It is my distinct pleasure to host, Henry Fernandez here for our keynote lunch session. Henry is the Chairman and CEO of MSCI, a company you have led for nearly three decades. MSCI is best known as a top global index provider, but importantly, it offers data, models, analytics, and research for a range of investors, financial firms, and increasingly, corporate clients. Headquartered here in New York, MSCI has employees in more than 25 countries, and it functions as a central connecting point for capital markets. In 2019 and in 2021, Henry was recognized by Barron's as one of the world's top 30 CEOs, and more recently, you may have seen the profile that both Henry and MSCI received in The Economist magazine. Earlier in his career, Henry was a managing director at Morgan Stanley.
Outside of MSCI, Henry serves on a number of different boards, where we have some good common interests, Henry, Royalty Pharma PLC, Stanford University, and of course, Memorial Sloan Kettering Cancer Center, which is a partner of RBC Capital Markets as well. Henry, thank you so much for joining us today.
Pleasure to be here.
So this keynote session is really around the intersectionality of emerging societal considerations on ESG and climate, and the importance of the financial sector in providing the tooling, the data, and the insights to tackle some of these long-term problems. So Henry, you have built one of the largest and most sophisticated global investment decisioning research and data providers in the world. What did you see in the external environment that led you to create this company that we talked about as a compounding company yesterday, alongside your own capabilities, and how did ESG and climate fit into that consideration?
Some 30+ years ago, when I was at Morgan Stanley in various functions, I began to observe that the top quartile talent in a society joined investments and finance, and when they arrived, the tools of their trade, especially in investments, were really pretty primitive.
Mm-hmm.
They didn't have any tools to understand performance, understand risk, models to do asset allocation, pricing models, portfolio construction, and all of that. So I said, "This is a good, you know, a good gap that we can fill." And, I convinced the senior management of Morgan Stanley to help me, lead an effort to build a third leg of Morgan Stanley. In those days, Morgan Stanley had the investment bank, meaning corporate and sales and trading. They had asset management. They didn't have wealth management at the time. And, I was gonna lead a third leg, which was investment tools for the investment industry. You know, risk models, performance models, asset allocation models, and all of that.
The starting point was this cost center that I found inside Morgan Stanley, which were equity market cap equity indices. So I said, "That's a good point. That's a good starting point. We can have some people, some clients, and get going." So, eventually Morgan Stanley lost faith in the strategy. There were a lot of changes that took place, and therefore, we spun out of Morgan Stanley to create the company that we have today. You know, they feel sorry because our market cap is one-third of their market cap today, and at the time, we were a tiny, tiny portion of their market cap, right? But, you know, we got good friends there.
So anyhow, then, in the late 1990s, I had moved to Geneva, Switzerland, which is where these market cap equity indices were created at the offices of the Capital Group. The CI in MSCI is the Capital Group of Los Angeles, historically. And a lot of our Scandinavian clients kept asking us for SRI indices, socially responsible investment indices. So they kept calling, and then I said to them, "Look, I don't know anything about that. If you're interested, come down here, and we'll talk." So they came down there. They came...
They went down to Switzerland, and as an economist that I was by training, I began to understand that this SRI concept, which is now ESG and climate, it was, you know, very much at the foundation of capitalism and, and economy, and, and economies, and financial markets, and all of that because a lot of these factors were not being priced in the securities around the world, and they were not being incorporated into the allocation of capital in a society. So I launched—You know, I went right into it, and I wanted to create ESG ratings. I went to the senior management of Morgan Stanley, and they said, "You must be kidding me. You're gonna take our corporate clients and create ratings for them?
It's good for the ones that are triple A, but the ones that are not, they're gonna fire us." So anyhow, we had to wait until we got out of Morgan Stanley to develop the business in earnest, and that was the genesis of it. So the important thing about that is that this did not start as a social cause, as a political philosophy-
Mm.
... or as some kind of governmental effort or NGO effort. We started this process pretty much at the heart of free markets, at the heart of capitalism, at the heart of pricing, at the heart of economic development, at the heart of an economic allocation of capital, and that's what we keep doing today.... You know, there are a lot of people that wanna use it for different purposes, and we'll be more than happy to sell you everything for different purposes. But the mainstream of what we're doing is getting the majority of the assets of the world to incorporate ESG factors, you know, in their fiduciary duty of highest risk-adjusted returns, so that they can price assets properly, and they can allocate capital properly.
