year 2021. Also, just to add, Christian, for completeness, RMS' assets and capabilities, they predominantly address the needs of P&C insurers. But that's highly complementary to Moody's historical insurance offerings, which serve mostly life insurers. And so we're going to continue to invest in new risk models and risk analytics. And you'll see insurance, as we spoke about earlier, becoming sort of a key area of focus and innovation for Moody's over the coming years. And that's, of course, separate to how you would leverage the data and the data sets for other products that we could talk about later on.

Okay. Perfect. Let's stick to the insurance point, we'll bring the conversation up a little bit here. Just more big picture, how big is insurance data and analytics market? How fast is it growing? Who are the key competitors? And then most importantly, how does the sort of Moody's and RMS offering in combination differentiate from other players in the market?

Yes, the insurance data and analytics market is one that we've been active in now for several years. And we've helped life insurers to perform a wide range of capital insolvency calculation measurements as well as financial and regulatory reporting. With the addition of RMS, we are excited to expand our reach now to P&C insurers and reinsurers, and that's going to serve a growing number of customers and use cases. And through the acquisition, we estimate we've grown our current addressable market by approximately $5 billion, as you can see on the slide. And that brings Moody's and RMS' combined current addressable market to over $40 billion. We think further that the risk management subsection or subsegment of the insurance and data analytics market is actually going to grow at a 13% CAGR over the coming years. And that's really because there's a couple of strong trends. First, insurers are increasingly focused on digitizing their businesses and moving to the cloud; second, the heightened need for companies and governments to understand and quantify uninsured risks; third, sort of the elevated demand to insure against a growing number of emerging risks like cyber attacks and supply chain interruptions. And as risk assessment needs evolve, it's our integrated set of risk products and solutions that we feel is ultimately going to differentiate us from our competitors. And so that combination of RMS' best-in-class climate and catastrophe risk modeling, along with its integration into our existing products or Moody's existing products, really is going to offer a -- will be able to offer a holistic unique capability set to our customers.

Great. And on that $40 billion of combined addressable market, is that all serviceable today with the combined Moody's and RMS offering or is there a need for investment in products, et cetera, to get that fully addressable?

Yes, one of the things that we've spoken about certainly over the last 12 months has been our continued investment back into the business through organic means. We've been very disciplined on an expense basis in 2020 and 2021 to create sort of the capacity to invest in organic-driven product growth. And that investment has been with the purpose of furthering the products that we want to bring out to the market based on extensive customer and proactive customer feedback that we've been receiving. I think this is an ongoing opportunity set for Moody's. This is definitely not one and done because the market itself continues to evolve and expand. The most important thing, I think, that as a management team we can do is to make sure that we're operating and participating in the right markets, in the right spaces, and we certainly are. The opportunity is there for us to capture and we're well positioned to be able to do that, and that's why we're continuing to invest.

Okay. And the RMS business under the prior owners was a modest grower. It wasn't particularly fast. Now to be fair to Moody's, you do have a track record of bringing in companies and accelerating growth. You did that with the Bureau van Dijk deal. But I'm curious what really gives you confidence with RMS that somehow you can take a somewhat slow-growing business and really accelerate growth under the Moody's brand?

We believe a key competitive advantage of RMS is the quality of their best-in-class models and analytics. This is just one of the reasons why we are confident in our ability to accelerate top line growth. And we've honed in on a few key avenues to ensure that we meet our stated targets. First, we'll support RMS with transitioning its customers to the recently launched SaaS platform. It's called Risk Intelligence. We have a proven track record at Moody's, given our experience with converting ERS customers to SaaS-based solutions. Additionally, with MA's global sales team, we're going to be able to further distribute RMS' core capabilities on a larger scale as well as generate cross-selling opportunities. In other words, we've already started holding joint sales meetings. We found that only 10%, approximately 10%, of our combined insurance customers are currently being served by both RMS and MA. And then, finally, through new product development and integration, we'll have multiple opportunities across a wide range of risks and use cases. So we feel pretty comfortable.

