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

Okay. Welcome to this fireside chat. I'm thrilled to be hosting Moody's and Mark Kaye from Moody's today. We will structure the chat as, first of all, starting with some general questions on the business before we then look at both MIS and MA. And please submit any questions you have via the online function. I'll put them to Mark as we go. And -- but Mark, thank you so much for joining us. It's a pleasure to host you, and thanks for the opportunity and the same to the IR team.

Maybe let's start with some general questions, as I mentioned. It's obviously been a bit of a volatile year for revenues. Does this make Moody's consider more the business mix? It's something we spoke about a little bit on the Q3 call, but it came to sort of explore this a bit more. Is there a desire to shift more towards subscription-based revenues as a whole in line with perhaps some of the peers? What's your thoughts there, please?

Yes. So Russell, maybe first and foremost, very much appreciate yourself and Redburn hosting us this morning. It's really a pleasure for us to be able to speak at the conference. And you're right, it's been a volatile year for the credit markets. Where we're typically asked this question during cyclical market movements, such as the current cyclical downturn that we're experiencing, which I think you and others are very aware, is adversely impacted issuance, and that's sort of the MIS revenue. To provide a little bit of context, MIS is oriented towards more transaction-based pricing, which we believe is the optimal pricing framework for the rating agency as well as for our customers. Transaction revenue constituted approximately 61% of total revenue, I think, on a trailing 12-month basis as of the third quarter. And we've really taken this approach because based on our data, transaction-based pricing tends to generate greater revenue than relationship-based agreements over the medium term. However, ongoing market disruption has caused first-time and opportunistic issuers, which are likely to be more in the pay-as-you-go or transaction-based pricing constructs, to effectively pause issuance. But we still believe that this disruption is cyclical in nature. We are -- and we remain strategically positioned to benefit when public issuance market activity normalizes. And so we believe it's the right construct. And the other important point maybe to make here is that the Moody's Analytics business has the opposite mix, which is about 94% recurring revenue on a trailing 12-month basis also at the end of the third quarter. And so Moody's Analytics provides a pretty good counterbalance to the transaction-based revenue volatility that we see in MIS.

Okay. Maybe let's talk to some of the cost measures that were announced at Q3, if we could, Mark. And obviously, those measures help support the margin next year, I think you mentioned that. Can we just discuss or could I ask detail maybe where these opportunities come from in terms of reducing the workforce without compromising even the potential upside to the business as that cycle turns, just getting to understand that the upside is still very much on offer?

Okay. Russell, it's a great question. It's one I feel very passionate about. I apologize in advance if my answer is a little bit long but there's -- I have quite a few thoughts here, I think, worth sharing. So we mentioned this on our third quarter earnings call, we've significantly expanded the size and scope of our 2022-2023 Geolocation Restructuring Program. And this expansion is going to help fortify and stabilize MIS' full year 2023 adjusted operating margin in at least the mid-50s range. And that's in addition, of course, to bolstering MA's adjusted operating margin when we release guidance in February next year. People are our largest expense, and I think that gets to the heart of the question you're asking. Approximately 60% of our costs are compensated -- compensation-related and tied to salaries and benefits as well as incentive and stock compensation. And as we've done in the past, we are being very deliberate and thoughtful in our expense rationalization because our goal is really to ensure that MIS remains the agency of choice and is a thought leader for our issuers and market participants. And that means that consistent with the approach we've adopted over the last several decades, we are prioritizing our ratings quality, which we believe is a differentiator for Moody's in the market. And this is one of the reasons that we publish these statistics on ratings quality and performance because it shows the predictive power of the Moody's rating scale. And so therefore, it's a priority for the management team to maintain our deep bench of experienced analysts across economic cycles because typically, we find issuers and market participants want to engage with those analysts during periods of stress like we're going through at the moment. And that -- so as we approach the cost and utilization exercise, it's really important for us to keep that in mind. However, some of the work that we're doing is around expanding the utilization of the alternative lower-cost locations, where there is sort of a requisite skill and talent base that we can use to supplement more of the in-depth analytical work done by our core analysts in some of the higher-cost locations. And that's going to allow us to both strategically invest for the right ratings quality at the same time as managing our expenses more efficiently. If I look at noncompensation just for a moment, procurement and sourcing teams are continuing to actively seek opportunities to generate savings through supplier cost avoidances, rebates, volume discounts as well as negotiating for comparable levels of service with more favorable terms. And then as part of what I consider best practice, we are continually assessing whether existing external services can be absorbed more effectively into our employees' day-to-day responsibilities as we become more efficient as a company and upskill talent across the firm. So maybe to summarize, we're balancing previously generated and sometimes new cost efficiencies with taking smart actions to exercise financial prudence to counter inflationary and other pressures. And that's going to enable us to invest in our employees, but also improve and stabilize the margin as we move into 2023.

