MSCI Inc. (MSCI) Earnings Call Transcript & Summary

All right. Hi, everybody. I want to get started promptly because it's a cool topic, and there's a lot we want to talk about. We've got awesome panelists. And I also want to give you opportunity to ask some questions as well. So we're going to try to be efficient and try to just learn as much as we can. So topic of this panel is ESG & Alpha. It's a session that's kind of a recurring session for us. Probably my favorite session because it's a big focus of a lot of the work that I've done over my career in GS SUSTAIN, is kind of making that link between sustainability and performance, which I think is going to be just really important to sustainable investing kind of achieving its promise ultimately. It's kind of an area where almost everybody can agree upon that it's important. So let me introduce our panelists. So on my left, I have from MSCI, Linda-Eling Lee. She is the Founding Director and Head of MSCI Sustainability Institute. Those of you in the ESG world probably already know who she is. Next is from Morgan Stanley Investment Management, Thomas Kamei, who is an Executive Director of Counterpoint Global. And then finally, from Goldman Sachs Asset Management, our own, Valentijn van Nieuwenhuijzen who's the Global Head of Sustainability for Public Investing. Thank you, everybody, so much for being with us.

I want to jump in to this question that we get all the time, which is, does ESG outperform? And that's really the focus of the panel. What have we learned so far about how ESG can really make us better investors? So Linda, I'm going to start with you. MSCI probably has more data and more history than anyone in the market. Just launched the MSCI Sustainability Institute last week, so news out of your camp. What do you think we've learned so far with all that data and all that history about how investing considerations can help performance?

Great. Well, thank you. Thank you for having me here. So yes, MSCI is the largest provider of any type of sustainability data and analytics to the global investment industry. Now any one of those sustainability data points, in and of themselves, is performance-neutral. It's really in how you put it together and how you put it into the investment process that really can have very different impacts in terms of risk and performance. And of course, we serve many different investors that will bundle the information quite differently. So I think that as an industry, we've been building quite good knowledge base at this point in terms of understanding when these different bundles of ESG information can perform well or poorly. And really, we can look at both academic research as well as research that MSCI has done on our own data. And so what have we learned? Okay, so if we start with just MSCI's research on our own data, we have been focused on setting our own ESG ratings and understanding the behavior over a long period of time. So we have about a decade worth of data. This is the longest continuous time series that's consistent of a ESG factor that is designed to only capture a small set of material issues that are different industry by industry, and that changes year after year to capture emerging industry risk. So over a 10-year period, looking at across the MSCI constituents of about 2,300 or 2,400 companies, what we have seen is that if you take the top quintile companies versus the bottom quintile, we've seen a 35% cumulative return advantage. That top quintile has been more profitable over time. It has shown lower earnings volatility. They have experienced much fewer sharp drawdowns on the order of 50% fewer. And I think what we've also learned is that weight matter, like how you actually put it together industry by industry. Because if you compare just taking equal weighting across industry, you're not going to see that same level of return advantage. So that is the MSCI evidence that we published and that you can kind of track over time. Now we also think you can learn a lot from academic research is now more and more of academic research. And that's one reason we launched the MSCI Sustainability Institute really is to connect across the financial ecosystem, industry and finance with policymakers and academics. And so if you go to msci-institute.com, we've actually put a research portal together where we've curated over 150 recent academic studies that are focused on looking at sustainability factors and performance, and also using commercial-grade data versus over 1,000 studies that we weren't able to put into the portal because they actually use data that would not be sort of financially usable in the financial application case. And what those studies have found is that the tendency has been able to see that each integration has actually provided positive risk returns compared to divestments and negative screening approaches. Now that may not be news for lots of people in here. I can see that there's some very long-time practitioners here. But I really think it's important to try to engage with that research that's coming out in academia because there are nuances as to the time horizons of investors, geographic and a country focus that can be different. And I think that as we build a longer history, everyone, all investors with their specific approaches can actually fine-tune the way of actually incorporating and generating value out of this information by looking at the evidence.

I wanted to just zoom in on one thing you mentioned when you said weights matter. Are you referring to kind of market cap versus equal weight or weighting by sustainable characteristics?

