Stakeholders wary of market consolidation as Moody’s closes ESG ratings business
Moody’s impending exit from the ESG ratings space could accelerate consolidation within the ESG ratings sector, put upward pressure on prices, and leave a gap in the market, according to users.
The credit ratings and data provider has confirmed to Responsible Investor that it will “discontinue its standalone ESG scoring products and will close its ESG Solutions business” after announcing a strategic partnership with MSCI this week.
Under the terms of the agreement, Moody’s will begin offering MSCI data and ratings to clients. In return, MSCI will gain access to Moody’s Orbis database, which will allow the data provider to extend its coverage of private companies.
Moody’s declined to comment on reports of mass redundancy across its ESG Solutions unit.
The ratings agency acquired Paris-based Vigeo Eiris in 2019 in a deal understood to be worth around €50 million. It later rebranded the company as Moody’s ESG Solutions.
The closure will not affect Moody’s climate data products and second-party opinion services.
Cause for concern
In response to the news, investors and other stakeholders flagged a number of concerns.
A large asset manager told Responsible Investor that consolidation in the sector presented a challenge due to investor over-reliance on ESG ratings to make decisions, and a decreasing number of established providers.
“There is invariably a challenge with market concentration and pricing risks, as providers have more leverage to raise prices,” they added. “In time this may push firms like ours to look at other options for sourcing data directly or through new entrants as they mature.”
An industry observer said the growing consolidation within the ESG ratings space was “not surprising” but noted that it could present barriers to entry for new providers. “Most, if not all, large asset managers use multiple providers,” they added.
The combined market share of Moody’s ESG and climate businesses had dipped from 15 percent in 2021 to 13 percent in 2023, according to data from Opimas. Market leader MSCI increased its share from 27 to 29 percent over the same period.
Last year, Moody’s ESG and climate revenues grew by less than 10 percent to $207 million, while MSCI’s grew by more than 30 percent to $472 million.
Frédéric Ducoulombier, founding director at EDHEC-Risk Climate Impact Institute, noted that historically the Vigeo Eiris offering “was aligned to ‘socially responsible investing’ and has therefore always focused on what is known today as double materiality”.
“This is a sad day for a company that has made a distinctive contribution to values-based investing,” he added.
Ducoulombier had been a user of Moody’s data while serving as a director at index provider Scientific Beta.
He noted that Moody’s had been more “receptive to feedback on data and models and were focused on improving their quality” compared to other providers.
“However, the bigger issue now is that there are very few providers remaining that are not linked to index provision and other value-added activities. Anti-competitive practices are rife in the business and supervision of competition authorities is ineffective.”
A European sustainability-focused asset manager said he feared the replacement MSCI scores and data would not provide the same level of insights as the former Vigeo Eiris business.
“MSCI has clearly stated that their ESG scores focus on financial materiality, while Vigeo Eiris also included a double materiality perspective. Therefore, I have the feeling something will be missing in the new combination.”
Competitor reactions
Shai Hill, chief executive at challenger firm Integrum ESG, suggested that the restructuring at Moody’s may have been due to the similarity of its product offerings to those of other providers.
“The problem was that they did not offer anything that was differentiated in comparison with MSCI and Sustainalytics. We actually regard the market as quasi-duopolistic between those two providers.”
A marketing email sent by Integrum ESG on Tuesday asked Moody’s clients whether they would “really want to be ‘transitioned’ to MSCI ESG?”.
“Many think the MSCI ratings product is a ‘black box’, which offers them an assessment but no understanding of ESG risks – which is why they chose an alternative provider like Vigeo Eiris.”
Moody’s and MSCI have been contacted for comment.
Meanwhile, Peter Webster, former chief executive of EIRIS, which later merged to become Vigeo Eiris, separately called for MSCI to hire those affected by the redundancies at Moody’s. “You would hope that MSCI might take advantage of the pool of ESG skills, particularly on the social side, in the Moody’s ESG team,” he said.
“Such things can easily get overlooked in the process, but that would be a better outcome for clients who obviously had the option of MSCI’s existing research when they chose Moody’s ESG in the first place.”
