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

Good afternoon, everybody. Thank you for joining us here on our next session. We're pleased to be hosting Moody's CFO, Mark Kaye, to talk about their range of ESG solutions and also a focus on climate. So Mark, firstly, thank you for being here.

No, Manav, it's great to be here this afternoon and much appreciation to yourself and Barclays as well.

Great. Appreciate that. So Mark, maybe just first question. Moody's is obviously best known for its credit ratings businesses and for those of you who follow you closely, also for your Moody's Analytics business. But how does ESG and climate fit under the Moody's umbrella?

ESG and climate factors are a fundamental component of our risk assessment capabilities. And as such, we take a comprehensive approach to their integration at Moody's. Let me spend just a minute to provide a brief overview of our diversified offerings, and then I'll get on to the specifics of your question. First, we integrate ESG into our credit analysis and our credit ratings with full transparency around our methodology and analytical approach. Second, our sustainable finance solutions help investors and issuers unlock growth and diversification in the sustainable debt markets. And third, we deliver a range of climate solutions and insights that includes assessments that cover over 10 million locations worldwide with over 400 market-leading risk models that assess the impact of perils such as floods, hurricanes and wildfires. Fourth are Moody's ESG assessments, which themselves provide a holistic view, capturing financial and stakeholder impacts with global coverage in excess of 300 million public and private companies through a combination of analyst-verified and AI model scores. And then finally, we do offer a number of product solutions and capabilities that help companies address regulatory requirements. If I now look with the idea of our broad ESG and climate offerings in mind, it's worth me spending just some time to talk through how they are integrated across the firm. And let's start with Moody's Investors Service or MIS. Our credit rating analysts consider ESG factors when reviewing both issuer- and issue-related transactions. And they assign 2 distinct scores in addition to incorporating, where relevant, their assessments into the credit ratings themselves. The first is the issuer profile score, which measures an entity's exposure to ESG-related risks and opportunities that could be material to credit risk. And the second is the credit impact score, which captures the impact of ESG factors on an issuer or transaction-related rating. And both scores are really designed to be comparable across sectors, geographies as well as asset classes. And that enables easy investor comparison and tracking when managing credit portfolios that are exposed to multiple ESG risks. We do pair our systematic approach to ESG with transparency. Our credit opinions and press releases provide information on the ESG factors that we considered in the ratings process and additionally, MIS' research and tools, which includes environmental and social sector risk heat maps as well as carbon transition assessments, provide increased transparency on the impact of ESG and climate factors on our credit profiles. If I turn for a minute to Moody's Analytics, or MA, they house our world-class catastrophe models and a comprehensive suite of accompanying risk assessment solutions. And we are continuously integrating ESG and climate data and analytics into our existing products as well as developing new offerings to meet evolving customer needs. And that's going to include flagship products like Moody's CreditView, which enables a comprehensive assessment of credit risk as well as the Climate Pathway Scenario Service, which was created to help insurers meet regulatory requirements regarding the quantification of the financial impact of physical and transition risk. And then really, the third and final area, just to briefly cover the full gamut, is Moody's ESG, which consists of our stand-alone ESG and climate solutions, which really help organizations better understand their ESG performance, assess climate risk and ensure that they can strengthen their sustainability action plans. And this is the area of the business that provides sort of the ESG scores and research. And those are the analyst-validated and model-driven ESG assessments for millions of private and public companies, which, in turn, help organizations identify and manage material ESG factors that could affect portfolio and supply chain resilience. It's also the area of the business that manages climate solutions. And that's what the idea of empowering market participants to, again, identify, quantify and manage climate-related opportunities. And a good example here is our assessment of the transition risk exposure on really thousands of companies, for example, from fossil fuel resource types or power generation technologies and that ilk. I realize, Manav, it's a long answer, but this is an important area for Moody's. And I just wanted to be comprehensive in sort of giving that initial overview as we get the conversation going this afternoon.