Fair enough. So I appreciate the detail in the answer there, Mark. Can we maybe just talk about MIS? I think you went there in the answer. Maybe starting with the outlook for '23. If I just took your ability to reprice in this business, based on some historical analysis we've done, the maturity rules, which both yourself and S&P give data on, yours is more timely over that. And then there are thoughts around new issuance. I think we could feasibly paint a picture for a recovery in '23. Even without that new recovery in new issuance, I think that's upside optionality. But if we look backwards for a second and we look at the forecast for issuance from last year, it proved way too bullish. And the previous year, I would say, way too cautious than what we saw in 2021. So is there a danger, Mark -- is there a danger that history repeats itself here in terms of underappreciating the strength of recovery in '23? Just to get your thoughts on that.

Yes. So Russell, a fabulous question. Also maybe a little bit of a -- let me give you a little bit of a lengthy answer because I think there are some good puts and takes here that are just worth considering. We've to date been very intentional about not bringing forward issuance guidance for 2023. So as I give my remarks, if we can just put that in context. We have had a few years of unusual market activity. And I know we mentioned during our last earnings call, the confidence interval around our outlook has been much wider now relative to prior periods. And that's really because the current environment is, to your point, it's quite volatile. And we see market participants are trying to understand really a couple of things: one, the individual and interconnected impacts of geopolitical tensions; the trajectory and duration of inflation that we did see some positive signs in the last print earlier this month; and then the Fed's response to those prints, especially as interest rates are now rising higher and at a pace that's much faster than what we expected earlier in 2022. Ultimately, the impact of these variables on the macroeconomic environment and on the issuance market will inform our outlook for next year. We also mentioned in the recent earnings call that we believe the third and fourth quarter of this year will likely be the trough in terms of the rate of issuance decline from prior periods. And that means we do expect gradual improvement in issuance throughout 2023, particularly in the second half of the year as macroeconomic front becomes clearer. And when we do get some clarity around the certainty and stability in the market, we are hopeful that in the first quarter of 2023, we can then turn our attention to the relative strength of the recovery. And maybe with that in mind, just a few headwinds and tailwinds I wanted to call out here. So maybe positive impacts. First, of course, if U.S. inflation abates in the first half of 2023, that could cause the Fed to pause tightening and turn more dovish in its guidance. And that may even, and may even, I stress that words, subsequently lead to lower rates. Second, of course, the geopolitical tensions and its impact on Europe's energy crisis ease. Third point that you made, the refinancing walls for some of the nonfinancial corporates are intact, and that's about $4 trillion over the next 4 years. And of course, we have that backlog of first-time issuers who've been waiting on the sidelines. And then the sort of the last point in the positive column, I'd say, is M&A has been quite suppressed in 2022. And with private equity capital to deploy, it could pick up substantially in 2023. Of course, all of that could be counteracted by escalation in the current geopolitical crisis with Russia and China being top of mind, at least for most; a recession, economic deterioration resulting in sort of a wider credit spread -- wider credit stress or wider spreads; and then, of course, lastly, negative surprise on inflation currency. Unexpected increases inflation, could cause the Fed to reconsider the pace and trajectory of rate increases. And that could then unsettle the markets and potentially fuel volatility. So I realize, a rather long answer, a lot of moving parts in the short term. But most importantly, the nature of this disruption is still predominantly cyclical rather than structural in nature, and sort of that gives us comfort in our underlying business model and drivers.

