The Growing Demand for ESG Investments

The demand for ESG investments is on the rise, predicted to further bolster the success of MSCI – a leading provider of financial indexes and ESG ratings. Analyst Alex Kramm from UBS recently released a note confirming this trend.

Although conservative lawmakers in the U.S. and lawsuits from red-state attorneys general have raised concerns about the future of ESG investment strategies, MSCI’s recent performance tells a different story. Following better-than-expected results in the second quarter, MSCI’s stock surged by 9% on Tuesday and an additional 2% on Wednesday.

While MSCI’s core business of licensing indexes to asset managers for subscription fees has enjoyed solid growth of 13% compared to the previous year, it is the ESG and climate segment that truly stands out. This business unit, which offers ratings, screenings, and other data analytics products, witnessed a remarkable 29% increase in operating revenue from a year ago. This growth rate has been consistently maintained since MSCI began disclosing segment-specific numbers in 2021. The revenue for this segment reached an impressive $71 million in the latest quarter, a significant jump from $39 million three years ago.

Kramm attributes the growing demand for ESG and climate products to both government regulations and voluntary disclosures. Notably, there has been an upsurge of interest in these products in Europe following increased regulatory clarity.

Despite tighter budgets causing companies to take longer in making purchasing decisions this year, MSCI remains confident that clients will continue to prioritize their ESG investments in the long run. In fact, there has been an increase in large-ticket deals within this segment over the past quarter, according to Kramm’s note.

ESG & Climate: A Priority for Clients

“ESG & Climate remains a priority for clients, and while budgets and longer sales cycles may continue to weigh near term, the structural drivers for the business are well intact in our opinion,” wrote Kramm.

MSCI: The Purest Play in the ESG Data Market

Although many companies could benefit from the growing demand for ESG data products, Kramm views MSCI as the purest play. According to his estimates, the total addressable market for ESG data would be $2.7 billion, and MSCI could capture about 38% of that market. This translates to over $1 billion in ESG-related revenues.

Strategic Investments in Competitive Advantages

MSCI continues to invest heavily in areas where the company has competitive advantages. One area of focus is fixed-income products, which might be among the earliest asset classes to experience repricing and reallocation of capital driven by climate risks.

Strong Business Segments

MSCI’s other business segments are also performing well. Assets in ETFs linked to MSCI indexes have significantly increased in recent years, driven by investors’ rising interest in low-cost, passively managed funds and innovative indexes focused on clean energy and new technologies.

Consistent Growth in Subscription Sales

Since 2014, MSCI has witnessed consistent annual growth of 10% in its total subscription sales. Kramm anticipates that this trend will continue in 2023 and 2024.

A Valuation Perspective

While the MSCI stock is not cheap, currently trading at 36 times Kramm’s expected 2024 earnings, it is still below its five-year average of 40 times earnings. “We continue to see significant value in the shares,” Kramm stated.

Analyst’s Rating and Price Target

Kramm maintained his Buy rating for the stock and raised the price target to $640 from $570 in the Tuesday note. As of Wednesday, the stock closed at $557, reflecting a year-to-date increase of 21%.