Okay. As part of the deal, you outlined, I think, about $150 million of revenue synergies by 2025, which that accounts -- that's almost 50% of RMS' stand-alone revenues of north of $300 million. So that's fairly lofty. So how should -- first of all, how should we think about the cadence of that revenue synergies -- or those revenue synergies through 2025?

We expect a portion of the $150 million of incremental RMS run rate related revenue to first be generated by scaling our global sales force and cross-selling. And this would most likely be followed by the revenue synergies created from product integrations. And then finally, the revenue from new products that are likely to occur last as those initiatives are naturally going to take time to develop. We expect $150 million benefit to be modestly weighted towards the back end of our suggested time frame with revenue growth really accelerating over time up to those levels.

Okay. And you mentioned a bunch of different opportunities, product development, cross-selling, et cetera. Is there a weighting to those opportunities? More of it is cross-selling or more of it is new products? I'm just curious, again, just give us some -- a little more meat on the bone in terms of that, what is a sizable sort of synergy number?

Yes. So as I think about sort of maybe more tangible examples, let me start really by reiterating that once we close the deal, we began to commence joint sales calls with the RMS and the MA sales team. So cross-selling and sort of scaling up of the RMS distribution model is underway. RMS' data and analytics are valuable across a wide range of use cases. So we've begun to integrate those capabilities into the assets, and an example could be integrating RMS' world-class climate risk modeling into our commercial real estate offerings. And that's going to be allow us to provide more in-depth climate content for CRE professionals who are looking to better understand their real estate portfolio exposures to climate risk, including extreme weather events like earthquakes, wildfires and floods. I know we've used CRE as an example, but it's not just the CRE market that is concerned with climate risks. I mean I'd say all institutions at this point, including corporates, banks, governments are accelerating their efforts to assess their exposures and resilience to climate change. And then outside of climate, the interesting part is RMS also has data sets and models around cyber attacks and pandemics to better understand sort of the business disruption risks. And that's an additional area where we are seeing an ability to integrate RMS data and analytics into our supply chain risk management offerings, and ultimately, again, to give customers that holistic view of risk.

Good. How should we think about RMS' impact on Moody's Analytics margins? I think you have a long-term target of mid-30s margin range. How does RMS impact that?

So maybe before providing some of the components based on your question that would get us to that mid-30s percent range, I think it's important just to give that context that when we are discussing our medium-term target, we're looking forward by approximately 3 to 5 years. We have maintained our 2021 MA adjusted operating margin guidance of approximately 29%. And MA's 2021 margin would have been forecast -- would have expanded -- or forecast to expand by approximately 300 basis points this year, so off of the 2020 base if we excluded the impact of recent acquisitions. So we've got really good sort of underlying margin expansion. Although our reported MA adjusted operating margin is expected to be approximately flat this year, we have demonstrated our ability to improve margins over time. And that's evident by the nearly 500 basis points that we've expanded margin between 2017 and 2020. And so the target of mid-30s includes ongoing improvements from both the underlying businesses as well as expanding the RMS margin, inclusive of expected synergies to, I would say, a similar level of mid-30s over the coming year -- years.

Perfect. And then you mentioned the SaaS transition, the SaaS platform transition for RMS. Does that in any way help the margin profile as well?

Yes. The short answer, Christian, is yes. Once you convert customers to a SaaS platform, we are able to expand margins by growing revenues and creating increased efficiencies that ultimately will lead to further operating leverage. For example, SaaS-based product enables us to provide customers with enhanced value propositions usually in the form of greater functionality and usability. And that then leads typically more people to use the product. With more frequent usage of the product, that results in higher yields. And we've done the analysis sort of to compare to on-prem solutions, and SaaS-based products also are operationally efficient. Just by leveraging the cloud, you're able to deliver more frequent product updates and provide more regular maintenance in a consistent and cost-effective manner.

Great. Curious how RMS impacts the ratings credit assessment product -- process. Is there -- one, does it impact the process in any way? And potentially, is there a way to integrate and monetize that as part of your Ratings business?

