Users say Moody's withdrawal from the ESG ratings field could lead to increased consolidation within the ESG ratings sector, putting upward pressure on prices and creating a vacuum in the market.
Credit ratings and data providers Responsible Investor After announcing a strategic partnership with MSCI this week, the company said it would “discontinue its standalone ESG scoring product and close its ESG solutions business.”
Under the terms of the agreement, Moody's will begin providing MSCI data and ratings to its clients. In return, MSCI will gain access to Moody's Orbis database, which will allow the data provider to expand its coverage of private companies.
Moody's declined to comment on reports of mass job cuts at its ESG solutions division.
The ratings agency acquired Paris-based Vigeo Eiris in 2019 in a deal reportedly worth around 50 million euros. The company has since changed its name to Moody's ESG Solutions.
The closure does not affect Moody's climate data products or second-party opinion services.
Cause for concern
Following the news, investors and other stakeholders expressed several concerns.
Major asset management companies Responsible Investor Consolidation in the sector is a challenge as investors place too much reliance on ESG ratings in their decision-making and the number of existing providers declines.
“Market concentration and pricing risk will always be a challenge, as providers have significant power to increase prices,” they added. “In time, this may prompt companies like ours to consider other options for obtaining data, either directly or through new entrants, as we mature.”
One industry source said consolidation within the ESG ratings industry is “not surprising” but could create barriers to entry for new providers, adding: “Most or all of the larger asset managers use multiple providers.”
According to Opimas data, Moody's combined market share for ESG and climate-related business fell to 13% in 2023 from 15% in 2021. Market leader MSCI increased its share from 27% to 29% over the same period.
Moody's ESG- and climate-related revenues increased less than 10% last year to $207 million, while MSCI's revenues grew more than 30% to $472 million.
Frédéric Duclovier, founding director of the EDHEC-Risk Climate Impact Institute, noted that historically, Vigeo Iris' offering has “always been in line with 'socially responsible investments' and has therefore always placed a strong emphasis on what is known today as double materiality.”
“This is a sad day for a company that has made a notable contribution to values-based investing,” he added.
Ducoulombier was a user of Moody's data when he served as a director at index provider Scientific Beta.
He noted that compared with other rating agencies, Moody's is “more open to feedback on its data and models and is more focused on improving their quality.”
“But the bigger problem now is that there are very few providers left that are not involved in providing indexes or other value-added activities. The industry is rife with anti-competitive practices and oversight by competition authorities is ineffective.”
The sustainability-focused European asset manager said it was concerned that the alternative MSCI scores and data would not provide the same level of insight as the former Vigeo Eiris business.
“MSCI is clear that its ESG scores focus on financial materiality, but Vigeo Eiris also takes a dual materiality perspective, so we wonder if something is missing in the new mix.”
Competitor Reactions
Shai Hill, chief executive officer of challenger firm Integrum ESG, suggested Moody's restructuring may be because its product offering was similar to other providers.
“The problem is that they didn't offer anything differentiated compared to MSCI and Sustainalytics. We actually think the market is a quasi-oligopoly between these two providers.”
A marketing email sent by Integrum ESG on Tuesday asked Moody's clients “whether they really want to migrate to MSCI ESG.”
“Many believe that MSCI's ratings products are a 'black box' that provides a rating but does not allow for understanding of ESG risks. This is why alternative providers like Vigeo Eiris are being chosen.”
Moody's and MSCI have been contacted for comment.
Meanwhile, Peter Webster, former CEO of EIRIS, which was later merged into Vigeo Eiris, separately called on MSCI to hire staff affected by Moody's job cuts. “I would like to see MSCI tap into the pool of ESG skills from Moody's ESG team, particularly on the social side,” he said.
“These are things that could easily be overlooked in the process, but clearly when we selected Moody's ESG in the first place we had the option to use MSCI's existing research, which would result in a better outcome for clients.”