MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. Good afternoon, everyone. Thank you for being here. I'm Faiza Alwy, Deutsche Bank's business services analyst. Very pleased to welcome MSCI to the conference. As you all know, MSCI is a leading provider of critical decision support tools and services for the investment community, including indexes, analytical tools, data, real estate benchmarks and ESG research. We have from MSCI Remy Briand, who is Chief Product Officer and Head of Index. Previously, he was Head of ESG and has been pivotal in the integration of ESG and Climate solutions across MSCI's offerings. Remy, thank you so much for being here today.

Maybe just to start, if you can talk a little bit about your background and describe some of the roles that you've had at MSCI and maybe what do you spend most of your time on as Chief Product Officer. And maybe delve a little bit more in terms of the catalyst for the role creation because I think it's a relatively new role.

Yes. Okay. Well, again, thanks for the invitation. Yes. So I've been with MSCI for a long time. So almost -- a bit more than 20 years. The first 10 years were really focusing on the Index business, which when I started, was the only activity, if you want, at MSCI, in index creation, management of the indices. And then in 2010, when MSCI acquired RiskMetrics, I got involved with the ESG business. And sometimes we say that we have this notion of a day job and a night job. So the ESG was the night job. My day job was to run research for MSCI. But as the ESG business grew, I focused full time on building the business over the last 5, 6 years. Now on your question about the new role, which is essentially the new role for the organization of Chief Product Officer, we wanted for a long time to, in a sense, optimize the way we create solutions. So we've been, I think, relatively good at capturing very specific opportunities in a, I would say, bottom-up way. So each product line seeing opportunities, creating solution. But really, when we started to expand, if you want, the ESG concept across all the product lines at MSCI, we realized the value of being able to create cross-product solution. And so that was really the catalyst to want to do a lot more of that, so have much more on approach, which is a platform approach to create new product and solution as opposed to something which would be only product line-specific. So -- but again, the more intuitive way to think about it is ESG today, for example, we sell data and rating directly to one business lines, but then we incorporate ESG in the indices, which is captured in the Index business line. And then we recently launched, for example, a fairly comprehensive analytical tool called Climate Lab Enterprise, which allows investors to track their progress on net zero. And that is also one way to embed, in this case, more climate and ESG inside the analytics product line. So that's an example of the things we want to do a lot more in the future with this more integrated approach to product creation and launches.

Great. Maybe can you talk a little bit about sort of some of the current focus areas, the growth drivers? I know I've heard the company talk about customized indices, sort of new types of clients, fixed income, things like that. Talk about, from your perspective, what the key growth areas are.

So we -- first, we tend to try to focus our -- the creation of new solution to essentially the sort of main disruptive trend that exists in the market. So if you look at general investment, we think that this whole concept of personalization, which will take the form in -- on the more wealth side of direct indexing, for example, would be one that will grow over time. But generally, talking about disrupting the trend, ESG and Climate remains the area of focus across the board. We also see that the -- generally, the move to the cloud, the emergence of alternative data, is allowing us on the analytics front to have much more flexibility in delivering our analytical content through various delivery mechanisms. So not only our application, but a much broader range of delivery mechanism, including, for example, embedding our analytical solution inside other systems like order management systems or even inside our clients' application. So much more flexibility to deliver the content. So that would be, I would say, the other key area of focus. And the last but not least, the last one is Private Assets in general. So you've seen us extend our offering through the acquisition of RCA. But more generally, if we look at the strategy of the firm is we want to have more presence in the Private Assets in general.

Great. There's also -- you've also talked about new types of clients that you're focused on. You mentioned both with direct indexing. There's also corporates, insurance. Sort of talk a little bit about those types of opportunities.

Yes. So again, part of the logic of, amongst other things, creating this Chief Product Officer role, is that we've seen through time that our core products, whether it's the Index or ESG solutions, can be used across the entire financial ecosystem. But you need each time to adjust, tweak or make the solution more relevant. And so having a focus on client segments that go beyond, I would say, our traditional segments, which would be the asset owners or asset managers, but going into wealth and having specific solutions for wealth. Insurance companies also are, on one hand, investors. On the other hand, they have specific characteristics. So we will adjust if you want our solution so that they're perfectly adapted to client segments. And generally, a lot of the underlying investments are also about us moving much more into fixed income because some of these new segments are actually heavily focused on fixed income. So we're beefing up across the board our fixed income capabilities.

