S&P Global Inc. (SPGI) Earnings Call Transcript & Summary

Yes. So we started looking at looking at ESG literally over 20 years ago, and maybe we didn't think about it like that, but we've had the ESG sustainability. So it's a Dow Jones Sustainability Index. It's 20 years old. But we really started thinking very seriously about ESG a few years ago, and each of the divisions were doing their own initiatives. We had purchased Trucost. We had an ESG Evaluation and green bonds in the Ratings business. Market Intelligence was starting to do some more products, investor-oriented products. And we put in place a design team to look across the entire company of S&P Global to see what our S&G strategy should be. As a result of that, we decided we needed to approach this as a real fundamental data business, that we needed to take what's already one of our areas of expertise, one of our strong capabilities and build this as a -- build up this business as a way that we would be able to have the core data that would be a basis for investors, for analysts, for people that were risk managers, et cetera, to have the data they needed to do sensitivity analysis, to make investments, et cetera. As a result of that, we're still building out our portfolio, but we've got the Trucost, which is the environmental carbon, water, waste, chemical usage for over 15,000 companies. Last year, we purchased RobecoSAM's CSA, the Corporate Sustainability Assessment business, which we've now incorporated into the Ratings business as well as we've got the data on the Marketplace, Market Intelligence platform. But our vision is to have the premier set of data and analytics and benchmarks for the ESG business. That's a vision. We're not there yet, more to come. But we've got products and services in all the divisions. We're linking them together with a more comprehensive vision, but we do think this is one of the most important growth trends over the next 5 to 10 years.

Got it. That makes sense. And as you said, I think you're still small in the tens of millions in terms of ESG revenues today. How quickly do you think you can scale that up? And is that -- does that also require more inorganic decisions?

Well, as in our current trajectory, as you mentioned, we're starting small. We think we can grow at 40% a year and grow. For us, a 40% per year growing business would be fantastic. We don't -- that doesn't necessarily include having acquisitions or inorganic investments. But if we saw things that we need to fill out the portfolio, we would. We think that it is valuable. It's a valuable enough, high-growth enough area that we want to have the best set of data and analytics of any other company. So we will be -- we would do acquisitions if it made sense. You've seen we bought Trucost. We bought RobecoSAM's CSA business. So that's possible. But this will take a while to really get geared up, but it's going to be embedded in everybody's financial decisions. I'm sure everybody listening to this call today, if you think back what you were talking about on ESG 3 years ago versus today and where you project you're going to be talking about ESG 3 years from now, we think that it's changed, everybody on this call, how you're thinking about it. And we want to be at the center of that discussion.

Got it. That makes sense. Just to peel a few of the layers of the ESG offering. So the first one is, obviously, you mentioned the SAM acquisition, and you've quickly made that a publicly available research business, I guess. Just a quick question there. So that wasn't monetized before and MSCI, Sustainalytics and a bunch of others already have a huge subscription business. How do you -- what's the second-mover advantage plan there? How quickly can you scale that up?

Well, we started scaling it up immediately. We ensured that as soon as we bought RobecoSAM that we can integrate the company into our company, that we were able to get the data already onto our Market Intelligence platform. There's more to do there. But the other thing is we're able to build all of the data into the foundational information that we can use in the Ratings business to produce our ESG Evaluations, and we're up to over 100 ESG Evaluations now since we launched them last year. And so we think that having the RobecoSAM is the foundational data for MI, for the Ratings business. It's also used for our index business that this was an advantage for us. Scaling it up to get it embedded in people's workflow is going to take a while. That's -- it's going to be a competitive discussion across the markets. But by -- but here's something as subtle, something that's a subtle difference. Some of our competitors provide a single score and a report. We can provide the single score and the report. We can also provide all the component scores underneath the E, the S and the G. So for example, on the E, we can provide information about the carbon output, about the quality of their environmental governance of the business and many, many, many factors. So if you're a risk manager, a banker, an investor, and you want more than just a single point, a single score, you can get that data from us. And our data wasn't produced just by scraping from the web. For 1,200 companies, it was produced by a very extensive survey that companies filled out. They've been filling this out for over 20 years in many cases. So it's a great set of data. It has a time series that goes with it. We've got the experts on board in Switzerland, in the U.S., around the world that we can really bring to bear on these kinds of opportunities.

That self-provided data is obviously one of the key differentiators at SAM, right, filling out 100-page question that you guys send out. Do you think you can convince more than 1,200 companies and scale that set up? Or do you have to just accept that there's another several thousand that you're just going to have to do it like the other guys would just scrape the web?

