Capitalism right now is
going through a reckoning. There has to be a way in which
profits and planet align. ESG in theory should help, but that's not what is happening today. Our sustainable investments benefit you and parts of the world that need it most. The whole business is built on the idea that you can invest in companies that will allow you to
do well as an investor, but also can do some good for the world. Perhaps the greatest
investment opportunity in modern history. ESG is now big business. It represents by some estimations, something like $35 trillion
worth of investments and in the last two
years, it's grown by 15% and that rate of growth
doesn't seem to be stopping. Underneath this entire system are ratings that look a lot like the
credit ratings of companies, but are based on completely
unregulated data and one company has come to completely
dominate that business and that's MSCI. So even though a lot of
people are talking about ESG, not many know what goes into making an ESG rating for example and that rating is what becomes the basis for decision-making for investors. ESG ratings focuses in on what's significant to a company's bottom line. What we found is that the foundation of this multi-trillion dollar new cash machine for Wall Street, is not at all what it appears to be and that it's really
almost exactly the opposite of what people think it is. I'm Cam Simpson, I'm a Senior Editor and
Reporter for Investigations at Businessweek in Bloomberg. There are about 160 different
companies that sell data and ratings that report to rate companies on their environmental, social, and governance practices or factors. Because it's a completely
unregulated business, because it's completely subjective. The ratings can land
anywhere across the board. MSCI's rating system is built on scores and they're converted into ratings that look like credit ratings, AAA, top of the line, CCC, bottom. By mimicking a credit
rating which is regulated, which is based on regulated data, MSCI has created kind of
an aura of respectability, an aura of confidence
for the investing world around these ratings. I'm Akshat Rathi, and I'm a reporter with Bloomberg News. I write about all things climate. MSCI has been around for
more than two decades and it started its life as a company that would arrange stocks in an electronic index. As the company progressed,
it found this demand for ESG metrics, that
people were interested in, not just ensuring that
they were making profits from their portfolios, but that the companies
within those portfolios were also aligning with society's goals. And so about 15 years ago, MSCI acquired a number of companies, that gave it the ability to
be able to create ESG ratings. MSCI has become the giant in the field. By one estimate, 40 cents on every dollar that is spent on ESG
ratings, is owned by MSCI. So, what MSCI does with its ratings really matters to the entire industry. So if you're a company,
especially a bigger company, that's included in the
S&P 500 for example, your ESG rating can really significantly help you in the world, to get included in one of these funds. It can lower your cost of
capital, which also can help you and so they're really
keen to have good ratings and so when a company's rating goes up, MSCI produces an updated report that shows what the key factors were that led to the company moving
up the ESG ratings ladder, moving up its score, moving up its rating. And so I started just with that, with a list of companies and upgrades and to see how quickly and how high some of them could climb. We found half of the companies, out of the 155 that we looked at, got upgraded just for sitting still, because MSCI changed the
way it weighted the score or changed the methodology and so their scores went up as a result. Take McDonald's for example, its total emissions are those that match the entire country of Portugal or Hungary and much of those emissions
come from its use of beef. But when MSCI gave it an ESG
rating upgrade in April 2021, it did that by reducing
the rating of emissions from a mere 5% to nothing and instead replacing it with a new initiative that
McDonald's had launched around recycling. Except, that the recycling
initiative came from installing bins in select
locations, in the U.K. and France. And when we looked at that, we found that within U.K. and France, there was either an upcoming regulation or a threat of a regulation, which would have forced
fast food companies like McDonald's and others, to anyway install these recycling bins and so, McDonald's essentially
got a ratings upgrade for doing the bare minimum that
it should have done anyway and for not being counted
for all the emissions it was putting out into the atmosphere. And McDonald's is not a singular example, it's actually quite typical. When we looked at the 150 upgrades, nearly half of the companies got that upgrade in their ESG rating without even fully
disclosing their emissions. We found the factors that
were driving upgrades over and over again, were for things like, what
MSCI calls corporate behavior. The other one that also
was kind of surprising was data protection and
also the structure of boards, deemed to be a factor in potentially having better outcomes for shareholders. Of the 155 rating upgrades
that we looked at, we found only one where a
reduction in carbon emissions, was cited as a significant
factor in the upgrade. The rating system and