Weighting by sustainable characteristics. Those are going to matter -- those are going to be very different industry by industry and you do have to make those adjustments. If you don't, you just don't see the same kinds of advantage, and I think that makes sense, right?

Yes. Yes, of course. Okay, all right. Well, Valentijn, I want to go to you next. NN, a firm that you were leading prior to acquisition by GSAM. Upon that press release a couple of years back, it noted that 75% of your assets are ESG integrated. That means some weren't technically, right? And so maybe you've had experience in both sides. And would love to hear kind of your experience on what you've learned in terms of where and why sustainable considerations might influence performance and where it might not.

Yes. And I think even at the end '21, so just before the transaction closed, we were around 90% of total AUM of the business at that point in time. And the extent to which there were assets that were not ESG integrated, it was not because it wasn't working from a performance perspective. It was more about practical applications that were difficult to find, for example, in private markets. It's just harder to integrate that. You cannot easily trade in and out of these portfolios and then there were other elements, which were more driven by derivatives or really purely liquid overlay strategies, which again, not so easy to integrate ESG characteristics. And I think with respect to the learnings on the value of ESG, I do want to anyway take a step back. And I think there is no specific magic to ESG in terms of other types of information that you need to think about as an investor. At the core of it, whether it's climate change or social change or all kind of elements related to governance that we sort of have included in the ESG scope. If and when they are influencing a sort of secular transformation in the real economy, they become very relevant for your risks, for your opportunities, for your ability to assess the adaptability and innovation of companies. And I think that's certainly been our experience as well. An increasing amount of data is providing insight and information around this topic. But I would also really want to emphasize that although we had ESG characteristics integrated in a big chunk of our assets and we're expanding that now. Certainly also in GSAM products and assets, it is not only about ESG data integration into your investment process, right? It is really about interpreting this data. It is about the mindset and about understanding that, that is a starting position that then needs to be brought into your more qualitative assessment of what is happening in the world. It needs to be translated into how you engage and talk with management of companies. And it hopefully helps you to identify these underlying sort of secular change currents in the real economy. And if you bring all these elements into practice, then I do think you have a great opportunity to manage your risks better and identify new growth opportunities earlier and, thereby, deliver alpha in your strategies. And just to underscore the fact that the mindset and the way of thinking is so critical in some of these products, our sustainable fixed income and equity strategies that we've been managing for many, many years, even before there was real disclosure on the data that we have at hand right now. Some of these businesses in sustainable food or in sort of the infrastructure build for renewable energy were really qualitative calls. Later on, we got more sort of disclosures and more data-driven insights in these companies. But at the first instance, some of the biggest alpha contributors were really coming from the qualitative analysis. And so I think that, that remains absolutely critical. Also because then although I fully subscribe to what was said earlier, there is quite a big amount of research by now that looks back over 1, 2 or 3 decades to the extent there's data, that both the financial performance of firms themselves as well as the investment performance of portfolios generally has a positive -- can be positively influenced by being more mindful of ESG characteristics in your decision-making, how to run a firm, how to manage the portfolio. But it is really critical that you understand that you need to always assess the context. You need to understand that what has worked 10 years ago might no longer be working today. Some of these success stories are now scoring amazingly high on all the ESG ratings. And they're no longer contributing to all because the way that the real economy is developing is shaping different drivers of alpha success using your ESG insights are currently actually at play. And to the extent you are an improver, to an extent you are really contributing to the transition of the real economy, also if it is not pure-play green business models but really more sort of, let's say, more carbon-intensive industries that are changing. You see now that there may be more of opportunities in that space, whereas 3 years, 5 years, 10 years ago, just investing in green would probably have added a lot of value in terms of all your portfolios.

Right, right. A lot of angles there that we can dig into more. So Thomas, for you. I mean, you're a growth investor that probably knows more than a lot of growth investors about sustainable themes and trends. And I'd love to just get your perspective on why you spend time on sustainability. What do you get from it? How does it -- how do you hope for it to benefit you? And I'm going to give you a 2-for-1, too, which is the -- is there -- are there ways that you think you are wary that sustainable considerations or ESG considerations could sometimes be detrimental to performance?