Maybe a bit of an unsatisfying way for me to start, but it's probably too soon for me to provide you with examples of what the benefits may be. But as we proceed with our integration plans, we are looking at opportunities to utilize RMS' risk data and analytics within MIS' credit rating processes and analysis. An interesting use case would be, for example, to leverage RMS' capabilities and their models to enhance our ability to measure the probability of a disaster occurring, while simultaneously, and here is, I think, the differentiator, quantifying the monetary loss associated with that. And that, in turn, could help us better understand the impact of a potential disaster on an institution's credit profile. So early days, excited not just about the breadth, but really about the quality of the data that RMS has brought to Moody's.

Good. And just operationally, how will RMS be run? If I remember correctly, I think Bureau van Dijk is being run somewhat semi-independently. I think the sales force is still its own sales force. I'm just curious how you're thinking about operationally running RMS going forward.

Yes. So we're going to apply a consistent governance model to all businesses under the -- we apply a consistent governance model to all businesses under the MA umbrella, which now includes RMS. And this approach enables us to give RMS the flexibility and freedom to focus on its core markets and expertise while we concurrently leverage its capabilities to advance product offerings for complementary MA businesses. And technically, this means that Moody's integration team is working with our RMS colleagues to best understand how we can integrate sort of products and services and combine our businesses, our processes really to deliver on those stated financial targets. And while the first step is important, it's really about focusing on the people to sort of get that operational integration and interaction. And an example, I know Rob spoke about this last week, several executives from both firms had an off-site in October. And it really helped sort of outline the path for that operating model for the business. I know you asked about sales teams. So just very briefly, we've started holding our own joint customer meetings that we are aligning together for those cross-selling opportunities that we spoke about earlier, and we'll continue to keep folks updated.

Great. Let's switch over to ESG. Just to level set the conversation, maybe can you talk about how you think about ESG revenue TAM for Moody's maybe now over the next 5 years? Just curious how to size the opportunity on a revenue basis.

So we haven't provided a specific breakdown of ESG TAM for Moody's overall. But when quantifying the opportunity, there are definitely a couple of points for investors to consider. First, ESG-linked issuance for the first 9 months of this year is nearly double that of the same period in 2020. And our MIS analysts are predicting that it's going to reach approximately $1 trillion by the end of this year. And that can be attributed to ongoing transition by financial market participants towards more sustainable practices. From a revenue perspective, this creates opportunities for us, not just in green bond in our SPO businesses, but also across a number of other use cases, including, for example, our bank stress testing models. We're also seeing a great demand or greater demand from a broad range of customers who are factoring ESG risks into their decision-making to help mitigate their exposure to climate-related events. A good example could be the ESG SME, or small and medium enterprise, a score predictor that we introduced last quarter. And that generates real-time predicted ESG scores for hundreds of millions of public and private small- and medium-sized enterprises worldwide. So really, to answer your question, if you factor all of the use cases that are going to require our ESG data and analytics, I think the potential TAM in 5 years' time for Moody's overall is quite large.

Okay. You've done a lot of beefing up, whether it's acquisitions or products, your ESG capabilities over the last few years. Can you just holistically talk about your products in ESG, and how you're using them to execute against sort of this potentially large revenue TAM?

Absolutely. We believe we're uniquely positioned to serve a range of ESG-related needs for our customers and to bring transparency to the equity, fixed income and sustainability markets more broadly. ESG is an integral part of our business. You'll be able to see this in our investor presentation. We have embedded ESG factors across both the rating agency and Moody's Analytics. And we have a stand-alone ESG solutions group. MIS has considered ESG factors as part of the credit analysis process now for several years. And ESG considerations, as they become more relevant and more important to credit positioning, we have introduced explicit ESG credit impact scores, an ESG framework and then sector heat maps. Within Moody's Analytics, we are focused on delivering a comprehensive range of data-driven and forward-looking ESG adjusted insights, macroeconomic forecasts and credit risk tools. And we do this by integrating this must-have ESG data and analysis into our leading information solutions serving cases for fixed income, commercial real estate, company compliance, procurement and supply risk, for example. I know we're just discussing RMS. So I'd like to note that their physical risk models and data can also be used to enhance our TCFD-related reporting solutions, which we do view as a very near-term opportunity. Lastly, just on the ESG Solutions Group, you'll see we offer a broad range of product offerings, if I just move 4 slides forward. Within ESG measures, we provide ESG data scores, assessments, controversy monitoring and portfolio management tools. On the Climate Solutions side, we're very focused on physical and transition risk data as well as climate-adjusted macroeconomic forecasts, newer modeling, et cetera. And then around solutioning for SMEs, the previously announced ESG Score Predictor, and it's very expensive coverage. And then finally, Christian, just within the sustainable finance space, we are providing second-party opinions and sustainability ratings. And in addition, we've worked with a number of European central banks in their assessments of green bond frameworks and how we can help them and market participants meet their requirements of the EU taxonomy regulation.

