Hiro Mizuno teams up with MSCI as special adviser

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Let’s jump right into it with our colleague Stuart Kirk’s latest criticism of environmental, social and governance (ESG) investing. He points out that the UK government’s new licences for North Sea oil and gas pose a big problem for banks that promised to no longer finance new fossil fuel projects. “Banks will miss a bonanza,” Kirk argues. “Moral high grounds invariably crumble.”

Kirk’s argument is sound. But I humbly posit a different viewpoint. It might be premature for banks to suddenly jettison fossil fuel pledges and hitch on to the Tory train. As Simon pointed out last week, the Tories consistently trail Labour by 20 points in opinion polls. The Tories’ Uxbridge by-election win that triggered a volte-face on fossil fuels “is also almost certainly being over-interpreted”, Robert Shrimsley writes.

Banks will try to finagle a way out of their fossil fuel pledges if the UK oil and gas opportunities look profitable. But the opportunities for growth remain in renewable energy and clean technologies — opportunities that won’t invite greenwashing and hypocrisy allegations.

The decision doesn’t seem clear. It is a healthy debate.

For another perspective on ESG, I write today about MSCI, the mighty index provider that has become a bellwether for ESG and climate concerns. The company also drew attention for linking arms with a pretty big name in ESG that Moral Money readers will recognise. — Patrick Temple-West

Mr ESG joins ESG Inc

Hiro Mizuno built a reputation as one of the world’s biggest champions of sustainable investing during his time as head of the giant Government Pension Investment Fund of Japan (GPIF).

Now he is teaming up with MSCI, a New York-based index provider that is banking its future growth on environmental, social and governance investing. Last week, MSCI announced that Mizuno will be helping the company’s chief executive Henry Fernandez as a special adviser.

While the role might seem a bit superfluous (Mizuno is not joining the board), it underscores MSCI’s commitment to ESG investing at a crucial time for the company. MSCI’s biggest source of revenue growth comes from ESG-related data and index products, and its share price has become a bellwether for the fate of ESG investing. MSCI’s shares have swung dramatically as political attacks on ESG rippled across the country this year. Its share price dropped 13 per cent in April after forecasting softer revenue growth for ESG and climate. 

Hedge funds have been concerned that MSCI’s ESG revenue growth could continue to decelerate, bringing down the growth of the company overall, according to Bank of America analysts. “MSCI has benefited from a first-mover advantage in ESG, but that sales engine is slowing,” the bank said.

In Europe, where ESG investing continues to grow, MSCI faces a different headwind. In June, the European Commission proposed new rules for ESG ratings, which could eventually pose new regulatory costs.

But in July, MSCI surprised Wall Street by announcing ESG and climate revenue growth had been better than expected. After its July 25 earnings announcement MSCI’s shares jumped 9 per cent, reversing the sell-off in the preceding months. Its shares are now up 18 per cent for the year, in line with the S&P 500 index.

By partnering with Mizuno, “the message sent to the market is that MSCI is still committed to the ESG and climate space”, said Owen Lau, an analyst at financial services company Oppenheimer. “What they are hinting [at] here is there might be lots of growth potential outside the US in ESG and climate,” specifically in Asia, he said.

Fernandez, MSCI’s chief executive for more than two decades, built the company into a Wall Street darling by offering a slew of market indices. But like many Wall Street firms — including Nasdaq, the credit rating agencies and Bloomberg — MSCI has jumped into the ESG and climate sector. Now, MSCI is the largest provider of ESG information services globally, according to JPMorgan, with about 3,000 clients including 49 of the 50 biggest asset managers.

This business division could be in trouble amid the US pullback in ESG investing. US investors pulled $11.4bn from ESG funds in the 12 months ending in June, Morningstar said in a report last month. Investor demand has been hurt by the political backlash against sustainable investing in the US, while ESG funds in Asia and Europe have enjoyed inflows, the report said. 

Mizuno stepped down from GPIF in 2020, after “sparking a startling revolution” that included refusing to engage with asset managers who did not have ESG credentials.

Then he joined Tesla’s board (after attacking short sellers to the glee of chief executive Elon Musk). In this role, he was forced to defend Musk last year after the Tesla CEO attacked ESG as “a scam”. S&P had just dropped Tesla from one of its ESG indices.

“To be clear, Tesla is not denouncing ESG investments but urges ESG rating scheme[s] to fairly evaluate a company’s positive impacts as well as negative impacts,” Mizuno said at the time. After he left the car company’s board earlier this year, Mizuno said that “Tesla’s positive impact on the auto industry to move towards electric vehicles has never been valued in ESG scores”.

MSCI has awarded Tesla an “A” ESG rating since 2020 — an “average” score for the automotive sector.

With investors closely watching MSCI’s ESG and climate revenue growth, the two separate products have been going in different directions. Climate revenue growth has been better than the division’s ESG indices, Lau said. Going forward, “the pocket of strength will come from climate, not ESG,” he said.

While ESG has been mired in political attacks from US Republicans, climate sales are unscathed.

“The climate product is less controversial because there are some objective measurements you can benchmark,” Lau said. ESG scoring is a lot more subjective and definitions are less clear. “Net zero is net zero,” he said. “It is more black and white.” (Patrick Temple-West)

Smart read

After the record heat in July, you might think US Republicans have reconsidered their climate change denial. Not a chance, writes, the New York Times. The Republicans’ “Project 2025” strategy, organised by the conservative-leaning Heritage Foundation, “would help repeal the Inflation Reduction Act” and close a Department of Energy office that has $400bn in loan authority to help emerging green technologies. Read the full article here.