Yes. Well, first of all, thanks so much for having us here and making the Morgan Stanley guy go last, I guess. One of the other things that I think is really constructive and like gives me a lot of optimism is, A, it's standing room only in here. And I think that it's partially because 5 years ago, ESG was like a given, like everybody had to do ESG, like we don't need to look for the performance. We don't even care if there's alpha. And I think we're in this new world where it's like, wow, we're really looking for the business case, right? And I think that's kind of evidenced by everybody being in here, kind of trying to engage on the topic. So super cool. Glad to see everybody here. So I guess kind of the big trend that I'm kind of most excited about is, and this is a little bit more of the perspective of all investors engaging with big asset owners, that we are moving away from just this risk orientation, right? How do we reduce exposures to getting a little bit more into that positive optionality, like the positive externalities that these companies create, how do we think about underwriting those as part of an investment process? So that is -- I know that's like a subtle change, but shifting from a risk mindset to an opportunities mindset is very material. And also like taking off the investor hat and maybe thinking about more from a global citizens perspective. That's also wonderful, right, because that means the for-profit capitalist rails are coming in to fund the solutions to take these ideas to scale. So that's also very encouraging. Your second part of the question, which was how do we think about the potential downsides? One thing, and we kind of hit on this is this whole idea of materiality, right? So a lot of companies right now are tasked with filling out thousands, like I'm not exaggerating, thousands of data points to fulfill all of their filing requirements or for the rating agencies. And unfortunately, you're using a lot of human capital potentially towards things that aren't necessarily material. So like an example of that, I think you wanted us to kind of give a couple like live case studies on the portfolios that we're kind of monitoring. There's like a fintech company and they did all this really, really thoughtful work on like parsing out their Scope 3 emissions. And as much as like that's really nice and it makes for a nice slide, I don't -- doesn't -- an investor who's actively investing in this company shouldn't really care because it's really not that material to their ultimate business model. But how wonderful that this company's core business model is aligned with socioeconomic environment? Each incremental revenue dollar does something really positive for the world. So why are we allocating our storytelling potential or the air time on the quarterly call or whatever towards highlighting those things that are opportunities and are revenue generative. So you are really stitching together the needs of all your different stakeholders. So yes, hopefully, there's -- that answers your question.

Linda, one of the things that I think is pretty well understood is that the kind of ESG investment landscape has tended to have pretty significant biases towards things like quality growth asset lightness, right? Some of the things that are definitely going to have influence, in terms of factor exposures on performance kind of on average on the whole. Do you think those are kind of biases that are going to remain? That's just a natural outcome of thinking sustainably or sometimes we get the questions like where are the value ESG investors, right? Where is the value sustainability? Is there a path for those biases to change or maybe be more inclusive or other factors?

Yes. So I think within an industry, if you're just tilting towards the companies that have stronger ESG profiles, I mean, there is that correlation with size and quality that we've seen, which means that those biases have tended to benefit in sort of more risk of environments, right? And so I think that's pretty well known. Now in practice, a lot of ESG funds, many of which are run by the people in this room. I mean, have tended to either have some fairly significant sector skews, which, of course, then means that you're kind of at the vagaries of a sector being in and out of favor in different cycles, but also the tendency to put in some value-based screens, right? And I think that the academic research certainly does show that there are some underperformance that is attributed to negative screening. And I think that do we see change in that in terms of just shifting away from that approach? I think that where we're seeing change is actually very much in the climate investing space. I think that there is an interest in investing into the energy transition. I think that we are seeing more investors going to almost where the emissions are because that is actually where the decarbonization needs to happen. And I think what's enabling more investors to kind of take that approach is new analytical capabilities that can actually help you attribute where your emissions reductions are coming from the portfolio level. So we have new analytical capabilities so that if you have a portfolio and you've shown some emissions reduction, you're able to attribute how much of that emissions reduction from your portfolio is coming from you just lopping off a couple of companies. But those companies, obviously, are still out there in the real world, right? And then how much of it is coming from you shifting weights from higher emitting companies, lower emitting companies in your portfolio? And how much of the emissions is actually accounted for by companies in your portfolio that are actually reducing their physical emissions over time, right? So your ability to actually transparently show that, I think, is really powerful because it allows investors who actually are using, for example, engagement as a tool to actually change the companies in their portfolio for them to be able to demonstrate the value of their stewardship. So I do feel like that analytical capability is beginning to give some way or some path towards a different approach.

