MSCI Inc. (MSCI) Earnings Call Transcript & Summary

Hello, and good day, everyone. Thank you all for being here. My name is Faiza Alwy, and I'm the Business Services Analyst at Deutsche Bank in the U.S. We're pleased to welcome Tia Counts to our Global ESG conference. Tia is Chief Responsibility and Diversity Officer at MSCI. And MSCI, as you all know, is a leading provider of critical decision support tools and services for the global investment community. Tia, thank you so much for taking the time to participate. We really appreciate your unique perspective. And before we begin with questions, would you like to give us a brief overview of your role and background?

Sure. Thank you, Faiza, again, for having me. I'm really excited for this conversation and thrilled to be talking to you about these very important topics. As you mentioned, I'm the Current Chief Responsibility and Diversity Officer at MSCI. I've been for almost 2 years. I joined from a very large financial services organization where I held similar roles and my background recently, actually I'm a lawyer by training, and I was a cross-asset class derivative structure for [indiscernible] before moving into the CR space. So again, excited for the conversation. Really happy to be here, and thanks again for facilitating.

Excellent. Thank you. So look, I'll start with, as we all know, MSCI plays a central role in the ESG ecosystem by powering better investment decisions through innovative research and solutions. Maybe to start, give us an overview of your solutions, their size, scale, and how they're differentiated in the marketplace?

Yes, absolutely. I think before I start, I'd like to highlight that MSCI, we do play an enormous role in the ESG space, but something that is really important for me is to distinguish that we play an enormous role in the investment industry, both from an ESG integration and from a climate risk perspective. And these terms are often conflated, but they actually are very separate. And from our perspective, they represent large, distinct and meaningful avenues for us to help investors address material risks and opportunities and separate avenues, if you will. So if you don't mind, we'll double-click on ESG, and then we'll come back to climate risk conversation.

Okay.

MSCI, as you know, is the world's largest provider of ESG ratings. And we have a coverage universe of over 10,000 issuers in 95 countries, spanning some almost 950,000 securities across asset classes, which is pretty, pretty large. We've worked hard to create an investment materiality-based framework and common language for investors to ensure that they have the ability to integrate ESG considerations for their portfolios. We also have screening tools, reporting engines and underlying data sets to help investors with their different investment objectives and ways of incorporating ESG considerations into their portfolios and monitoring and reporting their ESG risks and opportunities. Faiza, as you know, MSCI is a global leader in indexes, where we've also had a strong track record of building standards for the market. We create an extensive suite of ESG and climate indexes in both equities and increasingly, fixed income to help investors integrate ESG or climate considerations as an overlay to their portfolios or to use as a primary or secondary benchmark of their performance. And by the way, our ESG and climate indexes are using the same frameworks as our ratings and research. I should add that ESG -- ETF, excuse me, products linked to MSCI ESG and climate indexes have attracted roughly 70% of the cash inflows, showing strong leadership there. And finally, we're proud to be a leader in driving both ESG and climate transparency to help provide institutional investors with much needed clarity as they sharpen their focus on the financial impact of climate change and risk awareness of the value of ESG data and ratings to improve disclosure standards.

Excellent. If you dig -- digging deeper on climate, it is one of the most pressing ESG issues. And I believe your CEO said on the last earnings call that you are determined to become the undisputed leader in climate-related investment tools. Talk to us about how MSCI is positioning itself to capitalize those opportunities. And what role do you see MSCI playing in the transition to a low-carbon economy?

Yes, absolutely. I do remember when Henry said that. I'm glad to be talking about climate specifically, which, again, MSCI sees as a distinct and incredible opportunity for us in its own right. We've been very vocal in viewing climate change as one of the largest sources of capital reallocation since the Industrial Revolution. This type of transformation means for us that the investment industry looks at MSCI, and we believe that we're well positioned to help all participants in the ecosystem from institutional investors, corporate issuers to central banks and intermediaries. We offer a wide range of tools to help investors decarbonize their portfolios, including our climate value at-risk metrics, our net zero tracker and our implied temperature rise metrics. Through our Analytics engines, we help clients measure, monitor and manage climate risks and opportunities across their portfolio. For example, our climate solutions on MSCI ONE help asset owners, asset managers, banks and insurance companies sufficiently manage their net zero commitments across the portfolios and asset classes. We also help clients address growing regulatory requirements and report on their progress. Our reach in climate is based -- is broad-based. And we offer tools not just for public equities but also for private assets such as real estate, private equity and private credit.