Yes. Makes sense. I actually had 2 questions on the back of that in respect of the interaction between the business and the absolute level of rates. So firstly, I'll give you both questions together, actually. Maybe -- at what level do you think corporates en masse would be put off using debt as a source of funding? Is 4%, 5% a barrier to net borrowing in your view? And just sort of you mentioned there, Mark, in terms of if rates were to come back down at the same pace or a similar pace to what they went up, I kind of sense that would be a negative for the business, rate volatility were to stay high. So just wondering if I can get your thoughts on both of those things, please.

Yes. Great question. So the credit markets, in addressing your question, can likely absorb higher interest rate levels provided, and I think here's the key point, that rates are supported by economic growth and that they're well anticipated, if people can plan for this. While we, I would say, believe the Fed has been doing a great job recently of signaling its intentions, it's the pace and the magnitude of the rate hikes that have been coupled with decelerating economic growth that, I think, really put stress on the issuance markets. It's important to also remember that issuers consider more than just the underlying rate increases in the market but the overall cost of issuing debt, which includes spread. And rates and spreads remain, I would say, in line with historical averages despite recent increases. And that's important to keep in mind, that although rates are higher, they're actually pretty much in line with what we've seen occur over the last several decades. However, we have seen, just as Moody's, a decrease in the number of first-time mandates as well as a little bit of a limited pull-forward activity. And one would expect to see more of this in a rising rate environment. And so I think what we're -- our hypothesis here is that issuers are looking for more certainty in the rate and spread environment really before they have the confidence to ultimately enter the market.

Okay. Maybe just changing subject away from clearly issuance-based questions. Maybe -- a slightly challenging question maybe, but the annual data that we're tracking from the SEC suggest Moody's has been kind of losing a little bit market share on a consistent basis in the U.S. domestic ratings side over the last decade. Am I right in that, Mark? Or is there something going on in the data there and the way you're disclosing the data or the way they're reporting the data that makes it look that way, but actually, there's more to it than that?

Yes. And Russell, just to confirm, SEC?

SEC, excuse me.

All right. Maybe just to comment upfront, we typically don't comment on market share positioning, other than I'd like to say Moody's continues to be a leading credit rating agency, not just in the U.S. but across the world. We have a little bit over $70 trillion of rated debt outstanding. And we choose as a firm to focus and compete on the quality and accuracy of our ratings, which really serve to maintain and increase the value proposition that we provide to market participants as well as our relevance in the capital market. The SEC data, to the question you asked, primarily illustrates market share by number of credit ratings rather than by dollar amount of the securities that are rated. I think the one exception here is structured finance. And the definition here is the interesting point here of what constitutes a credit rating is actually largely determined by the credit rating agency itself. So back in 2017, at least from a Moody's perspective, we began to take a more conservative approach in our definition, which, for example, excludes credit assessments or credit estimates. We also don't know how other NRSROs, so nationally recognized statistical rating agencies or organizations, define credit ratings for the purpose of the report. It's a great question. Sorry to give you a bit of a nonanswer.

No, it's a good answer.

But at least, some color.

No. It's great. Yes. It's good to hit that on the head. And then -- but sticking, I guess, around this sort of area of regulation. Maybe not something that comes up too often, but just wanted to get your thoughts on how you or where you consider the currently -- the current regulatory threat that sit around credit ratings. Is there any risk that regulators either mandate fee disclosures or interfere to help fragment the market share in the industry, particularly in the U.S.?

Yes. So we monitor developments that could impact MIS and Moody's more broadly. And as part of that effort, we have an ongoing constructive dialogue with our regulators and policymakers. The general feedback from those discussions, I would say, has been quite positive. And I don't want to come across as complacent, but I feel confident that during this time, we're not a regulatory priority. We do publish our established pricing principles for the EU and the U.K. We plan to engage with the Financial Conduct Authority, the FCA, as needed when its market study on pricing is launched, just because that's another common question we get. At the end of the day, Moody's really supports the healthy -- Moody's really supports healthy competition. And we understand that fostering competition among the credit rating agencies is a regulatory objective, both for the Securities and Exchange Commission, but also for the European Securities and Market Authorities, so ESMA. And this is really because we believe that the credit markets benefit -- in credit rating agencies, competition is based on the quality and the accuracy of its ratings. And we will, as always, ensure that our ratings methodologies and approach remain transparent and that our credit ratings are relevant, accurate and reliable.