No, that's super helpful, Mark. I mean, that's exactly what we wanted to help just set the stage of all the solutions, data and insights that you guys provide. And I think you answered some of this already in the introduction, but there's a whole host of competitors out there. You have big public companies, medium-sized companies, niche startups, fintechs, you name it. They're all coming at it with this ESG angle. But can you just help maybe elaborate a few of the points that helps Moody's differentiate from the competitive landscape out there?

Sure. I would say the answer is actually quite simple. We have a unique combination of trusted data, insights and analytical capabilities that place us in a leading position to provide critical market solutions for this risk domain. I think it would be helpful to our audience if I explain what that means maybe for each of our businesses. So let me again start with the MIS. So our key differentiator in the rating agency is our ability to integrate and combine the information we receive from issuer discussions regarding credit and ESG considerations with our analytical capabilities and methodologies. And that's really going to lead to what we think of as best-in-class ESG risk-related insights. Similarly, for MA's climate capabilities, they've been significantly strengthened by last year's acquisition of RMS, and that enables us to accurately quantify the financial impact of physical risk as well as how it correlates across different portfolios and companies. For example, using some of our, again, world-class modeling tools, we can assess the impact of floods, hurricanes, wildfires and other climate perils. We also have the ability to model many nonclimate-related perils. And that's going to include earthquakes, pandemics, even cyber risk. And the idea here is really to provide decision makers with a comprehensive view of multiple risk factors. And then finally, in MESG, the concept of double materiality taken in the context of our ESG assessments is a key competitive differentiator. So let me bring that slide up on screen now. And you can see here the key point is that we consider both how ESG factors affect a company's enterprise value as well as the impact it has on the society and the environment in which the company operates. And this double lens perspective reflects the dynamic nature of ESG materiality, and it's core or central to the work that we do. And we think that's important because as markets evolve, ESG performance today could result in really financial risk tomorrow.

Got it. And talking about the double materiality, we discussed that same topic with the ISSB earlier today as well. And that brings me to my next question, which is, obviously, we all know ESG and climate are important considerations, but there is a lack of data comparability. There's very little consensus in the standards and transparency. So perhaps just how is Moody's positioned? Or what are you guys doing to help customers address these challenges?

I agree with you, Manav. ESG and climate considerations are becoming increasingly important. And the market is seeking clarity and standards to help it better understand and to be able to act upon, again, both the opportunity and the risk set. Customers tell us that they need ESG data and metrics to assess the validity and credibility of company's commitments and their actions to transition to lower-carbon products. Like other stakeholders, they're exposed to vast sets of conventional and alternative ESG data and metrics. And we are seeking help or those companies are seeking help to connect the dots to be able to identify signals and to respond to evolving regulations or recommendations like the ISSB is introducing. Moody's is very well positioned to address these needs. Our solutions enable our customers, and that's everything from corporates, banks, insurers to governmental entities or asset managers to really identify and manage those climate risks and opportunities. And that ultimately would lead to strengthened sustainability action plans as well as improved communication with key stakeholders. And let me give you a couple of examples on how we're delivering this. First, I would say through a holistic picture of a company's activities, and that we are able to create using near real-time data extraction and reporting model. And that's based on both corporate reporting, it's based on both our AI analytics and then where needed, supplemented through sort of our analysts and their experience. And that comes from direct engagement with the company. It can come from sourcing data that's in the public domain, et cetera. Second would be through our controversial activity screening products that help customers monitor companies' involvement in sensitive activities. In short, this screening provides a comprehensive view of the most common areas of investor concern, such as an issuer's association with sectors like coal, arms, tobacco, even specific chemicals. And then finally, if I move on to climate, climate-related risks can have a significant impact on the long-term value and financial stability of companies across really all industries. And as such, there is a need to improve transparency, particularly as climate events become more frequent and severe and as pressure from stakeholders increases. There's also, just one other comment here, significant run for harmonized and improved disclosure on company's climate-related physical risks as well as I would say their preparedness for climate transition. And we're seeing regulators in the U.S. and across the globe move in this direction as they place the focus of issues of consistency, reliability, accuracy, comparability really at the center of what they're looking to do. And this is where Moody's is able to help banks and insurers, as an example, conduct those assessments and run those scenarios so that there is a better understanding of the impact of climate events, both in individual assets and then also how they correlate across portfolios.