At the end of the day, it's ultimately about the creation of long-term value.
Right.
How you can look through the lens of opportunity and look through the lens of risk, with data that may not necessarily be apparent through a traditional financial lens. Within your global business, MSCI, you look at two. You look at climate and ESG distinctly. What solutions, what questions are your clients asking you to solve, that led you to go down this path for ESG and climate separately?
Yeah, so what happened was we started with ESG some 15-plus years ago. And, well, we started a long time ago, but, you know, in earnest, started rating companies when we got out of Morgan Stanley. And, you know, and, climate is one of the factors in the environmental pillar, but just one. You know, if you have a company or a municipality that pollutes a river, that's not climate change. It's just economic degradation, I mean, environmental degradation. So, therefore, you know, climate was one of the factors. But as time went by, we began to recognize that climate submerged on the ESG criteria eventually was gonna be a problem. Because if... As climate change and climate risk develops, and you let it run in the context of ESG, it's gonna swamp every other, every other aspect of it.
You know, then you, you're gonna then ignore other environmental issues, you're gonna ignore other social and, uh, corporate, uh, governance issues and the like. So we said, "It's fine to still keep it within that, but we need to break it out and make it its own pillar, its own product set, its own this," because over time, it's gonna be the mother of all transformations in, in our generation and in future generations, right? So, and it's gonna happen a lot faster than we think it will. But so that's why one of the biggest problems we have, and I'm sure you have, is that when you engage in a conversation with somebody on, quote, unquote, "ESG," it takes you a few minutes to figure out what the person is talking about.
Because the person may be talking 100% about climate, but he or she calls it ESG.
Mm-hmm.
Or the person can be talking about social issues and nothing to do with climate, you know, and the like. So it's a big problem. It's a nomenclature problem. We're trying to figure out how to solve it. ESG is not a good word anymore, so we're trying to figure out if there are alternatives to that. But importantly, we differentiate, you know, ESG and climate within it, to climate by itself. And that has worked really well because a lot of the discussions with our clients have been, you know, very centered around that, and, and there's no misunderstanding what is it that we're talking about.
Yeah, and you're solving distinct needs for your clients-
Yeah
... right? And it helps you provide direct tools for what-
Yeah
... they're looking to solve. It is a political environment right now, though, and as you mentioned, ESG has perhaps not become the, you know, the most used terms. How are you guiding MSCI through political waters?
Yeah. So the first thing that I tell people in our company, also and our clients, is that, ESG and climate are, and will continue to be, political issues. They have to be political issues. My own definition of politics is an organization of a society and the choices a society makes about how they treat their resources, how they treat their people, how they treat their environment, and all that. Those are political choices. Now, we in the private sector, especially in the capital markets, defined as finance and investments, need to then say, "Does that work well for us in terms of maximizing returns," right? So it is political.
Now, at times it will get politicized, because there are some people who wanna use it as a weapon to for their political purposes, right? So in a lot of America right now, you know, the sad part is that the retirement savings of citizens of states and plans and other is being weaponized by political purposes. Because they're trying to force people not to look at ESG integration in their investment criteria, and those people are not gonna do well in their investment allocations. You know, so they're weaponizing the expense of the retirement savings of people. So that's not good. So we look at the thing and we say, "No, we gotta speak the truth.
We, you know, regardless of the consequences, we gotta call out, you know, how it's being weaponized by the right or the left.
Mm-hmm.
You know, both sides weaponize it, because the left wants to take ESG as a way to channel resources to their social causes. That's what the left is doing. And the right says, "No, I wanna run a completely, you know, free market, and this stuff is woke." And you say, "Well, you know, it's neither," right? This is not a way to mobilize resources for social causes. That's the government, those are NGOs, those are other people. But people like you all, that have fiduciary duties, you know, to fulfill to the beneficiaries or to your clients, that gave you the mandate to get the highest risk-adjusted return in their portfolio.
Or, if you're a bank and you have a balance sheet, and you wanna make sure you have enough capital and return on capital, you're not the government. You need to make decisions that are fiduciary decisions in the best interest of the capital providers that were given to you. But there is gonna be a politicization, there is gonna be a polarization, and that's part and parcel of it, and I think all of us have an obligation to call it out, and to say what is it that we're using it for, and what is it that we're not using it for, to make sure that there is no misunderstanding as to what our goals and objectives are. So we at MSCI are doing that.