Well, it's probably going to be a hybrid. I'm sure that we're going to be able to get more companies to fill out the survey. It's also possible that between as public disclosure evolves, it's probably possible that we get more companies with more disclosure, and then we can supplement that without as long of a survey. So we're all over every initiative going on around the market. There's one from the World Economic Forum. There's A4S, which is Accounting for Sustainability, SASB, Task Force for Climate-Related Financial Disclosure. We're members of all of those different initiatives and many more, so we can help shape what will be the format of disclosure on how companies are going to be providing information. But the advantage of SAM is that since we're already there with 1,200 companies, we're already embedded in 1,200 companies. We become the survey of choice, the one that they know is going to make a difference. It's going to get used. And so we do think that as the survey advances, we will be the one that people want to fill out.

Got it. And just one point of clarification. So SAM, it would be a separate research subscription. And then on the Ratings business specifically, what are the incremental kind of ESG monetization products there? Is it just -- are you just giving it for free as part of your value-add with your Ratings evaluation or is it incremental stuff?

Think about the way we run the business. The Ratings business is monetizing the data by providing an ESG Evaluation. And the ESG Evaluation has a methodology that's based off of E, S and G factors. And the SAM data is now the E, S and G factors. The Ratings analysts are not going out and producing their own E, S and G factors. So this is the ability to accelerate the ESG Evaluations. And then the Market Intelligence side is where we distribute the data. We distribute the foundational data, the benchmarks, the research, et cetera. So that gets monetized through MI. Ratings gets monetization through the fee from an issuer to have an ESG Evaluation or a green bond, et cetera.

Got it. And then just to touch on the indices side of the equation, the Dow Jones Sustainability Index, like you said, has been around for a long time. Do you think that's undermonetized? And maybe just the strategy on Indices with respect to ESG.

Yes. ESG is definitely probably the hottest topic right now. If you think about the last 5 years in the index business, it was -- one of the biggest booms is in factor indices. Beta and smart beta and different sorts of -- well, think of it that now the factor everybody wants to look at is ESG and what are those factors, ESG factors, which are going to be included in investing, in Indices, or passive strategies. And what we see right now is, last year, we launched the S&P 500 ESG Index. Based on that launch, we've already raised over $1 billion with one of the companies, which was UBS. They launched an ETF, and it's got already has $1 billion in it. We recently signed agreements with both State Street and BlackRock to be their partner for U.S. ESG Indices to provide them all the data and the analytics that they would use, and we've worked on together for Indices in those areas. So we think that this will be an area on the investment side that even though there's certain types of impact funds, there are certain ESG funds, et cetera, we still think it's a very small percentage of the total, but that it's going to start being considered in more and more mandates.

Got it. That makes sense. And then just the last one on the ESG side is more of the question around Platts and almost a 2-part question. One, what are the ESG efforts going on there? And two, there's obviously -- when people think of ESG, they think of, oh, the energy industry, and that's bad industry. So do you think that has any negative impact? So does that maybe work in favor of Platts data?

Yes. I think it -- actually, your last point, it works in favor of Platts and Platts data. There's actually a couple of aspects to your question. The first is when you think about the transition, there will be an energy transition. Oil is not going to go away tomorrow. And you think about oil, gas, other sorts of energy sources, and you look at steel, how is steel produced? How is cement produced? How do you transport goods around the world in ships, airlines, et cetera? The ground transportation is probably going to shift faster to EV, electric vehicles. And then on the electric vehicles, a question comes, how did you actually generate the electricity for that vehicle? But on the other hand, what's in an EV? Lithium, copper. It's got an incredible amount of copper in it. And what's copper? It's a metal. It's traded. It's got benchmark. So we think that there's going to be a lot of shift from the oil benchmarks over time to other types of benchmarks, metals, other sorts of energy. We think we we're really well positioned both for the benchmarks and for the data and analytics in that area. On the other hand, we're also pursuing clean products for Platts. We've got benchmarks that we've been building up for the energy transition for natural gas. We have other sorts of alternative energy benchmarks. We have a recycled plastics benchmark and research and analytics on that area. So we're very well prepared to think about the commoditization of energy transition and commodity transition and Platts will play a key role in our efforts as well.

Got it. And maybe that's just a good segue just to talk a little bit about Platts and the impact and the performance today. It's obviously a 90% research subscription business, but I guess the customers themselves are in probably a lot of pain. So how do you envision how Platts is going to perform?

We -- in the beginning of the pandemic, we saw a -- as obviously you saw, some incredible volatility in the oil markets and the energy markets. And that first period, we heard a lot of call -- we got a lot of calls from our customers asking about we can have problems, do we need to renegotiate, et cetera. So we have seen -- we haven't seen that over the last couple of months. We've been able to be very active with our customers. We've been very close to them on their evolution on issues that they're facing. And so we think that Platts is going to come through this pretty well. The last time we saw a major interruption in Platts business was in 2015 when there was a big oil shock. And that point in time, there are a lot of E&P clients that had serious problems, and we saw some negotiations then. We get a few negotiations here and there, people that want to try to shift their contract or change their contract. Some of that might leak over into 2021, but nothing right now that's really very alarming.