How do you think about -- like where are you in the process? Whether it's -- I don't know if penetration is the right way to think about it, but how much more runway do you have in terms of some of these growth areas?

Well, it -- I think it really depends. So clearly -- so if you take, for example, staying with ESG and Climate, even after several years of selling solution, we're still fairly lowly penetrated even in our sort of core asset management segment. So there's lots of runway in what I would say the traditionals asset management segment. But we're also realizing in ESG that the corporates are really interested in the rating, and they're interested in buying solution. And so there, we're completely at the beginning. So here, it's really an exercise where we know the demand is, but we just need to get organized so that we can meet that demand on the corporate side. So you have a spectrum. I think insurance companies are a good example of a segment that we've covered for a long time. But our investment, both in Climate, ESG and Fixed Income more generally, allows us to just have much more products and solution to sell to that segment. So it has been also a relatively fast-growing segment for us.

Okay. Maybe just talk a little bit more about how important new products are to the growth strategy relative to maybe 3-plus years ago and walk us through sort of what goes into the development of a new product. Sort of how long is the cycle from conception or ideation to commercialization? How has this changed over time?

Yes. So I think it's a difficult question to answer because new product could be new application of the existing products. So if you look at Index, which has been there forever, if you want, it's still a business where the core offering, including the sort of global equity indices, we continue to find new applications, new segments, new mechanism to monetize. And so we tend to, by the way, like this idea of having a core product that you can then sell to many, many segments. And as I was saying, each time, you need to tweak it, extend it a little bit, but you don't need to reinvent or reinvest in something totally new. And so that has been driving the growth over decades on the Index side. And that's exactly the same logic that we have, for example, on the ESG Rating front where the core product is almost one product, the rating. But we've been -- usage increased from traditional, for example, equity portfolio manager then to fixed income, then to compliance, then moving to investment banks and now to the corporate. So that's the mechanism to create, if you want, or extend the product. And each time, you need to adjust and tweak. But -- and a good example, if you want, of the new approach that we want to follow is the creation of this new solution called, again, Climate Lab Enterprise that I was mentioning. This is really where we've essentially adapted a lot of the building blocks we had in the analytics and ESG organization to specifically solve the net zero use case. And that was done, if you want, in a matter of a few months, if you want, from -- not the thinking about the issue, but really the implementation because we were really optimizing on all the existing building block. And that's an example that I think we will want to replicate and systematize much more because it allows us to be very, very nimble, get to market very quickly, get feedback from clients and get into this very positive circle where you have the product, you sell, you get feedback, you know what to do to improve. And this fast iteration is the logic that we want to have more generally across new product and new solutions.

Yes. So is it fair to say -- I guess as we think about the economics of new products, it's really -- like how would you -- what would you say like the gross margin? Or how should we think about the margin of new product? It almost feels like you're saying it's above 90% or maybe even higher.

Well, as you know, we have this concept of Triple-Crown, which is guiding a lot of our decision-making. And this sort of Triple-Crown is essentially a way to ensure that any investment, any project, is filtered through a very systematic approach to look at, again, the fast payback, the fast time to market and also investing in the areas that are highly valued because they are part of the core strategy or perceived as key elements of the growth strategy. So any product and investment goes through that cycle. And that's why we much rather extend product, get feedback, reinvest because we have more clarity on the need. We have more clarity on what to invest marginally. And it fits a lot our approach, which is Triple-Crown, which is one where, again, you want to be totally ruthless in terms of how you allocate capital and get to the best ideas internally. So there's no preferred child. There's no secret codes. It's all about identifying the opportunities and really moving fast to capture them. And so this time-to-market element is also quite important.

Yes. Yes. Maybe for those who might not be familiar with the Triple-Crown terminology, talk to us more about some of the other elements of that strategy.

Yes. So essentially, it's high return on investment. It's fast time to market. And then it's in areas that are valued highly for the organization. So it's not just that we would go for the highest return on investment. If this return on investment is 10 years down the road and no interim benefit, it's less highly ranked, if you want, than one that may be slightly lower in terms of ROI but where the payback is quite fast. And then clearly, the -- our business is valued differently, if you want, by investors. And there's a link to sort of the strategy and the way things are being valued by investors. So we want to be aligned on that front. And that's the third element of this Triple-Crown approach.