Got it. Those are really helpful examples, Mark. And maybe that leads me to my next question, which is what are some of those ESG products where you're seeing the most customer demand for or perhaps where you guys are investing, where you feel like is the biggest growth opportunity? And maybe if you can just throw in there any particular customer segments that stand out.

Sure. So really, across the globe, there has been robust demand for several products, including ESG-modeled scores, second-party opinions, or SPOs, and our Climate-on-Demand application. And demand has been driven by a push from numerous stakeholders for greater disclosure of ESG and climate risk and for entities to consider the impact of these risks on their operations and investment decisions. Now our stakeholders are also, by the way, increasingly, as you know, concerned about the impact companies have on society and the environment, we've seen a lot of press about that recently, in addition to the profits that they generate. And we have also seen a marked increase in sustainable bond issuance. Over the past couple of years, I think back to 2021, that was a record year. Sustainable bond issuance was up year-over-year with growth in excess of 60%. And then as we responded to that increased demand by providing clarity on the sustainability impact of proceeds and the alignment to strategic frameworks. An example could be we provided an SPO on the European Commission's NextGenerationEU green bond framework, which really does result in the EU becoming one of the largest green bond issuers worldwide. And Manav, just continuing on there, despite what I would say is current market headwinds for sustainable bond issuance as a result of what we've seen year-to-date, our May 2022 report on sustainable finance does reaffirm that long-term sustainable growth remains strong. And that's going to be driven by many factors, including growing regulatory focus on sustainability, the interconnectedness of environmental and social objectives, growth in climate mitigation practices and even the adaptation of financing as firms really work towards decarbonization efforts to achieve any of their net 0 goals.

Got it. And so maybe I ask the question in a slightly different way, like which areas are you focusing most of your product development work on? Are there any white spaces or capabilities that you feel you're missing that you need to either invest on organically, inorganically? Maybe you could address that.

