JT: How would you describe demand in the big regions, comparing for example North America and Europe vs Asia?
BM: I think there is a sophistication and a robustness of approach in Europe that underpins the demand, across asset classes and market segments, among institutions. ESG is deeply embedded in the European market, so there is broad support for it.
In the US, demand is accelerating from institutional players. Their interest has been building gradually over the past 10-15 years, and they are coming on board quickly at the same time as the retail market is starting to embrace ESG. The dynamism of the US market should not be underestimated. Their ability to progress and adjust is phenomenal. It is a surprise to see how quickly they pivot, all the way from retail to wealth to institutional investors. Retail wealth in the US is focusing on impact, while the institutions are concentrating on ESG integration and risk management. They are moving together but with different core interests. Asia is lagging; there is not the same demand or market penetration. In Asia we see a more robust market for SPOs and ﬁnancial instruments linked to ESG products. Asian companies are engaging with ESG more quickly and deeply than Asian institutional investors.
JT: Looking at your ESG ratings, how would you compare those with other ESG service providers, and how would you describe your approach?
BM: In the early days, ESG ratings were often used for multiple purposes. Our clients had different needs. Some investors would be more impact-oriented, while other investors would focus more on managing risk. Our old ESG ratings, which we retired a few years ago, took a balanced score card approach that an investor could use for various purposes. It enabled both types of users to get a reasonable outcome, even though it might not have been ideal for either of them.
While there is a lot of overlap between impact and risk, there are major differences too. We view them as different issues to be diagnosed using separate tools. So, we built an ESG Risk Rating that aims to target the material ﬁnancial risks that can be caused by ESG issues. We are developing impact-related products that cover the impact of investment decisions. We view them as separate.
Both MSCI and Sustainalytics provide separate products for risk and impact. Other providers offer a more combined approach. Our products and services are probably most comparable to those of MSCI.
I would argue that, in reality, there are not so many ESG service providers. When it comes down to competitive processes and our products are compared to those of other vendors, there is a choice of three or four providers. And 80-90% of the time the choice is between us or MSCI. I believe this will change, however, owing to consolidation. S&P and Moody's are both moving into ESG via acquisitions. There is consolidation among ESG service providers, and the large players will likely control the space in the long run.
JT: How do you think the ESG ratings landscape will evolve? A concentration to a handful of players with a similar standardised approach (like for credit ratings), or many players in different niches?
BM: I think one of the current big four players will be the ESG service provider for clients. Thematic analysis or something more speciﬁc is not sufficient. The barriers to entry for ESG ratings are high. The regulatory regime can in some cases be a hurdle for entry, just as with credit ratings. But with all the large ESG service providers bringing their capabilities in-house, those barriers become higher since they can invest to grow. So I think it is difficult for a new service provider with signiﬁcant capabilities to enter this space.
JT: Do you think the various approaches to ESG ratings will be harmonised? Do you think the credit rating agencies have a role to play in the space beyond where they are today?
BM: While more harmonisation is possible, we are not likely to have the same level of alignment as credit ratings, where the assessments of the big players are more than 90% correlated. I doubt that ESG ratings could get to more than perhaps 75% correlation between the providers. The credit rating agencies use a narrow measurement. With various ESG deﬁnitions and the wide range of pertinent issues, plus the diversity of use cases for the ratings, they will by nature be less speciﬁc. They won't be as tightly correlated.
ESG issues are relevant to making a credit rating assessment. I think the question is whether there is a role for a specialised ESG rating. Or should the focus be on integrating ESG dimensions into other assessments? Certainly there is no easing in client demand for a speciﬁc ESG assessment. As long as that is the case, I don't think credit rating agencies will dominate the space. They provide a unique assessment and tool, for a single and different purpose. They are meaningfully integrating these considerations, particularly climate change, and recognise that these issues can have a signiﬁcant impact. I think we both have a role to play, but we don’t serve the same markets and we do not have the same products and services.