Great. Great. Thank you. I guess beyond the product side of the equation, can you discuss your own priorities as it relates to environmental sustainability? I believe you've committed to source 100% renewal electricity by 2025, net zero by 2040. And you've had your net zero targets approved by the Science Based Targets initiative. So talk about what you're doing to achieve this target and perhaps why not had net zero earlier, maybe by 2030? And as a second part of the question, talk a bit about how do you specifically sort of encourage your employees, clients, suppliers, to make sustainability part of their everyday business decisions, whether it's through R&D, procurement, travel, sort of all of their decision-making.

Sure. No. Thank you for that question, Faiza. As you know, MSCI is in a unique position as a provider of the very tools to help net zero alignment and decarbonization of portfolios. So it's really important to us to provide that same level of transparency and pathways for achieving these ambitious goals and targets as we set for ourselves. 2022 was a phenomenal and a very critical year for us for -- especially for our environmental strategy. And we were able to do, as you mentioned, a few very key enhancements to our strategy, including setting and establishing targets in a few way. So just to go -- step through those really, really quickly, we established science-based near-term, long-term and net zero targets, which were verified, as you mentioned, by the SBTi in November, so towards the end of last year. Near term, we commited to reduce all Scope 1 and Scope 2 carbon equivalent emissions by 80% and to reduce our absolute Scope 3 carbon equivalent emissions by 50% in each case by 2030 and from a 2019 base year. So we also committed from a long-term perspective to reduce absolute Scope 1, 2 and 3 emissions by 90% by 2040, again, from 2019 base year and to reach net zero emissions across the full value chain by 2040, again from a 2019 base year. So tackling our supply chain emissions is definitely the biggest challenge MSCI faces in reaching our net zero targets. And I don't think we're unique in this regard at all. But I just want to point it out that we're not a big carbon emitter on our own. Scope 3 emissions are over 97% of MSCI's total emissions. And within Scope 3, a full 80% are coming from purchased goods and services. So when you think about the scale of the challenge for us, it's pretty clear that Scope 3 is where we need to put our focus. And again, I don't think it's unique to a company in our industry, but I think it's important that we know where to put our focus. So we have, as I mentioned before, really -- it's really becoming really clear to us that as companies look to transition to net zero, supply chain interdependency globally really means decarbonizing along the chain, the interdependency as well. So to begin taking on this issue, we set a 2025 milestone to increase to 60% by spend with our suppliers with science-based targets. So we're actively encouraging suppliers to cut emissions and to use renewable energy. We also published our climate transition plan. And we plan to provide visibility to how we're working to reduce our own carbon footprint and to meet our targets and milestones. We believe that climate education and employee engagement are local climate matters, and a climate action is really important also for our communities and our employees. We think that it really helps to support their engagement and to make sure that they're all aligned. And we think that to do that, we've seen a few different examples of how we approach employee engagement. And I'll just give you a couple today just to illustrate the point. So as of 2021 December, so the end of last year, we had 22 climate action network employee resource groups across our offices globally. So when you think about, for example, the way you might have a DE&I-focused employee resource group, we actually, I think, are pretty uniquely positioned and that we have groups that are focused on climate action. We have quite a few of them, and they focus locally. So they're taking advantage of opportunities to really make an impact in the local communities. They're working on increasing awareness. They're working on broad employee engagement and managing local and global environmental issues. Activity, examples of some of the activity that they've been involved in include things like urban gardening in Mumbai and tree planting in Manila. We had a panel on plastics and the awareness of the danger of plastics that was held in Monterrey. So it's really exciting to see the employee base get fired up about the environment. And actually we're finding that as we get deeper into our environmental strategy, that kind of engagement, it matters to our employees. So we're really talking to them a lot about it and supporting these local groups. Yes. I think that's just important. I want to just underscore the employee engagement part because that's another part of my role that I'm responsible for employee engagement.