So I really want to stay on this kind of interest in investing where emissions are. We've talked about that in a number of different ways today. Valentijn, I think there's a narrative or when I hear people talk about or when I hear our clients talking about the really strict exclusionary policies that they run up against, it tends to be from Europe. You're our European representative here. In 2022, we kind of got this eye opener of a reminder of some of those industry skews that ESG investors tend to have, right? When energy ripped and materials ripped and defense ripped, and suddenly, for the first time in recorded history, the ESG funds weren't performing very well. Now that was -- that seemed to have been a relatively short-term phenomenon, given those dynamics in the first half of '22. But would love kind of your take on that dynamic. And to kind of Linda's point, are you seeing, from your point of view, asset managers be maybe more willing or more entertaining of investing where the emissions are or being a little bit more inclusive of the benchmarks?

Yes, yes. So I think that clearly, partially to where client demand was; where regulatory incentives were; and to some extent, where data availability was and investable assets were, these biases in what you just were referring to or in terms of growth and quality and all the sustainable strategies were indeed seen. And they were, to some extent, exposed by the energy shock in 2022. At the same time, as I said, we were running previously an enormous high percentage of our strategies with ESG integration. ESG integration per se doesn't create these biases. So you can definitely run and we've been running an income or value strategy with -- which is ESG integrated and sustainably focused. You can run multi-asset strategies without very explicit biases that have that. But it is then much more about inclusion and integration than it is about using the sort of exclusion or screening, hard screening metrics. But client appetite and again, to some extent, regulatory incentives, certainly, if you think about also SSDr, SC09, A Plus, push a little bit in that direction. Now is this shifting in terms of the European mindset or the European appetite of clients of especially asset owners and I would say, fund distributors, definitely. I think that is very much linked to what Linda was also saying. There is an increasing awareness that a carbon-light portfolio is not the same thing as having a real-world impact and really driving companies towards a more carbon-light business model. The crisis itself obviously created a much stronger awareness that the transition needs to be done in a mindful way. In the emerging market, we spoke about sort of transition that is very much, I think, at play right now that there is an awareness that the social factor needs to be taken into account. The impact on disposable income needs to be taken into account. The impact on social fragmentation needs to be taken into account in this whole climate transition. And so what you now see is that first, clients want to see more what is the real-world impact rather than just can you show us green enablers and a carbon-light portfolio? And what type of -- and with more data at hand and more analytics at hand, there is now more ability to provide that clients. And there's enormous demand in many of the European channels, client channels that we have for that. Secondly, let's say, sustainably focused strategies, which have more social or inclusive growth mindset are now becoming available in the market, both in private markets as well as in public markets. There's quite a nice suite of products emerging. We're also trying to bring that to clients. And some of these biases that you would have in more climate-focused strategies in terms of the builds that they generate with respect to sectors or regions can be compensated by complementing your portfolio with these times. So you're still staying pretty focused on a sustainability-focused portfolio but with a more prominent role for social or inclusive growth. And then thirdly is really this phenomenon and awareness, which was certainly accelerated massively in Europe around if you really want to transition our economic model, you need to think about what's happening in energy space. You need to think about what's happening in construction. You need to think about what's happening in the industrial space. You need to think about what's happening in chemicals. If that part of our economy is not transformed, you can't have a very nice and green and carbon-light portfolio, which is the actual real-world impact is significantly less. And therefore, now the appetite in who is leading there, who is leading the transition. So the and the Alpha drivers right now often in these portfolios are, for example, industrial solutions providers that really leads or construction companies that really lead in a more sustainable way forward, not only for their own businesses but in terms of the service they provide across these sectors. And they are -- these type of transition leaders are getting a better reward in the market right now than some of the traditional sort of green starts, which have the inspiring business models that help this transition, but it's not enough to really transition the whole system.