Great. How do you see MSCI's role evolving over time as regulatory requirements and sort of mandated disclosures come into play? Are there areas of the business that potentially may become more commoditized? And how do you see your role moving forward?

So clearly, the topic of regulation is very high or being discussed quite a lot in the ESG and Climate space. And for us, regulation -- by the way, a lot of the growth in ESG and Climate has not been on the back of regulation. It's been really voluntary, buying from people who are really thinking that those issues are important. But we're seeing more opportunities, especially in Europe, where regulation is coming to actually, again, either sell more of our existing products to our clients that are or will be subject to regulation, extend that. So for us, it's a lot of opportunities. Now we also are preparing ourselves to be regulated in one shape or form on the ESG side, especially in Europe. And that's something which, again, we pay quite a lot of attention to, we interact quite a lot with regulator. But generally -- and we've seen that on the Index side when we also were regulated in Europe is that generally, regulation force to codify, to bring sort of standards generally to a higher level. And that tends to drive the marginal player out of the industry because it's not worth investing in the compliance part if you're either marginal player or if you're actually a lousy player where you need to completely reinvent the way you do business. So that's how we would expect, if you want, the regulation to play out, which is a lot of work to comply, but then it's work that will tend to put more benefits to the strongest player because already just generally in processes, in transparency and things like that. And that's how our strength...

Yes. Yes. Okay. Maybe talk a little bit about just ESG investing in a downturn. As you know, there's a lot of consternation around a potential recession coming in the next 12 to 24 months. Sort of how do you think about the ESG market or ESG investments in that type of an economic climate?

Yes. So -- and our view is -- and that has been also our message for years, is the ESG topic is about long-term investing, and it's also about reflecting sort of the underlying societal changes into the way you invest. So I personally don't think that those trends are moving away. Clearly, from a short-term investment standpoint, when there is a rally in the energy stocks, there is more pressure short term on performance. But we see absolutely no indication of a slowdown either in terms of discussion with our clients, neither in terms of the level of interest on this topic is. So clearly, we will see where the economies go. We will see how markets will behave. But from our perspective, the more -- and it's a general statement, not just on ESG and Climate. The more we latch on, on structured long-term trends, the better it is in terms of strategy, growth in good times and in bad times. And so that's what we would expect from most of our activities going forward as well.

Yes, yes. Maybe just on the Index business, as we're talking about a potential downturn, obviously, the markets have been pretty volatile. How do you think about just your Index business overall relative to market? Is there -- I know there's -- obviously, there is a correlation. But how do you think about that business performing?

Yes. So here again, I think we're thinking about sort of capturing those long-term trends. So the longest one for us has been global investing, and that has driven quite a lot of the growth 10, 20 years ago when I joined. That was the #1 topic. But then we created or highlighted, if you want, the benefits of factor investing. And that has been a sort of second wave of growth, which is still a growth element. Then ESG came and really added another element. So the next wave for us will be around customized strategies on the index side or direct indexing, which is a subset of that. We've also invested quite a lot on capturing a lot of themes linked to innovation. And so that's another element of growth. So clearly, the soft market levels will impact us on the AUM, but the underlying drivers of growth are linked to those long-term trends or long-term structural needs. And again, those are there and are not really changing.

Yes. Yes. And there is -- is there a bit of a countercyclicality as we think about the futures and options business?

Definitely. That is something which at the moment is doing extremely well, extremely well. And so it's not a perfect hedge. But again, compared to a few years back, both the size of that activity, plus much more diversification in the AUM actually by asset class and -- is just making the volatility of the market a little bit less acute, if you want, than 5 or 10 years ago.

Yes. Yes. Great. Can you talk about just the technology? I know you've talked about the cloud. Sort of where are you in that process? Sort of how has that helped in terms of new product development?