Yes, yes. Excellent, excellent. Thank you. Maybe moving on to other aspects of ESG beyond climate. Before you took on the Chief Responsibility Officer role, you'd originally started as MSCI's first Chief Diversity Officer. Talk to us about where MSCI is on the DE&I journey. Where have you gained the most traction? And where do you think there is still more work to do?

Sure. So you're absolutely right. When I joined the company, I was hired as their very first Chief Diversity Officer, which was a very exciting opportunity for me. MSCI has already been on a journey for inclusion and diversity. And I think that ultimately, where -- when I joined, we were interestingly at a sort of a cross point of our development along that journey. I came in, and I looked around, and I realized that what we were focusing on were the right thing. So we were focusing on our people, our leaders and our communities and communities in a very broad sense, meaning our clients, vendors, downstream partners, external partners and local communities. We established some connectivity that was already in place, but we've shored it up and really redoubled our efforts to establish connectivity with the workforce, ensuring that DE&I would be properly developed and embedded throughout the business. So we did this through reimagining the Executive Diversity Council and creating a new inclusion of Belonging Council, which specifically focuses on the inclusion and belonging, whereas the EDC focuses more on strategy development. But we also put in place something that I was -- I thought was really exciting and innovative. And these are local activation groups, which work to ensure that DE&I comes alive in the most populous countries and cities where our employees are based. So we were really particularly interested because we're such a global company in ensuring that DE&I was not felt to be U.S.-centric for the company, that it actually resonated across the board with every office and every person in the company. We had a mission that there would be no one left behind from our -- in our DE&I journey. So we did that through a couple of measures, but one is the activation groups, which I think are really, really important. They help us identify what are the most pressing DE&I issues in those particular cities, which may be different city-to-city even if we have a global strategy that centers on inclusion and inclusive leadership and representation. The conversation is slightly different in the U.K. than in the U.S., for example. It might be very different in Mumbai or Pune than it is in Chicago. So we've done some work around that. I think executive accountability is another key win for us. Our leaders are extremely engaged, and accountability remains a very strong part of our DE&I strategy. We designed an executive accountability framework, which ensures that we continue that great focus on inclusive leadership behaviors and representation as those 2 key pillars of how we will create the type of culture where diverse employees can thrive, and everyone else can thrive. We were really intentional that we did not want to focus solely on representation because we believe that it's the 2-pillar approach that will create the sustainable company with the most innovation and the richest culture that we're looking for. So we've taken steps to do that and to specifically continue to support our growing ERGs. We wanted to make sure that they were sustainable and that they have what they need to continue to grow because they really are the eyes and ears of management and those who were most involved of the day-to-day experience of employees and how they experience the company. While we've done that, we also continue to make progress in growing the representation of women globally and people of color in the U.S. And we've continued to expand on our development and advancement opportunities for diverse employees. Progress takes time. I will say that I've been at the company, as I mentioned, just under 2 years, and I'm really amazed at how our leadership team has leaned into the DE&I discussion, how we've been able to embed the DE&I principles across the company. It's publicly stated and known that we link management director compensation to progress in DE&I. And my message to the Board when I present on these topics is always the same. It's about staying the course, right? It's a very slow-moving game, and we're in it for the long hurdle. And we want to make sure that we have sustainable gains that are consistent and can be sustained over time. So we need to stay the course and just stay focused. But I'm really impressed with the way the company has evolved and embraced really taking DE&I to the next level.

Yes. That's wonderful. And I'd be remiss to not mention that it is International Women's Day, is guess March 8, and we're around that time. So I know we have a lot of work here at Deutsche Bank that's happening around that. I'm curious if you'd like to reflect on that. I know the theme this year is embracing equity. Is there anything? Maybe talk a little bit about what that means to you.