Yes, yes. Interesting. So is more evidence of kind of softening of some of those sector SKUs is maybe an unintended consequence of Vladimir Putin's decision to roll tanks. Linda, I want to shift gears a little bit and talk data. Investors have kind of made major moves like with the ESG wave that we've seen in the last few years in terms of obtaining access to the ESG-linked data resource that they feel like they need to properly integrate sustainable considerations. What do they still lack? What are they still kind of clamoring for? And maybe any kind of sneak peek you can give us, in terms of what the pipeline looks like in terms of what comes next from MSCI?

Yes. So two of the really biggest areas in terms of kind of demand and the gap in the market are in private assets and also just more data to measure climate risk. So on private assets, I think that investors have gotten used to more and more formation and sophisticated ways of measuring their public equities portfolios than, to some extent, their fixed income portfolios. And now they really very much want to extend that same view into real estate as well as their private equity and their private credit portfolio. So this is a very big area of focus for us. We've acquired Burgiss, which has a data set that covers over 13,000 private asset funds. Last year, we did a first pilot really of a carbon footprint of some of the, I think, 15,000 companies that are in 4,000 of the funds. But that's very much scratching the surface. I think our goal certainly is to provide this move towards providing the same sort of data sets that you can see in private asset portfolios versus public assets. So that's one. And then the other is really around climate, climate risk and analytics. I think that when people think about data and data gaps, they're really thinking often of corporate disclosure. So when we think about data and trying to fill data gaps, we really go to other sources, more kind of alternative sources in order to bring data sets together that can be decision useful. And so as an example, for climate risk, one of the big areas of focus for us is building out an asset locations database right now. We have over 1.1 million locations of assets of companies that we cover, and that's factories and mines and buildings and their characteristics and where they're precisely located. And our goal is to dramatically ramp up that coverage. We have a partnership with Google to be utilizing the geospatial analytical tools they have to really kind of ramp that up. I think of this as very much a fundamental data set that needs to be there for measuring any kind of climate physical risk because you can have amazing flood maps and wildfire hazard models, but if you don't have the physical locations of companies and what their asset value might be, it's just not a very financially relevant set of information. It's also the base data set that you're going to need as we build out to the demand that we're seeing around companies' dependence on nature, their exposure to deforestation and biodiversity loss. Those are kind of the next frontiers in terms of growth, and we're very focused on delivering those.

Awesome. Those are all in big demand, no doubt. Thomas, on the data side, I know you've got some experience with sometimes what we call alternative data, right, the data that we don't necessarily get from companies but that we feel like we need to either kind of fill in gaps or get more insights. And I'd love to hear just kind of your experience with kind of alt data that could technically be classified under ESG. And then also if there's kind of any other kind of alt data that's kind of on your wish list that you think would be really powerful to have in terms of security selection, I'd love to hear your thoughts, too, on that.

Yes. First, I would just be careful with like applying the hedge fund as set of heuristics to all data because a lot of that could be like credit card data or whatever that could inform you to like better predict the quarters. And look, I think that sustainability topics are not things that help you make or miss the quarter. But very often, these could be the fundamental questions for these companies to answer over a 10-year time frame, right? So a lot of -- so it's less about, oh, I'd love this thing because maybe that will help me get the right GMV number or something and a little bit more like, wow, what is the underlying culture of this company? Like how are they allocating resources, et cetera? And one of the things that I would just kind of say that's really exciting kind of about like in this intersection of data and investing is there's so much great stuff out in the academic world, like -- and going and looking at what's happening at Harvard Business School with Professor Seraphim and the impact weighted accounts initiative and Professor Rowan, thinking about like culture. And for instance, we were at a meeting yesterday, people were talking about, oh, we really want retention data and like in their employee bases. I was like retention data. I was like that's very 2019. Like there's been 5 years' worth of innovation in that sphere. And that's why we're going to get some really interesting new ways to look at companies, hopefully with kind of these new set of disclosures in the United States. So that's really fun. And then also on the climate side, it's like as finance, we don't need to invent these. Like if you go to MIT and you look at the joint program for the Science Policy of Global Change, for instance, they have these amazing global integrated systems models that are using -- those are what's being used to inform like central banks. And by the way, like a lot of these things are open source so you can start to bring them in your own investment process. That's really exciting. I think AI, like I know that's like a very much a buzzword, but man, there's some really interesting sentiment data in the Twitter firehose, et cetera, or X firehose. And you can like let that help indicate things that are on the minds of consumers. And what does that ultimately mean for the brand equity that gets created or destroyed, right, if you do the wrong set of things.