Okay, a very comprehensive list of products. But maybe going forward, do you think there are additional -- whether its products and maybe capabilities that you think Moody's needs to really fully execute against the long-term opportunity?

Yes. So to fully realize our ambition of becoming the leading global ESG solutions provider, we are focused on increasing coverage, further integrating ESG into our risk management solutions and then sort of maximizing some of our product and capability development efforts. And doing this is going to really allow us to deliver a steady stream of innovations to help our customers identify and manage risks particularly in the climate space. One example could just be the ESG Solutions team recently launched an expanded data set of global physical climate risk scores and then incorporated those physical climate risk scores and data into our flagship CRE analytics platform. And so while we may be at the start of the journey here, I think we've made considerable progress. And as the market is going to continue to grow and evolve, we'll remain focused on meeting its needs.

Great. I apologize if this sounds a bit of a skeptical analyst, but I would say the ESG rhetoric is a little bit bigger than actual ESG revenues, not just for Moody's. I think broader -- your broader peers as well in the info services space. Is there a catalyst out there, I don't know if it's regulation or something else, that can really make ESG revenues a more meaningful contributor to sort of Moody's or the broader industry?

Yes. I can start by discussing the key drivers for ESG more broadly and then focus on how Moody's can take advantage of them. I think there are probably 5 key drivers at a high level. First, there is an increase in regulation. So clearly, the EU is leading the charge with their sustainable finance action plan. There's also been progress in the U.S. where the SEC has been actively involved or focused on climate and human capital. And then in the APAC region, where China, for example, has committed to reaching carbon emission neutrality by 2060. Then if we turn to standards, there is an ongoing harmonization of standards as certain initiatives like TCFD are becoming more mandatory in several jurisdictions. And then yesterday, for example, the IFRS Foundation announced the formation of the new International Sustainability Standards Board, which, along with the commitment to consolidate the Climate Disclosure Standards Board and the Value Reporting Foundation. That's pretty meaningful in terms of looking at harmonization. Third, we've seen growth in sustainable finance beyond green, social and sustainability bonds and loan issuance. We're now focusing on transition-linked loans and bonds. Maybe 2 more factors as I think about them. Fourth, I'd say, would be the increasing focus on other dimensions of ESG, in particular, diversity, social, racial and income inequality. And then finally, increasingly vocal investors continue to seek investment that reflect their values. And so Moody's, from Moody's perspective, these drivers really present additional opportunities, which is why ESG remains such an important strategic growth priority for us.

Great. Maybe shifting on to cyber, and this is a space where I'm actually surprised isn't just meaningfully bigger for the industry given how critical cyber risks are to most businesses. But it's one where you've done -- Moody's has had a focus for quite a while, actually. And I'd be curious maybe to talk about how we should think about, again, the cyber revenue TAM for Moody's over the next sort of 3 to 5 years?

Yes. It's evident that cyber attacks are growing in frequency and severity, and they're affecting a broader range of industries than ever before. MIS actually recently published a report on cybersecurity for sectors like property and casualty insurance, higher education and sovereigns as an example. And they all showed that it's a growing problem with material implications. And that's why there has been an increasing demand from our customers to help them better identify and measure and manage cyber risk, and to integrate that into a variety of sort of our risk workflows. So that's why investment in this space has become increasingly important for Moody's. But I also think if you step back for a minute, this is another area where we, as a company, can provide that best-in-class holistic risk assessment solution to our customers to ultimately help them understand who they're doing business with, if who they're doing business with reflects the values and purpose that their company may have.