Yes. So that's something which we're now systematically -- so we're moving all of our activities in the cloud. ESG and Climate is there 100%. And then the other business lines are moving sort of on an accelerated basis, which is for -- it's something which generally technology-wise is good. But from a product and solution perspective, it allows us -- going back to this idea of creating solution by assembling building blocks. If your building blocks are in the cloud and also your clients can access those building blocks in the cloud, then it opens a lot more possibilities to create new solutions so -- and also to start blending again different types of data, different types of analytics. So for us, that's -- it's a very exciting area and where -- and one where you can feel that it's the beginning of a trend as opposed to something which will be just a technological trend but with no effect, if you want, in the core business. So it's not like changing a database. It's much more profound because of that flexibility of distribution. So for example, the -- a lot of the core infrastructure in finance has been around terminals because, again, 20 years ago, there was no Internet really in terms of distribution mechanism. But one of the more recent trend we're seeing is that a lot of our clients want to create their own application, either for internal use or sharing with some of their clients. And they can do that because they can assemble, again, pieces to create those solution much more at a lower cost generally. And so that's something, again, we see as an opportunity because we're an open platform at heart. And so we want to connect to a lot more distribution mechanism or application around there.

How do you think about competition broadly? There's obviously the ESG side, where it seems like there's a new player coming in almost -- I think there's hundreds of players that purport to be ESG data providers. But really across your business, like how do you think about your competitive advantage? How sustainable is that advantage? And how do you ensure that you're staying ahead of competition?

Yes. So first, we don't have one competitor, right? So it's really depending on the business, the use. We have typically a few competitors, but not a lot of competitors, and they tend to be different, again, depending on the business. So again, part of the exercise through the years has been to, first, it sounds kind of obvious, but it's to be client-centric, you really need to understand what your client wants and adapt quickly. So it's both being client-centric and nimble that has allowed us to grow but also to deal with competition. And sometime, people kind of underestimate a little bit this element of the ability to grow fast, iterate, which also change your position competitively. And so we've seen it in the ESG space where, again, 10 years ago, we -- there were much larger organization that could have entered ESG or have even said that they would, but their execution capability was just not there. And so you can create those sort of enduring business by being relatively early, create those -- the moat, if you want. And then it's much more difficult for others to catch up. So that's really where we are on ESG is like we think we have a strong moat. Even if there are, as you say, lots of people trying to capture pieces of the pie on the data front, but we have a very strong offering. And that's also why we spend a lot of time and effort on climate because we think there, the level of innovation, the level of demand is very high. And so we want to make sure that we capture as much as this early pie, if you want, as possible to establish those position very strongly. But we do look at competition very seriously and sometime adapt, but generally, it's more the focus on the client and the nimbleness on execution that matters.

You've talked about Climate quite a bit. Maybe we can just dig a little bit deeper on that. So talk to us more about what this Climate Lab metrics product is. Give us a bit more detail about exactly what it's doing.

Yes. So if we start by actually the need as opposed to the product. So what is quite specific, if you want, with climate is that we think that it is a problem by definition that affects everyone, which is kind of unusual. So it's both something that every investor but also every corporates will have to deal with. And within that, there is an element of understanding the risk, and we can go back on the types of offerings we have on that front. But there is also something which is also very specific to Climate, which is this commitment that organizations are making to be net zero. And that is a commitment that tends to be a CEO commitment. It's a public commitment. And it's fairly unique in the sense that for most organizations, it's a leap of faith, right? So you don't have a plan to actually be net zero. You're making a commitment. And so we want to make sure that we're the entity that help turn this commitment into a series of action, monitoring progress and providing all the tools to think through net zero, monitor, change, implement and so on and so on. So it start with really trying to define the problem. And then we started with providing first data out of climate models in that space. But again, we are realizing with this latest offering, which is an application, if you want, is that when you make a commitment at the firm level and your CEO, you don't want in a year's time to have to announce that your emission across the board have gone up because you made the statement a year ago and a year later, nobody in the organization really cared about it, right? And so that's, if you want, reputational risk is one that is also in the back of the mind of people. Now it's not an annual delivery, if you want, or you've done in a year. It's a multiyear cycle, but still there is a need to go and progress through time. And the same way, you need risk application to manage risk across the board. We think that you need the same type of sophisticated application to manage your net zero commitment across an organization. If you're a large manager, you can have hundreds of analysts, hundreds of PM. All of them tend to be very autonomous in their day-to-day decision. And so it's not going to happen naturally, if you want, that your overall profile on climate is going to be managed on a top-down basis if all the actors are moving independently. And so you need something quite systematic to monitor progress, and that's very similar to a risk application run by a risk team to ensure measurement across the entire organization. So that's an example, if you want, to get from the need, which is net zero and monitoring progress, to then a specific application that, in this case, we're launching to help in the management of that process.