Valentijn, I wonder if I could get you to weigh in on that kind of data question as well. And I mean, what it springs to mind is kind of all these kind of waves of regulation that are really kind of the epicenter is really coming from Europe that mostly have to do with getting investors more data, getting more disclosure and more transparency from corporates, et cetera, from investors, too, of course. But I mean, what do you think? Is this -- is there still going to be a really important role for alternative data or kind of where we're going to have to go and find these kind of unique data sets? Is there -- can we really expect that we're going to get all the information that we need from the companies just giving it to us?

Well, I think a relatively easy answer is no. You will never get all the information you want from companies. Obviously, in that sense, you could call traditional data is also continuing to grow. You talk about regulation, new CSDR regulation in Europe will force, by the way, not only European companies but all companies doing business in Europe to significantly increase their disclosures around ESG and value chains. So there's a whole batch of more than, in that sense, traditional data just coming our way to further enrich our insights around it. But I would say, and again, it's not necessarily distinct to or limited to ESG. Obviously, insights around alternative data can enrich your understanding sometimes with a long horizon, but sometimes also with a very short horizon what type of risks or opportunities are surrounding a company that you might be considering to add or dispose in your portfolio. One of the points, if you talk about AI, is not only the way to digest these data and using new technology for that, although also that is not an easy game. There needs to be a degree of persistence as well as a degree of transparency and understanding how that works if you bring this to clients. AI models might be amazing in delivering short-term results. But if you cannot explain to the client why 3 years later, something went horribly wrong because you were following that AI model, you have another issue in terms of transparency. But one of the most interesting things which does have a lot of application for also ESG analysis is the transition from looking at numerical data into linguistic data. Some of the analysis that you need to do, we touched upon very shortly on private markets where the density of disclosed corporate data is lighter. But also for public companies, there's a lot of information which is a bit more forward-leaning in the type of direction they provide on where a company might be going and what type of commitment it's making and how it's going to be deploying its new capital that is maybe not in hard numbers or numbers that are being provided to the market, that might be disclosed in a way in more written format or spoken format. And if you have an ability to really crunch that in big numbers, so to get the information using whether it's large language models or whether it's just other versions of NLP to get the right information, which helps you to understand more what is the strategic direction around net zero climate ambitions, social ambitions of a company, how are they going to deploy their capital? How are they going to manage their people in the organization? That can be very valuable information as well to enrich your overall ESG analytics.

I got a couple more, but I -- you're here because you've got things on your mind. I'd love to hear some questions. We probably have a little more wiggle room because there's a break after this session so we might indulge a little bit. But yes, if you want to start. Chris?

[Question Inaudible]

Want me to take a stab at it? I love that second part of that question so I want to talk about that. Yes, you're talking about how do you gauge additionality, right, if you're just trading secondary shares? It's not primary capital into the business. And the way that I kind of talk about it with clients is if Nike invents a great basketball shoe and LeBron James dunks the basketball. Like as an investor, I don't take credit for the championship, right? But for some reason, if Nestle decarbonizes or uses less plastic, as an investor, I get to take credit for that having less ocean plastics. It seems kind of like a broken thing. Then most investors say, it would be engagement, right? But like kind of the joke that is probably worn out at this point but it's like for the parents in the room, you might engage a lot with your teenagers on better behavior doesn't necessarily lead to any behavior shift. So engagement count as a metric, hard to engage if that's how valuable that is. The 1 thing that I would point to that is really exciting is that there are certain investors that are much longer term-oriented and the ones that actually care a lot about the sustainability optionality baked into these companies. And ideally, this optionality gets catalyzed and be internalized, meaning like you get financial credit for it once companies get really effective at that type of storytelling. And I think that long term-oriented investors have a really important role to play in partnering with companies to help kind of: a, encourage management teams to invest there. That's kind of the engagement part, but more so to help with the narrative and the framing so that they ultimately do get credit. And we call that partnership rather than just engagement. And hopefully, we see a lot more of that over time.

