The increasing demand for ESG investments will continue to grow the top line of MSCI, a leading provider of financial indexes and ESG ratings, according to the latest note from UBS analyst Alex Kramm.
Investors have been worried about the future of ESG—investment strategies that take environmental, social, and governance factors into consideration—as the U.S. witnesses a rising wave of anti-ESG legislation from conservative lawmakers and lawsuits from red-state attorneys general.
Those concerns might be misplaced, if judged by MSCI’s recent performance. MSCI stock jumped 9% on Tuesday and another 2% on Wednesday after the company reported better-than-expected results for the second quarter.
Its core business—licensing indexes to asset managers for subscription fees—have seen solid growth of 13% from the year-ago period. But it’s the ESG and climate segment, which provides ratings, screenings and other data analytics products, that truly shined.
In the second quarter, the ESG and climate business unit increased its operating revenue by 29% from a year ago—a rate that’s been maintained since MSCI started breaking out the segment’s numbers in 2021. The segment’s revenue has reached $71 million in the latest quarter, up from $39 million three years ago.
Both government regulations and voluntary disclosures continue to drive demand for ESG and climate products, wrote Kramm. Particularly, MSCI is seeing green shoots in Europe following some clarity around regulation.
Although companies are taking longer to make purchasing decisions this year due to the tighter budgets, MSCI remains confident that clients will continue to make ESG a priority in the long term. In the past quarter, the segment has seen an increased number of large-ticket deals, according to Kramm.
“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.
Although many companies could benefit from the growing demand for ESG data products, Kramm views MSCI as the purest play. He estimates that the total addressable market for ESG data would be $2.7 billion, and MSCI could take about 38% of that market. That means more than $1 billion in ESG-related revenues.
The firm continues to invest heavily in areas where the company has competitive advantages. This includes fixed-income products, which might be one of the earliest asset classes to experience repricing and reallocation of capital driven by climate risks.
MSCI’s other business segments remain strong as well. Assets in ETFs linked to MSCI indexes have increased substantially over the past few years, thanks to investors’ rising interest in low-cost, passively managed funds and innovative indexes such as those around clean energy and new technologies.
Since 2014, MSCI has seen its total subscription sales grow by an average of 10% every year. Kramm expects that to continue in 2023 and 2024.
To be sure, the MSCI stock isn’t cheap. Shares are currently trading at 36 times Kramm’s expected 2024 earnings. Still, the valuation is below its five-year average of 40 times earnings. “We continue to see significant value in the shares,” Kramm wrote.
He maintained his Buy rating for the stock, but raised the price target to $640 from $570 in the Tuesday note. The stock closed at $557 on Wednesday, up by 21% year to date.
Write to Evie Liu at evie.liu@barrons.com
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