All right. Thank you for asking. This might give me an opportunity to talk a little bit about ESG360 and some of the other products. So we are continuing to focus on integrating ESG and climate risk assessments into our solution set. And I know I've mentioned several of these products and capabilities during our conversation so far. So one newly launched solution that we mentioned on our Q1 earnings call is our Moody's ESG360 platform. And that was principally designed with the customer in mind. And it delivers very transparent, what I think of as very decision-relevant climate and ESG data and insight for portfolio managers. And ESG360 really allows those portfolio managers to identify ESG leaders and laggards across themes, sectors, regions with the idea of monitoring and reporting on the portfolio-level performance across a pretty broad range of research lines and then to be able to analyze key risk metrics at both the portfolio and the entity level. And then all data points are clearly labeled with their relevance to industry standards and are traceable back to their source. This is something the management team is very excited about because we really believe that it delivers innovative approach and demonstrate some of the considerable progress that we're making in addressing some of the customers' evolving needs. So with that, I realize it's a lot of words, but let me maybe pull up a demo of ESG360 so that I can share with you sort of real time what we're seeing and what we're beginning to experience in the market. So if I log on to ESG360 sort of on the top side here, the first view you're going to have is of our dashboard page. And we have 3 different views on our website today, and you can think about it as a funnel into how you would perform an analysis of your portfolio. The first is the dashboard view upfront here. And that really offers a comprehensive view of your subscribed data set in one view. The second is a portfolio analysis for you here, if I just flip over. And that allows users to do a deeper dive into a portfolio analysis of a specific data set. In this case, the companies that we've preloaded. Users obviously have the ability to toggle between different research lines, if I could go over here, between physical risks from temperature alignment, carbon footprint as well as across different -- [ here we are ] industry sectors, different dates, different regions. And the idea here is to be able to see their portfolio distribution, again, screen for leaders and laggards. And you analyze any regional sector climate impacts, et cetera. And then, of course, we do allow users to take a look at individual company searches. So there's a particular company that you're interested in searching, you simply have to bring up the name. And you can click through to the individual company for additional detail. If I go back now to the dashboard for a second, there's a couple of things I think the audience might find interesting. You'll see here daily controversies right upfront in the dashboard, at least through May 9. You'll also be able to perform a geographic distribution analysis and compare those different research lines. And you'll see leaders and laggards within the portfolio, as I mentioned just a couple of minutes ago, geographic distribution, research lines, et cetera. Let me pause here on the comparison of research lines. I'll do a little bit more depth here. So let's say, for example, if I were an investor looking to reduce my portfolio's greenhouse gas emissions and meet a 2030 mandate, for example, to eliminate investments in companies with more than 50% of their revenue in fossil fuels, all I would need to do is quickly look up which companies in my portfolio fall into that highest carbon footprint category and have brown shares, for example, involved in fossil fuel activities greater than 20%. So let me go ahead and select carbon footprint. Let me go ahead and select brown share, and I'll select the most intense ones first. And then you can see the companies in my portfolio that fall into that characteristics that I might be interested in managing through would be on the list over here. The full list of companies is obviously dependent on portfolio. So here I've loaded up 314 portfolio companies. And simply, you can get the list here available to -- specific to the individual analyst or user. If I also spend just a minute looking at carbon footprint because I think it's such a timely question, go over to portfolio analysis, interested specifically to understand our carbon footprint. And here, it's quite unique in that carbon footprint offers a comprehensive view of your portfolio's overall carbon footprint impact. And the page itself provides a weighted average calculation of a firm's carbon footprint in grade, the carbon intensity and then also the financed emission values. And obviously, you can upload your own benchmark portfolios to compare how your portfolio's carbon footprint aligns with any benchmark data emissions calculations. The summary section upfront shows what your current portfolio performance. Below that, you'll see what companies are driving your carbon footprint. And then we have an update table that shows, for example, any new companies that have added to our coverage as well as any monthly changes to the carbon footprint category grade of a company within your portfolio. We also have an impact chart that displays which companies in your portfolio, for example, have both certain investment percentages and scores, depending on what you're looking at in terms of positive or negative climate impact. And then, of course, if you wanted to look at the carbon footprint in absolute terms, you can view that in the rank order of the highest contributors, both in our leaders and laggards section. And similarly, you can do this by region and sector. And I think the point that I'm conveying here is that I think there's been significant progress that Moody's has made in this area of being able to quantitatively bring to life analysis that various portfolio analysts can do. So really, again, as an investor that's interested in GHG emissions, the portfolio aggregation data and company level data of carbon emission information does inform my strategy. We do have a lot of data that allows them to make good, clear, transparent, traceable decisions around that data.

Got it, Mark. That was super helpful. I mean, from a user perspective, it clearly sounds like that dashboard is super friendly, incorporates all the different data sets you guys have built and acquired over the years, but it couldn't have been easy to build. So can you just talk a little bit about how important investments in technology are and how that plays a critical role in your tools? Because we have heard that from your other competitors at this conference as well.

Yes, Manav, it's a really, really great question. So technology is a key component, and it has really increased in importance, given the accelerated pace of digitization during the course of the pandemic. And it's also enabled the development of models and analytics that we weren't able to imagine several years ago. And those models and analytics are really used to identify and address some of the challenges that are related to climate change and everything that's from the curation of company data to the delivery of critical ESG and climate insights. For example, we rely on advanced machine learning algorithms to automate the collection, the cleansing and then the organization of that data, which we use to deliver information on a company's impact and progress towards its climate goals and commitments. And our data ingestion platform really does bring together what we think of as analyst-designed interfaces, which allow for detailed evaluation with sort of that machine capture and content. Another example could be our ESG Score Predictor. And that's a first-of-its-kind tool that generates real-time predicted ESG and climate metrics really for any company anywhere in the world based on either its location, sector, science. And that ESG Score Predictor also provides, by the way, financial institutions with quantitative data that is used for portfolio and risk management as well as helping those firms monitor the ESG risk across their global supply chains. The data, just a second on that, is also based on a model that's derived from Moody's proprietary ESG scoring methodology for those large-cap corporates. It has over 300 million precalculated company ESG and climate metrics. And the tool is not just valuable in terms of the product, but it's also valuable in terms of how easy it is for customers to access that tool. And that could be either through Moody's platform. It could be through on-demand APIs, but it's about allowing customers to leverage the insights provided by those scores in their daily workflows. And just this year, I have to say this, the ESG Score Predictor won the Analytics Innovation Award from FinTech Breakthrough. And that's one of the many awards and recognitions Moody's has obviously received for its technology and its innovative solutions in this space.