Sure. Yes. So we've -- every year, International Women's Month, we normally will run a campaign through our women's focused ERG, which we call the WLF or Women's Leadership Forum. And this year is no different. We've taken the opportunity to think about embracing equity and really ask the question across the company, what does this mean to you? So there's a video that will be coming out soon with a certain version of a video that we've shot with senior leaders and others just really reflecting on the fact that equity is an interesting conversation to have, but it's also an active conversation. Embracing equity to me and to many others at MSCI really has to do with being intentional about your efforts to bring about what we think of as equal outcomes. But in order to bring about equal outcomes, you have to sometimes do something different. You have to understand and recognize that everyone doesn't have the same beginning and doesn't start from the same place and also doesn't have the exact same journey. So you have to be intentional about leveling the playing field, and you have to do the things that you know should be done even if they're the hard thing. So we think about embracing equity as a simple concept because it's -- I don't think anyone disagrees or could disagree that equity is a good end. But it's not an easy thing to deliver. And it encourages us to really ask some of the difficult questions and do the hard work around things such as pay equity, which we have done. And we've put a public statement out on our website, and we continue to regularly review all pay contracts for equity. So there's a lot of layers to it. And I think it's definitely something that MSCI takes very seriously.

Excellent. Thank you. Maybe from a social perspective, this is an area that is often underappreciated. How are you as a company ensuring social sustainability?

Yes. So I mean, social sustainability is one of those -- I think, you're right that it's underappreciated. It's underfocused on, and I think it's because it can be one of those, that's the most difficult to measure. So what a lot of companies do and the way MSCI thinks about social is very wide. Our largest and most invested in asset, if you will, is our people. Our people are the reason that we are able to fuel the growth in the company, and so we do focus a lot on our people when we think about our social sustainability. As I mentioned, when we talked a bit about DE&I, we think about how to ensure that we are focusing on the development of our talent. So we work hard to evaluate and regularly improve our talent practices. We think about benefits and our outreach programs. We do believe in fundamental human rights. So we also have a very strong commitment to human rights and understand that those are foundational to our company. Treating employees with respect and making sure that they are treated with dignity, we develop ethical codes and policies to help us ensure that we're on the right track. And we interact with clients, vendors and others to make sure that we're creating a safe and equitable environment. And, of course, a diverse workforce is part of that. We're also really committed to employee engagement. And I think it's really important to MSCI that we understand how our employees are feeling. And we regularly ask this question. We regularly take a pulse survey or at least annual engagement survey where we assess how are we doing as an employer and then we take action on what we find. So I think it's really for us, again, it's another lens on how employees should be experiencing the workforce. And we're measuring ourselves against whether what we think we're achieving is actually being achieved. These surveys are fully anonymous, but we do review the outputs and look for areas of improvement. In January of last year, so January 2022, we formally introduced our future of work, which is MSCI's hybrid working arrangement and how we think about trust and empowering our employees to do the right thing and how we think about the way they're experiencing the hybrid workforce and the specific areas that we should focus on, given the fact that hybrid working has its challenges and its benefits. We reimagined our office space and our -- modernized our technology to make sure that we could enhance interactions of clients and employees. And we wanted to also obviously take advantage of some of the peak benefits that can be enjoyed when you have that sort of flexibility that really wasn't with us pre-pandemic. So we want to empower our employees to use the space to build and bond with each other. And we believe very strongly that employees should be empowered to take charge of their careers and their professional growth, and it's our job to support that. But speaking of professional growth, MSCI offers many opportunities for growth, which we think career growth that is transformative for many in offices around the world. We are such a global company that is very important for us that these opportunities exist in every corner of the geography where we have employees. So it's one of our really flagship concepts that we pay a lot of attention to and really focus on. So this is regardless of whether you're based in the U.S. or Asia Pacific, Europe, Africa, Middle East, we have workforce with -- that's very global, and we serve clients in more than 100 countries. So it's important for us that we're engaging properly with our employees in all of those locations. We prioritize health and well-being as part of the S pillar at MSCI. In particular, coming out of the pandemic, I think it became really clear to many companies that the health and well-being of your employees was something you need to take a very active stance in. And we do that. We encourage them to obviously take care of themselves, but we do what we need to, to ensure that they're given the time to invest physically, emotionally, financially in their well-being and they stay connected through our communities. So we're, again, creating these opportunities for employees to engage and to reach out if they need help. Our benefits ensure the health and well-being of our employees to the extent that they are taking advantage of them. So we really encourage them to do that. I think the only last thing I would mention from an S perspective would be that we encourage our employees to support community involvement. This is through global or local activities. We empower them to come into the office and get together to do these activities and also to support organizations that have positively impacted a local community where they may be living and working. So it's important for us that, that is something that the local community has to be attended to by local people. And so it's really empowering for our employees to be able to get involved locally. And of course, DE&I is a big part of our S as we talked about that already.

