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.