Okay. That's helpful to know. And then maybe just shifting gears, time seems to be moving real fast here. But just on Market Intelligence, I know there are different components of that business, but just an end market question around the customers and the risks there, right? The financial institutions so far seem to be hanging in pretty okay, but is there a potentially delayed impact where we start feeling some pain?

We have -- as you say, everybody has been hanging in there. We haven't seen any major impact on Market Intelligence. Similar to Platts, we did see customers come at some point and start looking to see if there could be value-added to their contract, maybe looking at extending their contract or not providing us -- not giving us as high of an increase. So clearly, a little bit of negotiation here and there. But we think that after the last -- after the first couple months of the pandemic, things are back to a little bit more of a normal pace. We're obviously watching very closely the financial institutions. Financial institutions came to this crisis with really strong balance sheets and strong liquidity. The central banks around the world have pumped massive liquidity into the markets and provided very low interest rates to help with the pandemic, but -- and there has not been a financial crisis. So we're not expecting one. We aren't planning for one. But if there would be one, we'd be ready.

Got it. And just an update on the platform. I think it's -- you guys have said many times, you'll take it slowly just to make sure it's done right. Maybe from our end, it's taken a little longer than we thought. So maybe just some updates there?

Yes, it's definitely taken longer than we initially signaled about 3 or 4 years ago. And it's partially because of the programming, the development always takes a little bit longer, but also because we wanted to make sure that we could get customer feedback along the way and provide all of the bells and whistles that our customers would like as we make the transition. In addition, we've done some really, really high-quality acquisitions. Well, think of Trucost as one. Even though we bought Trucost in the index business, we've moved it over to Market Intelligence. 451 Research, Panjiva. These were really high value-added, high-quality additions to our content and to our capabilities. Kensho is another one that's been very helpful for us. And so these acquisitions have also added new capabilities, and we wanted to get those incorporated as well along the way. But the project is on -- it's underway. It's on track for -- over the next year that we would be moving people over from Cap IQ to Market Intelligence in a way that it gives them choice. And it also gives us a lot of feedback along the way to make sure we're doing it in the right way.

Got it. And maybe that leads me to my next question, which is, how do you envision the Market Intelligence division as -- where it fits within your organization? Because clearly, it's got the lowest margins of all your businesses, but it's also where all the action is, right? You've got Trucost and ESG in there. There's analytics efforts in China. Kensho, I believe, sits in there. So how do you envision that as in the portfolio there?

Yes. It's definitely a business that is absolutely core and essential and central to S&P Global. It's our data engine, our development engine. It's the part of the company where we've got the most interaction with customers. It's where the innovation is happening on customer interface, on customer satisfaction, on customer experience. So we absolutely need to have a strong Market Intelligence division. It's central to our vision. It's central to how we think about our future. And so I'm completely totally committed to this business and to keep growing it and to keep investing in it. And in terms of margin, I know a lot of companies that would love to have a margin in the mid-30s. And we have -- some people say, "Well, it's only in mid-30s." Yes, but that's because we have businesses in the 50s and 60s. And so if you put it on its own and compare it to its peers and its competitors, we're in really good shape. And we've got incredible people, world-class talent, and it's absolutely necessary capabilities for S&P Global.

Got it. And maybe just my last question as we run out of time here, talking about capabilities. And an acquisition we really liked was the Kensho acquisition you made several years ago. And I guess the question is more just an update on whether -- the acquisition price was questioned, obviously, back then, metrics aren't at least available to us to decide if that was the right price. So just a quick thought up there.

Yes. So we think that we did that based off of an understanding that the markets were going to evolve in a way and capabilities are going to evolve, that artificial intelligence and machine learning was going to be embedded in people's decision-making. We didn't think that artificial intelligence would replace people, but they will assist people and make them smarter and make them be able to make decisions faster and that we needed to have that kind of capability. And as a result of that, we purchased Kensho, which we think has been a huge value-add to the company. Kensho's work is now across every single division, every function. There -- they've -- we've got some early wins that you know about of data linking when we brought in Crunchbase data into the company and did it in a couple of hours instead of a few weeks or a few days instead of a few months, things like that, that we've been able to do. We've been using them in our workflow process like we did with the Market-on-Close in Platts. We've got a data product right now of Omnisearch and Market Intelligence and more to come on that. So we're using them across the board, and it's been a huge success for us. And we've been able to keep the people. We've been able to keep them excited and engaged in some ways by keeping them separate, but also they're part of S&P Global, but they've got their own team that can run around the world and do really interesting projects. So we're really pleased with the success of Kensho.

Got it. Well, that's a great place to end then, Doug. It sounds like a lot of great things going on at S&P. So glad to hear that. Thank you for your time. Really appreciate it.

Thanks, Manav. Thank you for hosting this conference again. It's too bad we couldn't see you in person, and I also look forward throughout the day to meeting with many of the investors. So thanks again for putting this together.

Yes, absolutely. Take care, everybody.