Yes. Yes, absolutely. Thank you. Thank you for all that. Maybe shifting gears to the G part of it on governance. Give us the main highlights of what has -- what have been sort of those main highlights over the last few years on the G side of the equation?

Yes, absolutely. So on governance, our governance practices are overseen by our Governance and Corporate Responsibility Committee of MSCI's Board. So there are 3 or 4, maybe I'll give you 3 main areas that I think are worth calling out. The first is skills refreshments as a major focus for MSCI and the Board has been on the skills of the Board, and the skills of the Board needs to support MSCI's long-term strategy. This includes active Board refreshment. So over the last 5 years, as an example, we've appointed 4 new directors, including those with expertise where we needed it: in technology, cyber risk, marketing, digital strategy and the investment industry, of course, including some of our key client segments and growth areas. So Board refreshment is really important to us. And when we appoint new directors, we look to ensure that we're getting the skills that we want on the Board. The [indiscernible] policy of prioritizing new members so that the Board, on the whole, possesses the mix of experience, skills and qualifications necessary to support MSCI's long-term strategy. So that's the first thing I would call out, Faiza. Secondly, I would say transparency. So the Board, the Governance Committee and MSCI as a whole have been focused on transparency. That's something that we touched on a little bit earlier. But this includes for the Board a transparency about the Board itself, its processes and its focus areas and of course, its makeup. This also includes information that we disclose about corporate responsibility and our corporate responsibility practices and developments. And we provide significant reporting to our investors on everything from carbon emissions to targets to the workforce demographics to turnover in the workforce. This is all, again, in the spirit of transparency, which is very important to MSCI and its Board. I think we are a leader in some of the transparency that we are providing. It's pretty sufficient and pretty robust. I would also say that maybe as a third thing to call out in terms of the Board and governance for the year is oversight. So we work regularly to make sure that the Board is able to exercise all of its duties and its proper functioning with the specific areas of oversight better allocated to the right committees and the right information is reaching the Board. So for instance, in the last few years, the Board's changed the name of the Compensation and Talent Management Committee to the Compensation, Talent and Culture Committee. And this was to emphasize the importance of corporate culture oversight for the Board. And there were a few other similar changes of committee names to better reflect the oversight and responsibility of the Board and the separate committees. But I think oversight for us has been something that, again, is very -- it's top of mind. We want to ensure that there is as much clarity and transparency for what the Board and the separate committees are responsible for as possible. One final point to mention about our governance practices, which I think is really important, relates to our approach to shareholder engagement. So we feel really strongly that we must consider and incorporate the feedback of our investors. And we've developed a robust investor engagement process in order to do that. We engage with investors throughout the year, including outside of proxy season, just to make sure that we have an opportunity to gather all feedback or relevant feedback. And we regularly have Board members involved in those discussions. And 2022, for example, 4 of our Board members joined meetings with investors as part of our engagement efforts. Again, I think that is pretty extraordinary. And it was not without being really intentional about the Board's interest and shareholder engagement. And I just thought it would be important to call that out as well.

Yes. Yes. Very interesting. Thank you. So I guess just going back to the product side of the equation, right? So MSCI has several products to help institutional investors align with a multitude of regulatory and industry frameworks, for instance, the UN SDGs, SFDR, TCFD, et cetera. So what are the main ones that MSCI has adopted? And given MSCI's unique position, sort of how does CR affect the commercial agenda in your ESG and climate product lines and vice versa?