Got it. All right, Mark, let's bring this back to a couple of numbers here so that some of the investors in the audience can put this into perspective. So last quarter, this last quarter, you provided some new breakout of ESG and climate revenues. You included the RMS-related climate revenues in the business. So maybe just to start off with, can you just remind us of what that number is, what it has been growing perhaps and how we should think of the growth rates looking forward?

Sure. We -- thanks for that. So we did disclose that we have approximately $170 million in pro forma ESG and climate-sourced revenues in 2021 that is expected to grow in the low double-digit percent range in 2022. We also mentioned that our climate revenues, which are predominantly from RMS, are expected to accelerate as we continue with the many integration efforts that we've spoken about. But we're not looking to provide a detailed breakdown necessarily of revenue by peril or by product type. We do plan to continue introducing new products and solutions as well as enhancing the existing ones really with the idea of meeting the low double-digit revenue growth target that we have disclosed for the year. And that's going to include our ESG360 and climate products that, again, are focused on the identification, the quantification and the monitoring of climate risks. We've also expanded coverage of the physical risks that are posed by climate change. And that includes introducing a new subsovereign risk or climate risk score that quantifies population-weighted exposure to floods, heat stress, hurricanes and typhoons, sea-level rise, water stress and wildfires. And we've launched the temperature alignment data, which is a net 0 solution that assesses how companies' emission targets align with global temperature benchmarks. And that allows, again, companies to track their progress against meeting those targets. And they're great additions to what I think of is an already robust set of ESG and climate solutions that Moody's provides, again in helping address some of the complex interconnected macroeconomic, financial, society factors of climate change. And then finally, maybe just to close out this answer. We expect to share continued good news as we continue to work with our colleagues from RMS. I think the teams are integrating very well. And they're very focused on providing differentiated solutions to meet, again, customer demand in this climate space.

Got it. And I do want to touch on the RMS acquisition in a bit. But just to follow up real quickly on the prior question. I understand why everyone is breaking out ESG and climate as separate categories almost. So within your $170 million pro forma number, is there a sense you can give us on how much is climate and how much is ESG per se?

Sure. You could think about climate being the vast majority of the contribution, and we've aligned the actual definition of climate to that used by both the SEC and the TCFD. And we've taken a very strict analytical view of really only classifying climate revenues as climate versus a broader interpretation or analysis of what climate in theory could be.

Got it. And then maybe let's end with a few questions on RMS, it was one of your bigger acquisitions you announced about a year ago. Can we -- maybe you can just remind investors of kind of the targets you had set back then and just how that integration is going today to start out with?