Any more questions? On the topic of improvers, go ahead. Go ahead.

[Question Inaudible]

That was my question. Yes, I mean, case studies of kind of alpha and like improvers, are we really seeing that happen?

Well, I mean, I'm happy to talk to you a little bit here as well. I think there's been some great research just with respect to the trends over the last 2 years where you do see that there is a reward in the market in terms of outperformance for companies in those more heavily-emitting industries. And that have taken the lead, whether it is through being an improver in the sense of being, let's say, within an industry, a leader on ESG metrics as well as being a leader in deploying more towards their forward-oriented activities and capital towards transformation and adjustment. So deploying more green CapEx, it certainly seems to be -- and again, history is relatively short. We always have to be a bit mindful of how persistent these trends are. But after the last 2 years, you do see a rising evidence emerging in the way that markets are rewarding these companies that are more explicit, outspoken, but specifically actually put capital to work in a green transition are being perceived as leaders and are being traded at a higher price.

Yes, just to double-underline there, like that -- just to you the value, like the green CapEx report that you put out last year was awesome. And there was that chart that like we use all the time, which is like how does IRA affect these tickers? And like that's the type of analysis that ultimately we want to get to. It's like how does this drive more incremental free cash flow? Ideally, when it's not being recognized by the rest of the Street.

Maybe can I add 1? I mean, coming back to the earlier question about also is ESG not simply investing? I think to some extent, yes, but a really good investor is very much forward-oriented. And that means that you understand that the metrics that you need to monitor and give much -- most weight to also in ESG space change over time as well as your traditional metrics. Using AI, using alternative data, you'll have to enrich that compared to your traditional financial analysis of a company, which might have worked great in the '80s and '90s but will not bring you outperformance in the market today. So yes, ideally, it is just plain vanilla investing, but all of our investors occasionally need a little bit of inspiration on identifying these new trends and the richness of new information that is basically being offered to them.

Yes.

Difficult to a lot of first-time investor [indiscernible] with transition. It's not clear that any of the -- very many of these companies are actually [indiscernible] have differentiated competitive advantage. While they're investing in the transition, which is social good, it's not clear from an investor standpoint that they're going to be winning companies other than the perception to a higher multiple business for some reason [indiscernible] risk. So how do you think about that? Because if you just look at the volatility that clean energy [indiscernible] through over the last 2 years [indiscernible] the customers being investing in because IRA [indiscernible] hasn't necessarily high margin, high-growth [indiscernible]

So I think that I agree in a sense that you always need to think about making a right and good and prudent investment decision, right? So you should never step away from that. So it remains very critical that it is solid long-term businesses that you're thinking. Now they might still be volatile due to -- I mean, it's been a bit of a volatile ride for the last 2 years for a number of reasons, right? But I do think that lens, you can never draw. So you do need to look at that. And one of the things that you're referring to in terms of clean energy, so that's a little bit the point I was making earlier on is the pure-play green able companies, although they are a fundamental part of the transition and an inspiration to the broader economy and to maybe also our investment approach might, at this point in time, with this focus on how do we actually put the transition into practice in the more heavy emitting industries, not the biggest often drivers or winners. And then you get back to who of those companies can keep a very solid business model in place and, at the same time, become a winner because in the end, there is so much forces at play, societal, regulatory policy forces that actually make these business models more likely to win than to lose if they are playing the transition in a smart and forward-thinking way. Using some of that technology but maybe not always betting on the provider of the technology but more of the company that's embedding in their transition story.

Probably have time for 1 more. I don't want to get into your break too much, but if anybody else has a question. I'm going to ask one then, which is we talked about kind of improver alpha. Can we talk about engagement alpha? Any examples of kind of in your experience where you've seen success and performance that you could link back to engagement efforts or at least an engagement thesis that you had.