Appreciate the answer. Can we just maybe also add to that question, in terms of pricing, you talked to 3% to 4%, I believe, across the business. I assume that's higher in MIS and lower in MA. And I wonder if despite being part of sort of triopoly, I guess, in the rating space, does the regulatory -- I hesitate [indiscernible]. Does the regulatory oversight restrict what you can do from a pricing perspective in that business in any 1 year?

Sure. I think the way that we've approached pricing here is really to align to the value that we provide our customers. If I think through to specifically MIS, there's a lot of value that we're bringing above and beyond sort of the individual ability for an issuer to come to market. There's a really neat slide that we've included in our investor presentation deck that we publish once a quarter and specifically on MIS, and this is Slide #27. And if you don't mind, Russell, I might just bring it up on screen for a second. I think investors might find this quite helpful. There is an illustrative impact of adding Moody's credit rating to the portfolio, and what you'll see here on the screen is the relative savings that a company is able to generate. And here, just a generic 5-year $500 million corporate bond expects to generate over $16 million in interest expense savings versus a very nominal relative cost of the rating here. And this is a study that we completed just this past year. So it's refreshed in reality for the current environment. So significant value to the underlying issuers. Now in addition to that, and you'll see here on Slide 26, there is significant benefits to the Moody's ratings that extend beyond the rating. And all of this, to the question you asked around pricing, we take into consideration in the way that we approach our customers and think about the fees that we charge for the services that we provide.

That's great. Appreciate the link to the slides as well. I want to go back to the area of the cost saves, just to answer one of the questions we're getting from the audience. Given the bulk of those sort of $200 million cost saves that you mentioned that are going to be focused in supporting the margin within MIS next year, can I just ask you, how should we think about how much of these $200 million of cost saves will return when issuance returns? Sort of how flexible are we in terms of being able to take those costs in and out of the business?

Sure. Primary drivers that sort of support the underlying cost actions that we're taking are, of course, compensation-related. I know we spoke a little bit about that earlier. I think the more important point from my perspective as a CFO is to create financial flexibility within the business. And what that means is if the environment turns out to be better than expected, we can certainly deploy a portion of those costs to reinvest and accelerate some of the priorities back in the business. And then, of course, if the environment turns out to be worse than expected, we can use some of those cost savings to further buttress the margin. But the key point here is financial flexibility. And I think that's a big responsibility of the CFO, to make sure that, that's in place for the organization.

Yes. I appreciate that. Could I move on to talk about Asia and particularly China, where you have a presence? Clearly, a big untapped market for Western credit rating agencies, no debate there. Moody's has -- in the past, looked to increase their stake in CCXI. I guess, given the geopolitical climate and the sort of lack of inroads that international rating agencies have made in the domestic markets in recent years, have attitudes at Moody's towards expansion in the region changed? Or are you still very much committed to your stake in CCXI? Or maybe I could challenge you, could the capital be deployed better elsewhere?

Another really good question. We view Greater China and its bond market as a long-term growth opportunity despite current geopolitical tensions. And we strive as the management team in working within China and with the Chinese regulators and authorities to assist in the development of the Chinese credit markets. And this is the key point: consistent with the preferences of the Chinese regulators and policymakers, so consistent with the way that they would like the market to develop. There are really 2 markets here in Greater China: there's one that serves domestic, and there's one that serves sort of the cross-border issuers. There is more than $20 trillion in outstanding debt in China's onshore debt market, and that really means it's second in size only to the U.S. It's growing something like 20% CAGR since 2012. So it's quite significant. And our intentional approach to that onshore market participation is through a 30% ownership stake in CCXI. And that's China's leading domestic rating agency. It has approximately 30 -- mid-30s market share in the domestic-rated debt market in 2021. So that's quite significant. And it's our access -- sorry, it's our investment in CCXI that gives us access to that market, enabling us to learn about the market, participate in meetings and develop relationships with some of the issuers, some of which start off in CCXI's domestic issuers and then grow in size to become cross-border issuers, which we can then rate in our MIS business. So I'd say, in summary, we're pretty committed to our partnership with CCXI and in the way we participate in the Chinese market.