Sure. So I'll start with MSCI sort of as a product provider, so on that side of the house. Our road map is always informed by our clients and what they need us -- what they need from us to help them, issues that they need us to help them solve, including addressing and aligning to the regulatory and the industry frameworks that you mentioned. For example, our sustainable finance solutions form a holistic toolkit for the financial industry compliance. We equip clients to report on sustainability, on risk, detailed principle, first impacts, the pinpoint sources of portfolio emissions to classified products and report on their progress. We also created the MSCI SDG alignment framework, which is built on the premise that companies may contribute to the goals in a variety of ways, positively and negatively, across several important impact areas. We evaluate the degree of alignment across the company's operations, products, services with each of the 17 sustainable development goals or SDGs. Turning to MSCI as a corporate. When we identify frameworks, we look across the marketplace to understand what the industry trends are and to draw from our -- we also draw from our ESG and climate research. MSCI is currently aligned to TCFD. We published our second report last fall. When developing our TCFD, we actually were able to use MSCI's own climate VAR and our applied temperature rise metrics to identify our climate risks and imports and impacts on the environment. We also aligned to UN SDG's SFDR and SASB and some of the others that you mentioned.

Great. Great. Thank you. I guess I'd say you're in a very unique position as someone who is responsible for "ESG" for a company that is also an ESG ratings provider. What do you think are some of the hurdles both -- that both corporates and investors face in ESG? And how would you like to see ESG as an investment philosophy sort of evolve over time?

Yes. Great question. So I think as a leader in the investment community, we've really seen ESG accelerate over the last several years and various inflection points in the industry. But even today, I think it's clear that ESG means different things to different people. At MSCI, we provide solutions for at least many different objectives of investors whether it's values-based investing, so think about screens that we provide for to help an investor screen out weapons, manufacturers, for example, impact investing -- women's empowerment investing, for example, or increasingly ESG integration. Our view has always been that ESG risk is investment risk. We don't push normative agenda or what's good or bad. What we focused on with the ESG ratings is what really matters from an investment materiality risk of return standpoint. So as I said, as I mentioned earlier, ESG is an investment strategy centered around minimizing risk and maximizing related -- maximizing opportunities related to ESG. It's not just a green or impact investing. This unified understanding is crucial in order to have a real constructive dialogue about ESG. As far as the future of ESG is concerned, we really hope and expect to see that, that will be incorporated into every strategy and portfolio globally within the next several decades. But that may not seem material for every business right now. ESG risks may not seem material for every business right now. We believe that ESG risks, largely climate and policy-related risks, are growing rapidly. Soon, not accounting for these risks will lead to underperformance in investments as businesses began to struggle as a result of these growing risks. Ideally, ESG as an investment philosophy will evolve to no longer being a separate factor. It will be fundamentally ingrained into all investment strategies. A final point to make on corporates, if we still have time, is...

Yes, absolutely.

Just in reference to a tool that we've just recently developed that might be helpful. Corporates face issues on consistent data collection. And adversely, this sort of lack of consistency really can adversely affect their strategy implementation, their ability to reach their net zero targets and their social impact. So our latest solution, which we've called the Corporate Sustainability Insights module, addresses some of the gaps in the knowledge that corporates face. It comprehends and shows a comprehensive sustainability risk and performance for each company and allows the corporate to compare how they stack up against their peers. So we would encourage people to take a look.

That sounds great. Excellent. Maybe just final question to tie it all together. I'm curious, we went -- we covered a lot of ground. I'm curious like where do you find yourself spending the most amount of your time? And maybe another way to put it is out of all of the things that we discussed, what do you think is most challenging from an ESG perspective?

Well, that's a big question. It's interesting because each elements of the E, the S and the G, requires focus and dedicated planning and strategy. And I think for me, looking across each of the pillars, it requires me to put on a slightly different lens and in order to also ensure that we're pulling in the right direction. ESG is I always like to say, it's a team sport. It's not something that one person or even one team manage. Working together with my colleagues in finance and in IR and in all of the other key elements of MSCI means that we will continue to move in the right direction and get there together. But it's really important that we stay the course and that we tackle the growing challenges and the opportunities to support our clients in a cohesive and collective way. And we can only do that if we row in the same direction. And I think the industry, to a certain degree, is also rowing in the same direction. It's not like some of other elements that have come through the investment community where there's competition. I think people understand that ESG is something that we should row together on because we all want the climate to stop warming. We all want a better future for our children. And we all want to be able to say that we -- when they ask you where were you that we were involved in this, and we did our best.

Yes. Yes. Excellent. Well, thank you so much, Tia. It was such a pleasure to have this conversation with you. Really appreciate your time. And yes, hope to talk to you soon. Thank you.

Thank you very much, Faiza. It's great to be with you.