Great. Great. Maybe if you can -- the Analytics business, I know you're not directly responsible for that, but are there...

I am, actually, with the new role.

Okay. Great. I think that relative to maybe some of your competitors, I think the Analytics business has lagged. It certainly lagged relative to your own sort of long-term growth expectations. Talk about what you're doing there and what -- are there specific products that you're introducing that would maybe accelerate that business? Sort of what is your strategy there?

Yes. And in fact, we've discussed some of these element in terms of making sure that the Analytical business growth levels are going higher than that they were in the past. So one element is Climate Lab Enterprise is an example of an extension, if you want, of the analytics product range. The other part which we discussed is this cloud delivery, if you want, a more flexible delivery. We do think that it is something which is very aligned with our core strength, which -- we've always been an open platform. So being able to embed our analytical content across the board in the industry is something that we have not focused enough in the past, but we will in the future. And again, the cloud element is just an accelerator of approach. More generally, we're -- we've been really good and known for the depth of the insight, if you want, that we provide on risk. But we haven't sort of put it in front of people in the easiest way. And so some of the upcoming improvements that you can expect from our Analytics business will be on being able to actually leverage a lot more the insights that are already calculated but not necessarily displayed or accessed, again, across an entire organization. So that's also something which we think is a way to sort of accelerate growth through more usage inside the existing client base and then addressing new segment because, again, the insights will be more accessible, if you want.

Okay. Okay. I know you talked about private markets before. Maybe just tell us a little bit more about -- just review that market for us. How fast is it growing? And I know you made the RCA acquisition. So talk about that a little bit. Sort of where does that -- how well integrated is it at this point? Sort of where do you see the opportunity with that?

Yes. So first, Private Asset is a very broad area, which is essentially very specific when you look at than the serve asset classes. So we're present in private real estate. We've been there for a long period of time. What is new now with the RCA acquisition is, first, we have a much larger presence, but also we are much more diversified in terms of the types of clients or client segments that we're addressing. So that's why the RCA acquisition is very exciting from that perspective. We're also -- so we're in the process of integration clearly. But we also are working hard to bring some of the content that exists within MSCI into the RCA product line, so Climate being an example. So that's part of the upside, if you want, beyond just integrating and continuing to sell the core RCA product, it's to bring some additional content or insight inside this product line. Now we still need to develop much more the other segments in Private Asset: private equity; private credit, in particular. And there, we -- so first, our strategy, if you take over time, will combine organic growth and acquisition. So that's something which is clear. But on the organic front, for example, as we discount quite a lot, I think up to now is we see again ESG and Climate as an immediate opportunity. There's lots of needs and it's also our entry, if you want, to serve more specifically in private equity and private credit the GPs and not just the LPs. And that's an example of, again, bringing the content that we have within MSCI into new segments and new asset classes.

Maybe on M&A specifically, you haven't historically done a lot of M&A. I think RCA is really one of very few acquisitions that you've done. Is the strategy changing as it relates to capital allocation? Sort of where does M&A rank now? And what type of assets would you be interested in?

Well, if you look at the history of MSCI, we actually -- we played a little bit on the whole gambit. So the first 2 acquisitions, which were Barra and RiskMetrics, were in that category where MSCI doubled in size with Barra and then doubled in size with RiskMetrics or kind of relatively big and disruptive, in a sense, acquisition, but one that allows us to have a big part of our existing franchise. So those were, I would say, the types of acquisition may be needed at the beginning. And then we went into having a lot more very bolt-on acquisition. So we did two in the area of -- one in the area of ESG and one in the area of Climate and then more lately, RCA. So that's more what we tend to like, which is to be able to have acquisitions that are much more manageable to integrate.

Okay. So at this point, it sounds like the focus on acquisitions is more around the Private Assets side, building more of that.

Not necessarily. I think we're -- so we're looking at a lot of potential acquisition. And the pace has not really slowed over the years. So we still look at a lot of potential acquisition. It's just that going back to our Triple-Crown approach, it also applies to external acquisition. And so we want to make sure we buy the right company at the right price and also very importantly, with a good level of confidence that we can do the integration fast. And so -- but again, if we want to grow in the private asset space, we will likely to look at acquisitions.