Okay. Great. Maybe if I could move the conversation on to MA, Moody's Analytics, business. [ I think I asked ] by investors how proprietary is Moody's data within MA. I think that's where I believe value really sits, in the proprietary nature of the data. So maybe I could just invite you to talk to that as a starting point for this business.

All right. You're not starting with easy questions. This is a very, very good one. So the data within MA comprises MIS data feeds, which is proprietary, unique and hard to replicate. We've integrated this data with our other proprietary sources, and that's going to include, maybe just a minute on this, Orbis, which is one of the most comprehensive databases in the world. It has ownership structures and corporate hierarchies and more than 445 million public and private companies around the world. We've also integrated trade credit data on millions of companies in North America. Think about the Cortera acquisition from several years ago. And then our GRID database, which contains a list of politically exposed people. We also get data through partnerships with various organizations around the world. And Russell, our data goes beyond proprietary to include historical data sets where the data itself may no longer be available publicly. We then deploy AI and technology to curate this data. And I think that's where our customers get a lot of value. So the data becomes curated. And we've tagged the data so that we can deliver it when, where and with the frequency and accuracy that the customers want. So an example here could be we record decisions in AML, KYC and due diligence process, which form the basis of a proprietary training set that we can then use for machine learning. Another example could be our ESG Score Predictor, which is really a first-of-its-kind tool that generates real-time predictive ESG and climate metrics really for any company in the world based on its location, sector or size. And so the value we provide here is not just in the data sets and analytics, which is itself valuable, but also in the integration of our capabilities. And then as we look to the future, we are developing an integrated risk offering that pulls together credit, economic, thermographic property and climate data as well as analytics forecasts and then insights that we can provide customers. And the idea here, again, is holistic and comprehensive view of risk.

Yes. I guess on that note, on the integrated nature of the risk, maybe could I get your view on how countercyclical is the MA business? A lot of what you're doing is providing rich services. That should, in my view, be quite countercyclical. And particularly, what areas have you been seeing greater demand for product and data given heightened global risks in the last sort of 12 to 24 months?

So MA, I would say, has proven to be quite acyclical -- it's proven to be quite an acyclical business. We've had 59 quarters, almost 60 -- we've had 59 quarters of consecutive revenue growth throughout various market cycles. And I think that demonstrates the mission-critical nature of our products and solutions. The value proposition of our offerings becomes more obvious in times of stress because customers really do need our solutions to navigate increased risks and uncertainty, especially in periods like this. You can think about portfolio or even risk managers increasingly relying on our research and our insights to make informed decisions. Maybe an example of this is the strong demand for our KYC and compliance solutions, which has been especially driven this year by several factors, including our customers' awareness of risks related to verification for their own customers, suppliers or their own counterparties, as they shift from compliance to more of a self-sanctioning perspective. These factors, including the heightened sanction environment, have resulted in a 24%, I know this number by heart, organic constant currency revenue growth for our KYC and compliance business in the third quarter. And I'd say also, in addition, our customers' increased focus on digitization is also contributing to MA's growth. And we are seeing strong demand for tools to help banks digitize some critical underlying processes. Maybe one last example and then I'll pause, demand for our climate solutions is also contributing to MA's recurring growth. And through our RMS business, we are helping customers understand the physical risks related to climate change. And this demand is expected to continue increasing as the intensity and frequency of the changing climate grows and as we integrate RMS's climate assets into our offerings at Moody's.

Yes. Makes sense. And maybe bring this home for me a bit, Mark, and describe to me exactly, give me, maybe if you can, some examples of how customers consume products from Moody's within MA. You talked about the integrated risk nature of the business. I understand you don't just sell these kind of businesses in isolation. So maybe it would be helpful just with a few examples. If you can bring that kind of home to us, that would be helpful.