I think there's many examples. I'm responsible for the public side of the markets, but I think in terms of the value creation through this engagement in the private side, there is really enormous amount. And at the core of it, whether it's public or private and also coming back to the example of can you engage with your kids? There -- it's not a one-way street. There is a lot of companies that understand the world is undergoing a massive amount of change and that would like to get not only inspiration but also information about how to tackle that best, how to accommodate that best. And this also shines through in the academic research that focuses not on the investment performance but more purely on the financial performance of companies themselves where you do see that there is significant evidence that they are performing better due to being more innovative, more forward-leaning and more risk aware. And that translates into their financial results. So through that engagement, there -- obviously, doesn't hold for everybody. Like it doesn't hold for all of your kids. But some of them are really eager to learn from not only what you're telling them, but also what through those engagement efforts broader in the industry, they are getting through you from what others are doing and what is best practices. And how can we put those best practices into our business model?

Those are who I call my favorite children.

Just 1 second. Like I really love your question about, end of the day, you have to be a mode-driven investor. Like what is the durable competitive advantage around this business? And engagement and using that venue to talk with the Boards or people in operations or people who run HR, that's a really interesting opportunity to not get the IR, CFO as but like talk to people actually in the business. So I don't necessarily think I could systematically tie it to alpha, but that is a way that you can kind of get a unique qualitative view into these businesses.

I wanted to end with you. Go ahead.

No, no, no. Go ahead.

What I was going to ask you was, I mean, you just have a really unique vantage point and that I want to make sure that we hear, which is just kind of where you think we are in kind of the maturity cycle for ESG, especially in the United States, right? We've gone through this kind of a tumultuous time and people are talking about kind of this evolution of sustainable investing and there's polarization and all of these things. And you have your fingers on the pulse of the market for investors because that's your business. And so what would you say about where we are in that life cycle?

Yes. So I think we're in a really interesting part. And I think that from the outside, it would seem like there's a lot of noise and okay, there is a lot of noise. But I think that from my vantage point, I feel like there's actually clearer tracks in terms of where we're going into the next stage of sustainable investing. And the really -- I think of them kind of 3 dynamics. And the first, I think, is that there's a solidifying of kind of the core principal back to basics of using more information to make better investment decisions. I feel like this whole conversation you've just had as well as the question about whether ESG investing is just investing is actually we're getting there. We're really, really close to ESG investing being just investing. And I think the ironic thing is that because of the political headwinds, there has been a lot less talking about doing and that actually has allowed, I think, a lot of people -- certainly, all of our clients are not going -- they don't want to be at an information disadvantage. They really want to be looking at the same data and more data than what everybody -- all the other market participants are in. So there is this focus on all you're trying to do is to use the information in smart targeted ways to find the companies that have forward-looking management that is attentive to the huge societal environmental changes that are upcoming, right? So there's that one track that I think is actually becoming more solidified because -- ironically because of the global headwind. I think the regulatory component, which Valentijn had touched on, I think we're definitely in the phase over the next couple of years where investors are adjusting to the fact that they're going to have a lot of disclosure requirements on them, whether they're companies or as investors or financial institutions. And I think that there's going to be a period where investors will get to the point where they realize that you have to actually make a distinction between what sustainability data metrics are useful for reporting to these various regulations that are coming out from different jurisdictions that don't all match. And which of those metrics are actually good for investing, right? And so those are not going to be the same things and there's going to have to be a distinction made between these. And I don't think it's that different from saying GAAP or IFRS metrics, right? Those are necessary components to any financial modeling but you're not going to use every single one the same way. Nor are you going to be limiting yourself to only using those metrics for your financial modeling. And so all this conversation around or other sources of data, you're always going to have to need additional data metrics. So I think there's that regulatory reporting versus investing component. And then finally, I think that where -- what we're seeing in terms of the emerging kind of growth area in that next frontier is really that I think investors are quite interested now in thinking about more systems level outcomes and feedback loops. And so I think a lot of that comes from now engaging with the multidimensionality of trying to incorporate climate risk and investing into the transition, what does that mean. And then there's also the coming out of the pandemic and that was, obviously, a big systemic shock. I think that there is a lot of interest in understanding how your investment dollars are linked to companies that then are interacting with the physical world in such a way that you can actually create sustainable value in a positive feedback loop. So that systems level kind of outcome of feedback loop, I think, is really very much what we're focused on as well as many investors are more and more kind of looking at that next area.

Perfect. Thank you for wrapping us up. Everyone, we've got a break until 2:45, both sessions. Please join me in thanking Linda, Thomas, Valentijn.