Okay. You've also -- there have also been some recent partnerships that have been announced. Talk about like what's new with those partnerships?

Well, the partnership is a way also to, if you want, get a sense of potential partner which someday may be for sale. So the Carbon Delta acquisition in Climate that we did now maybe 3, 4 years ago started with a partnership to distribute their content. And essentially, the 2 parties liked each other and after sometime, it led to an acquisition. So it's not a bad model, if you want, where you can distribute, get to know the third party and then if there is an interest to acquire. But more generally, it's either to distribute content, that's the Analytics part, partnership part to distribute our content, or to incorporate specific data or offering that we don't have in-house but we think are good complement. So we did a lot in ESG with particular data providers that we found interesting and complementary to what we have.

Yes. Yes. Okay. I guess I'd ask, it seems like few are satisfied with the state of ESG data, even ESG rating. Sort of there's many different -- the ratings aren't really correlated across various ratings providers. I think it's led to a bit of frustration on the part of corporates. Maybe talk about like how do you see that evolving over time.

Yes. So first, it's still a new space. So there's still generally a need for a lot of education on what the rating is and is not in the [ ESG ] space. And when you look at this topic of low correlation, which obviously strikes people because they're used to high correlation in the credit rating, when you try to analyze why, you can break it down into 2 or 3 pieces. One is not everyone is trying to solve for the same problem, which, again, in credit rating, more or less, you're trying to solve the same problem. Here, we and a few others are really focused on this concept of assessing long-term risk. So this notion of materiality of the risk is really, really important. So a way to give you a sense, if your -- if you take the topic of water management and if you're a bottling company, if you don't have to -- access to water, you're out of business. It is material. Now if you save water and you're an advertising company, it's a good thing to do, but it's not going to be material to your business, right? And so this concept, which is kind of very relevant in the financial space to assess long-term risk is not relevant if what you're solving for is more of an NGO-type approach, where you want to promote good practice. Good practice, water management is as important if you are an NGO that it's being done across the board than only with the material activity. So that explains why you have very different answers because you're not trying to solve the same problem. The second element, which also explains a lot of the divergence, is very often, you -- a lot of scores, if you want, only look at what the company are self-disclosing, which, by definition, is biased towards the positive things, right? So if you take our rating, for example, 45% of the inputs are not coming from company self-disclosing information. We obviously capture that, but we also look for range of alternative data, if you want, to cross-check that what the company is saying is actually done in reality. So it's a lot about, if you want, product recalls, litigation, things like that, which -- or fines that might be put on certain companies. You will never have the list of EPA fines in the U.S. on a CSR report. It's just -- it's not there, but you can get this information, and you can use it to sort of cross-check. And that explain also why you have high differences on. So it's part of the maturity cycle where there needs to be a lot more consensus, if you want, or at least understanding about the objective and then a better qualification about what is a more robust or less robust approach. And that's what the investors have been doing over time. And that's why we have a very strong base in the investment world because we're solving for this problem. But we're not solving for other types of problem like advocacy or more activist-type of approaches.

Do you foresee having maybe several types of ESG rating so you could have one that measures risk, ones that measures sort of impact, something else that measures some other aspect of ESG?

We do -- by the way, we do. And that's been part of what we're trying to explain for a long period of time is you can think about it as your -- you can want any number of things in your portfolio that are due to you as an individual. So a religious screen is not about making money. It's about you and reflecting that in your portfolio. So that's our screening business. That's one. Then you have what we just discussed, the sort of assessment of long-term risk, and that's around the rating. And then we also have offerings to allow to measure more the impact, so linked to the SDGs, for example, and that's also part of the offering. Again, part of the issue is sometimes, people get confused and then look at one topic and -- for one need and sort of mix certain things. So it's part of the exercise for us to continue on this education front, if you want, to explain why certain things are done in a certain way for specific objectives. And sometimes, it's something you can explain. And sometimes, people just don't want to listen because they're not interested in really understanding what's going on. But that's part of the exercise, I guess.

Yes. Great. Understood. Well, it was a pleasure having you here. Really appreciate your time.

Okay. Thank you very much.

Thank you.