Perfect, Russell. And thank you for the lead-in. I think it's a great question. So our focus here really is on providing customers with a holistic understanding of risk. And that effectively is a 360-degree view that enables them to better understand, measure and manage interconnected risks. And that includes not -- obviously, not only an understanding of credit risk but also the reputational, operational and climate-related risks, among others. So as such, to address these customer needs, we have invested, I'd say both organically and inorganically, to integrate our capabilities and to grow our presence in these related markets. It's important for me to note, we're still on the journey of integrating all of our data capabilities. But to your point, let me give maybe just a few examples of this interoperability. So within our flagship credit research platform, so CreditView. You can go to moody's.com and take a look. In addition to the credit profile of a specific entity, you can also access information to help you understand its corporate structure, the entity's exposure to credit material, ES&G considerations as well as climate or transition risks that the entity may be facing. Another example to bring it home is our KYC business, where customers are asking for our help in quantifying risks associated with suppliers, their own customers and other third parties. And we provide this to them through the ability to screen against sanctions list, adverse media stories and other reputational risks. And maybe one last example, commercial real estate. Our customers are seeking an on-demand scoring capability to evaluate global properties against, for example, sustainability considerations. And to help them address that need, we now offer a solution that includes forward-looking risk assessments of a property's exposure to floods, hurricanes, wildfires, other climate hazards. And so we're equally customer focused in our product delivery, but the idea is by continuously exploring new technology and solutions, we can really help our customers see a holistic view of risk from the products that Moody's provides.

That's interesting. So if you were to think about -- if you were to hone in on the insurance sector, and insurance has been an area you've identified for growth. If I was to think about the profitability headwinds currently being faced by that client base, does that lessen the opportunity for you? Or is it the opposite? Is it more headwinds equals more risk equals more solutions that either are demanded or that you could supply? Maybe just where do you fall on that?

Yes. It's a really interesting point. So I would say the majority of our products and solutions support customers' mission-critical activities. And our experience is that in periods of uncertainty, and I mentioned this a little earlier, the value of our analytics and insights becomes even more important. And therefore, we believe that the demand drivers for our insurance business remains strong and that we're well positioned to take advantage of some of the medium-term opportunities. And this is grounded in several factors, including, I would say, the efficiency and productivity gains of our SaaS solutions, the use of our modeling output as a benchmark for losses in the industry and our belief that our science-based models are unmatched. And that really enables our customers to manage through increasing climate- and catastrophe-related peril exposure to create optimum portfolios. We're also, by the way, starting to see indications of new capital entering the reinsurance market to take advantage of the increasing premium rate environment. And this new capital in turn will become ultimately new customers. So Russell, you may not be aware, but I'm also an actuary by training. So maybe just let me spend a minute on the U.S. insurance market mostly because I think this is an area that's of personal interest to me. And what we've seen in that market is persistent inflation and monetary policy tightening. We've seen geopolitical shifts. We've seen market volatility. We've seen rising risk of recession. But I think the outlook for that industry is pretty good. And I would say that's because rising rates do a couple of things. They boost portfolio yields. And the fact that treasury rates are higher means that U.S. life insurers can now invest new money at yields higher than the current portfolio yields and that those rising rates are going to likely increase demand for interest-sensitive insurance products like, maybe this is too technical, fixed-rate deferred annuities, which historically have had a strong correlation with interest rate environment. Of course, if rates spiked, there's disintermediation risk, but I'll put that to the side for now. We also do see or at least I see life insurers having very strong balance sheet profiles, which help navigate the economic environment. They've maintained very strong capital leverage -- capital levels through the RBC. And so I do think prolonged establishment of those life insurers as we head through this period, they're in a good spot.

That's interesting. Just maybe just sticking on this for a second. I mean you've obviously got some really good tools that service the life insurance sector. We just spoke to some of them there. And then I think you've brought a fantastic business in RMS, a real kind of lead provider in a very strong growth area. If I stack you up versus LexisNexis or Verisk, to name some competitors, there's sort of broader kind of number of solutions that those providers offer to the insurance industry. Just sensing from your answer to your question, is this an area where you're looking to grow?