Great. Same as ESG and cyber, you've been beefing up capabilities, done a couple of deals. I think BitSight is the most recent. Can you talk about your products in cyber and how you're using that to execute against the revenue TAM?

Yes. So maybe to give you a few examples. Within Moody's Investors Service, we have a cyber risk group that regularly publishes research and helps other credit analysts understand the impact of cyber risk. Within Moody's Analytics, we are working to develop a cyber risk quantification tool. And then on the BitSight deal, together, we have the most comprehensive cyber risk assessment capabilities in the market today. And that helps us be well positioned to be able to quantify financial exposure to cyber risk as well as the integration of those insights into our risk workflows. Just a couple of examples of what that could look like from a product perspective. If you think about the KYC space, cyber attacks and ransomware events are increasingly being viewed as financial crime. And so we will be integrating BitSight's 10-year historical data set, which now covers over 200,000 entities into our KYC procurement and supplier offerings. And we are also working on the financial quantification of cyber risk within insurance and credit use cases to provide better insights into the cyber risk insurers and lenders in the risks that they're underwriting and how they're pricing them.

Very interesting. Okay. So the KYC scores product essentially could have a cyber component, which just basically brings into it as you quantify cyber scores.

Yes, that is correct.

Perfect, okay, good stuff. So we just have -- we only have 3 minutes here, but a few more questions. On the credit research product, I think on the last quarter call, you talked about generally strong renewal yields in that product. Curious exactly what's driving sort of the strong renewals and how should we think about that going forward?

Yes. So at the MCO level, the contribution from pricing initiatives remains around 3% to 4%. And that's very consistent with historical periods. Within credit research specifically, the driver remains the need for transparent, thorough and comprehensive analytics and research, especially during these periods of uncertainty. An example could be we've enhanced the relevance of our credit research products by integrating ESG considerations into our flagship CreditView product. Also, you can see it at moodys.com. We've provided our customers with access to more holistic analytics. You can see the ESG portion here, Shivani has brought it up on the screen. And that's really helped them make better decisions, save them time and money, but it fundamentally reinforces the demand and value of our products.

Great. And then just curious on the broader MA business, I know you just finished the RMS acquisitions. But do you think there's opportunities to do more from an M&A perspective to bolster any of those things you talked about today? And if so -- not to get too specific, but if so, which areas would make the most sense?

Yes. So maybe before speaking to M&A specifically, I just want to reiterate our priority when it comes to managing the balance sheet is really to ensure the business has both the capital necessary to grow and the flexibility to operate effectively. And then beyond that, we're going to deploy cash in a manner consistent with our long-held capital allocation policy. First, to reinvest back in the business organically then look at sort of appropriate M&A targets, and only after that return capital to shareholders by way of dividends or as share repurchases. So without a doubt, one of the most important roles that we have as a management team is that efficient and effective allocation of capital and resources. And we believe we have several compelling opportunities in our high-growth markets that we serve. Quick example, recent acquisition of Bogard. They are a leading provider of data and information on politically exposed persons in the Nordic region. And their sophisticated technology will continue to advance our ability to help customers prevent financial crime. Moving forward, you should expect to continue to see from us investment, again, both organically and inorganically, because ultimately, we want to win in these markets. And that means we need to build enough scale and sufficiently operational flexibility to help ultimately our customers and our shareholders win here.

Great. Last question. We're asking this question to every executive at the conference. What is the single biggest execution challenge that you face as a company?

Improving the interoperability of our data and analytics to give our customers a holistic view of risks and to deliver to them in an intuitive and digestible format. And just to expand a second more, we have the raw materials, and we are leveraging them to deliver a world-class experience to our customers. And our goal is really just to make it easier for them to find the answers and insights that they're looking for so that they can make better, more informed decisions.

It's a very big topic, I wish we had more time to dig into it, but we're out of time here. So thank you so much, Mark, for the time. I really enjoyed that and I hope everyone else on the call have found it useful. Thank you, everyone.

Thank you very much, Christian. I appreciate the time this morning.