the ratings themselves, create exactly the opposite of what many investors
believe they're looking at when they see a highly-rated company, they think that company
has strong environmental, social and governance practices, in terms of, its impact on the
world, its sustainability. But what they're actually
measuring is exactly the opposite, is the company sustainable? Is the value to shareholders sustainable? What's the impact of the world? Climate change, water shortages,
potentially on the company, it was a hard thing to get our heads around until we saw it all together in the data. MSCI is the leading provider of investment tools in the world and as such, in our basic raw material our sophisticated models, big
data and advanced technology. Henry Fernandez is the
CEO and Chairman of MSCI and has been since the
founding of the company and we met Henry at COP26
where governments meet, but increasingly, businesses
have been playing a role in shaping the conversation
around climate change and how much they are doing
to help fight climate change. We asked him, do you
think ordinary investors, retail investors have any idea that the entire lens of the system is the impact of the world on the company and not the impact of
the company on the world? And he said, no, that
they didn't have any idea. And in fact, he said he thought
even investment managers who were putting together
these funds, didn't grasp it. You know, they're not really concerned about the impact on the world
the investment managers, their fiduciaries and their
interest is in their fees. He said, he's a libertarian and that he would like as
little government intervention as possible and wanted to
ensure that the use of ESG would be one way in which he
can stop any socialist ideas from creeping into capitalism at any cost. This is a permanent change
in the way capitalism works and by the way, we're doing
this to protect capitalism. Otherwise government
intervention is going to come, socialist ideas are
going to come and the like. So it's not against capitalism, it's about, you know, dealing with the externalities that are created in capitalism. Henry Fernandez was born into an incredibly privileged
family in Latin America. Henry wound up at Stanford,
where he decided to get an MBA, that was really kind of at the height of the "greed is good" movement on Wall Street and Henry then decided that
he would go into finance. He ultimately found
himself at Morgan Stanley and Morgan Stanley had a partnership with a company called the Capital Group, Capital Group International. By the start of 2019, it was
clear that this massive shift driven significantly by millennials
and their pension funds, was really going to take hold and that created demand
for investment managers all over the world to sell
investments to the public, that purported to make
the world a better place. So Henry Fernandez took his bland kind of back office Wall Street company and he rebranded it and he's
done pretty well from it since. Your company has had an amazing run since it was spun off from Morgan Stanley. What'd you say up 10 times since 2009? We went public at $18
a share 12 years ago, and it's $220 today. Henry appears to be the first
ESG investing billionaire. His shares are now worth
about $1.3 billion, which makes him almost
as wealthy as Tim Cook, the CEO of Apple. Companies have a hard time, often time getting their founders, getting their directors,
getting their executives to invest in their businesses. Henry has his whole net
worth in his business and basically his board
actually said to him, "We'd like you to sell a
little bit of stock Henry." And Henry said, "I'm not gonna sell stock. I think I'm going to make
three or four times that money in the next 10 years. Why
should I sell any stock?" ESG ratings have come under
the scanner in recent years and so in this Wild West of ESG ratings, regulators now are honing
in, on figuring out a way in which they can standardize
how ESG ratings are made and make sure that ESG ratings don't end up green washing
a company's activities. The Securities and Exchange Commission has come up with a regulatory agenda to bring in more regulation, as far as ESG disclosures are concerned. It will be critical I think
in the next several months to see what the Securities
and Exchange Commission does and whether or not
they're going to crack down on some of the claims
that are really critical to bolstering ESG investing versus what ESG investing really is. Society hasn't changed. You know, you would have been intolerant of our transgression a hundred years ago, except that you didn't know
it, it was not prevalent. Now today you can find out very quickly if somebody is doing something wrong and therefore societies
tolerance towards that is very limited. There's no question
that shareholder action can move companies, can move companies
away from things that are, you know, really driving climate change or other ills in the world, but those moments are incredibly rare and the idea that these funds,
investing in these funds is doing anything to
make the world better, it's really, really hard
to see how that's the case and there is a huge demand from people, especially young people around the world, to not have their pensions
and their investments destroy the planet that they live on. Whether it will be met
with anything that's real is a really hard to answer question.