I would view our KYC business as being really best in class. We are incredibly well positioned to deliver solutions in a growing market. And we do that on the KYC side, Russell, really through 3 different avenues. There's the data avenue, where I view our data sets as being preeminent in having a comprehensive database on both entities, corporate hierarchies, corporate structures, adverse media technology. In terms of the ability to do 100% subscription-based SaaS end-to-end solutions, our technology that allows for workflow optimization, significant reduction in false positives, for example, some of the real-time monitoring, perpetual KYC. And then the third area besides saying technology, I'd say, is distribution. So really fully integrating our KYC solutions into customers' workflow, allowing, for example, API delivery, being very intelligent and flexible in the way that we do that. And our solution set within KYC covers 445 million companies and entities, over 1.5 billion ownership links. We're 99.99% precise in ownership data. And so as we compete in this space, we're very comfortable that we're bringing a solution to our customer that is truly best in class.

That makes sense. Let's shift to talk about ESG and climate. I don't think we could do a fireside chat without at least touching on ESG and climate. Who do you consider your kind of main target client base to be here? I sense there is a real difference actually, when I'm listening to MSCI, Sustainalytics, S&P, as to actually who is being targeted and the different type of products that are being delivered by different providers. So what's Moody's revenue growth rate in ESG and climate might be a nice place to start? How sustainable is that? Where does Moody's currently focus on expanding? And like I say, who are you targeting with your solutions?

Let me go ahead and tackle maybe each of those questions separately because I think they're [indiscernible].

Yes. Sure. Yes.

So our expectation is for the full year 2022, ESG and climate related revenue will increase in the low double-digit percent range, and that's going to be to approximately $190 million. I'd note that the incremental revenue we generate from integrating ESG and climate-related solutions into MIS and MA's product sets is probably -- is forecasted to be somewhere between $5 million and $10 million. And the growth here is really underpinned by increased customer demand for both climate solutions and accelerating investor requests to integrate ESG factors into our credit analysis and investment analytics. As for our current and future offerings, our ESG solutions are well positioned across the business to respond to a variety of use cases and customer sentiments. So maybe I'll do both MIS and MA. So within MIS, our credit rating analysts incorporate ESG into their credit opinions and research, and that's illustrated in our credit impact scores and our issuer profile scores. We also recently transferred our second-party opinion business from our Moody's ESG Solutions Group to MIS, and that allows the joining together of our deep domain expertise in the SPO and sustainability markets with our scale and our track record in the debt capital markets. And then finally, on the MIS side, I'd say while the pace of growth in labeled sustainability bonds has slowed as a result of the broader macroeconomic headwinds, the slowdown is less pronounced than the overall market, which demonstrates continued demand for sustainable finance issuance. On MA, we are integrating ESG and climate data scores and analytics across the organization. And we do this to help our customers identify and act on commercially relevant ESG risks and opportunities. It allows us as a company to bring, again, unsurpassed rigor, clarity standards to our analysis. And we are focused on developing our ESG and climate products and capabilities across, I'd call it, 3 key areas: data, applications and modeling. And if you indulge me just a second on this. So if I just look at data to start, we are concentrating on delivering capabilities for our customers that drive transparency, and here's the key points here, traceability and comparability across ESG data and disclosure. So for example, over the last 12 months, we've launched several new data sets, and that includes our Sustainable Finance Disclosure Regulation, that's in Europe, SFDR; the EU taxonomy and temperature alignment products. And we have increased our detailed coverage across the majority of our data sets to over 10,000 entities. And if I look at applications now, in September, for example, we launched our new ESG insurance underwriting solution for P&C insurers, just to tie back to your last question. We also are enabling customers to integrate ESG factors into commercial underwriting and portfolio management activities. And these integrated solutions combine public and private company data, the double materiality assessments. I think Moody's has a differentiator here. And tailored analytics, which really help customers identify correlations between ESG factors and financial risk metrics, such as claim frequency or loss ratios, ultimately enabling them to identify the accounts that contribute to portfolio-level ESG performance. And then finally, our analytics and modeling capabilities are focused on helping our customers make better and more sustainable-based decisions. So in summary, strategy is focused on primarily integrating ESG as a capability into Moody's leading products and services, and that helps reinforce our strategic direction of offering a holistic integrated view of risk to our customers.