Sure. So acquisitions, Manav, as you well know, are really about people. And we've taken a very thoughtful approach to ensure that the RMS team feels fully at home within the Moody's organization. We've been working very hard to preserve RMS' unique and what we think of as very valuable qualities, which should ultimately enhance our ability to continue integrating efficiently and delivering on the synergies that we identified when we announced the acquisition back in August last year. Our integration management office is focused, first and foremost, on accelerating that integration of personnel as well as the commercial assets and the operations to deliver maximum value. And those efforts have included aligning our sales and financial systems for go-to-market activities, putting in place the necessary IT infrastructure to place -- really sync up the underlying ecosystems and then, of course, to provide the HR-related support. In addition to merging our sales teams, we've also built a single expert -- sorry, in addition to merging our sales teams, we've also built a single expert team focused on climate by combining the 2 separate teams that were previously working on climate at Moody's and then at RMS. And what I'm most excited about, it's really our ability to deploy this powerful combination of Moody's and RMS' offerings to provide, again, an integrated risk assessment solution for a really very large number of customers. And for example, you can think about the insurance industry relying on RMS' analytics to manage risk selection, profitability and solvency. But the wide-reaching nature of climate-related risks means that those same analytics can be applied to many different industries, for example, from commercial real estate to banking, all of which is going to ultimately help our customers build their resilience and enhance their risk management goals. Thinking more broadly, we'll continue to integrate RMS' climate assets into our offerings at Moody's. And you'll recall that Rob mentioned what we've been doing during this -- sorry, what Rob mentioned we're doing in the CMBS space during our last earnings call. We effectively mapped every property that has an outstanding loan in a CMBS security to a physical risk through RMS' analytics and scoring rubric. And we're able to assign those property scores for various physical risk perils. And we've done that because the information is critical really for any CMBS portfolio manager who wants a full view of their portfolio of climate change risk exposures. And one more quick example and then I'll pause. We are also using RMS' models to assess the impact of physical risks on banks' mortgage portfolios. And that's about providing a deeper understanding of -- and concentration of -- deeper understanding of concentration and vulnerability and really enabling the quantification of climate events.

Got it. Yes. I think you already answered a bit of it, but I was going to ask you maybe to take a step back and talk about what RMS brings to Moody's, what Moody's brings to RMS. And particularly in the framework of that $150 million of incremental RMS-related revenue synergies you guys have talked about by 2025. Because we did see some of it. I think RMS held their Exceedance conference a couple of weeks ago. And so there was clearly some good examples there, but maybe just wanted to hear your high-level perspective for investors to appreciate.

Yes. I think there are many differentiating qualities that both Moody's offers to RMS and RMS offers to Moody's. Maybe just a couple of quick examples here. So first, if you think about RMS and their climate capabilities really are best-in-class models and the depth and value that the RMS analysts are able to bring through their climate training and their climate expertise really have allowed us to deploy those analytics within existing Moody's modules. So for example, we offer climate-adjusted credit analytics in our bank credit assessment and loan origination tool CreditLens. And the capabilities within that tool have been enhanced through the value that our RMS colleagues are able to bring. Similarly, Moody's is able to expand the offering of RMS products well beyond the traditional property and casualty sector as well as expand the nature in which RMS' products are provided beyond just sort of the traditional insurance industry. And we've spoken extensively about accelerating RMS' revenue growth rate over time. And part of the way that we're able to do that is, again, through cross-selling the introduction of existing RMS products beyond their traditional customer base. And those are just maybe 2 of the ways that we're thinking to take advantage of the RMS acquisition and the benefits that it brings.

Got it. All right, Mark. Well, maybe one last one to end here. And I think we already know the answer to this, but I'll ask it anyway. But in terms of capital allocation priorities, in terms of organic investment priorities, clearly, ESG is a top priority at Moody's. Is that fair to say?

I think we all know the answer to that one, Manav. Absolutely, it's a top priority. And Moody's is really in a prime position to be able to capitalize on our market-leading capabilities across all facets of climate risk. And it's really going to help us capture significant market share in a growing sector. And Manav, if you just permit me, I did prepare one slide on the off chance you might ask a question around this. We are being recognized for our advancement. We have received over 40 awards in just the past 3 years, including the Analytics Innovation award from FinTech and the ESG Opinion Provider by the International Finance Review. And we've also been recognized as an ESG Category Leader by Chartis, and I thought I would just show the slide. I thought it was a pretty cool way to finish some of my remarks that I wanted to provide.

No, that's super helpful, Mark. Thank you so much for your time and looking forward to tracking your developments. Hopefully, next year this time, we can talk even more about it and elaborate on your investments over the last year. So thank you again, Mark. Really appreciate it.

Likewise, Manav. Thank you very much.