Again, like I said, we couldn't escape without an ESG and climate question. So we got a few more minutes here, Mark. Can we jump back up to kind of a group level and talk about capital allocation priorities? You spoke a bit about this on the Q3, as you always do. And I got a question here from the audience that I think is a good one. How do you think about paying down the 3% cost of debt versus repurchasing your shares? How do you think about that, please?

Sure. So within that capital allocation, first and foremost, we always do look for opportunities to invest back into the business, and that could either be reinvestment organically or acquisitions. To the extent we have capital remaining, we do look to return it to shareholders, and folks have seen this through either dividends or through share repurchases. We are anchored around a BBB+ rating. And that's important for us because we feel it's a good balance between the cost of capital when we go out to the market to raise new debt as well as the efficiency that we generate through being allocated cost of capital in a BBB+-anchored range. In terms of allocating additional capital, we want to maintain that leverage level. And you can see simply because of the market downturn this year, that cyclical nature, that our leverage has ticked up a little bit on externally measured Fitch ratio. And it simply ticked up because Fitch, in their methodology, doesn't include an offset for cash allocation. And so the specific question that was asked, would we allocate additional cash to repaying down debt versus sort of share repurchases, I think on the margin, we would do it, for small amounts. We recently launched approximately $100 million tender that went out this morning through a press release, which is probably what engendered the question. But it's more around the margins, Russell, than anything comprehensive or holistically that we would look to do.

Great. Okay. And then a sort of connected question, I guess, here also from the audience is just around your appetite for further inorganic growth. We've obviously seen a slowdown, but not just at Moody's but across the sector in terms of inorganic growth appetite this year. You've obviously been hugely successful in terms of your acquisition strategy. And just wondering -- the question looks here like people are wondering what your -- where your appetite currently sits. And can we expect that to be part of the growth strategy for 2023?

Yes. So as we think about inorganic-based activity and the allocation of capital towards inorganic-based activity, there really are 3 sort of lenses that we take. Perhaps the most important lens is the acquisition itself must have a very clear industrial logic. Strategic fit is the most important factor. It's the first screen that we use. And any acquisition that we do must fit and support the ecosystem of our broader integrated risk assessment strategy beyond just contributing to a specific discipline or area. The second aspect or lens that we look at is the achievement of very disciplined financial targets. We've had a long-held clear financial framework, both external and internal investments. And those are IRR at or above Moody's cost of capital, at least a 10% annual cash return yield between years 3 and 5, a cash payback between years 7 and 9 and then adjusted EPS to be accretive by year 2. So that's sort of the second lens. And then the third lens as we think about any acquisitions is really about a post-acquisition review, to have a very disciplined and rigorous monitoring process in place post close. And that's about ensuring clear accountability, and we do regular reporting both to the management team, but also to the Board around activities that we participate. We included a really great slide in our investor deck in the third quarter on tracking, to that third point. I'm going to bring it up on the screen here just to show sort of that track record of successful M&A delivery. And we've showed it both across the RMS acquisition, the most recent one, the one before that being RDC and the one before that being BvD to show both the targets that we had committed to as part of those acquisitions; and then equally important, the performance of how the business is proceeding against those targets.

Great. Okay. Mark, I think we've got time for one more question here, and it is one of the audience questions. I think the point of the question is, given the medium-term targets we set earlier last year, the base is now lower as a result of 2022. Are you looking to talk to some new targets for the full year results?

Yes. And Russell, great audience question. This is something that we will come back to the investor and analyst community on in February. There are obviously several macroeconomic developments that happened in 2022 that we did not anticipate in our medium-term target, specifically around issuance and around FX. That's it, they're medium-term targets for a reason, would not look to necessarily revise medium-term targets annually. But we might want to take a sharper look at them over the next couple of months, and then we'll get back to the investor community in February on our year-end call.

Makes sense. Mark, it's been really insightful and absolute pleasure to host you and the team today. Thank you very much for the opportunity. Good luck for the rest of the year, and enjoy the festive season.

Thank you very much, Russell. It's been a pleasure. Thank you.

Thanks, Mark.