Obviously, sometimes we don't endear ourselves with either side, you know, the left or the right, because of that. But, we're a company that, as I said at the beginning, was created to provide transparency, to provide, tools to fully understand risk and performance and asset allocation, you know, around the world, and obviously to shed light into some of the factors that are not being incorporated, such as ESG and obviously climate, into people's portfolios and into people's balance sheets, and we're gonna keep doing it until there is a law that bans us from doing it, right?
Yeah. Well, it's a courageous decision, and I know it's one probably many of the organization's representatives continue to wrestle with, but it's staying with that transparency and that authenticity, I think, that's so important.
And not only that, let me add, it's actually an obligation of ours. You know, we can't let parts of society hijack what is best for what we do and what is best for the allocation of capital, and that leads to economic growth, you know, in an economy and in our society. So we have to take the high road, and the high road is to say, "This is what we intend to do." Now, if we don't, then it's gonna continue to get weaponized and politicized, which is fine, but it will then begin to distort the narrative-
Yeah
... and the education of citizens. They're not gonna understand, you know, what we're trying to do. And importantly, it will be socialized instead of being privatized, right? It'll be socialized, and it's gonna be taken away from us, and people are gonna dictate, you know, what we do, whether we like it or not, and I think most of us will not like that one.
Yeah, that's not a good outcome either.
No.
So sustainable investment decision-making is predicated on good data, and proper, transparent data that can be integrated into the decisions we all make, and sustainability is no stranger to that. We're still far ways off from having perfect ESG and climate data, but we have come a long way. How are you thinking about the next evolution of data from MSCI's standpoint? How are you utilizing big data? How are you utilizing AI to take you up to that next level of transparency?
Yeah
... for your customers?
So, you know, first of all, you know, MSCI, in terms of our own function, is a modeling company.
Yes.
We model risk, we model performance, we model asset allocation, we model, you know, pricing, we model everything. Like a good econometrician that I used to study, you know, my professor at the time at Princeton was always told me, he said, "I'm gonna teach you how to put models, econometric models, but you gotta understand that there are three requirements for you to do a good job." And I said, "Great, what are they?" "Data, data, and data.
Right.
Right? No model can do anything... You know, you can have a bad model, but if you have a great model, it cannot do anything without data. Actually, I use the example of Google. Everyone gets mesmerized by the Google search engine, right? You know, you search to see what, what's going on. That's the model. That's the equivalent of the econometric model. That model will be completely useless without the underlying data, meaning, where are the Vietnamese restaurant that you're looking for, and what time do they open, and where are they located? That's the data, right? If, well, you said, "I go to London. I need a haircut," so haircut near me.
You know, you know, they have to know the data is where all the haircut places are, and then the, the search engines have to gather it and serve it to you on a platter. So data, data, data is the new oil, right, in the world. So therefore, MSCI, you know, it we started as a modeling company, and therefore, we will take our models, we will get third-party data, processes in, process it in our models, and give it to clients, you know, in terms of their portfolio, their risk-return, the equity indices, the, the Barra factors, et cetera. But in the last 10, 15 years, you know, we have gone into we're in a, in a journey of becoming a very large, giant data-gathering, data-building company.
It started with flow data on equity indices, then it moved to ESG, then it moved to climate, then into private assets. We have the largest databases of private asset classes in the world. It's about $15 trillion of underlying values, you know, in those databases of private assets, and counting. And, you know, according to our estimates, in a few years' time, even though we have an incredible amount of data today, we're gonna have 1,000 times more data inside MSCI than we have today.
1,000 times.
1,000 times. So it's a major explosion, and therefore, how do you collect it? How do you store it? How do you cure it? How do you set it up in a way that you can retrieve it, and make it useful, you know, to people? You know, how do you put the models on top of it, whether it's the risk models, the performance models, the pricing models, how to put all of that, and then how do you serve it out? So, so we've been doing that. We've been using AI for about 10 years, mostly predictive AI, to have it, because we don't wanna throw tens of tens of thousands of people to do this. We needed, you know, techniques to gather it.
and now we've been using Gen AI, and that's gonna be an incredible godsend, because we'll be able to gather a lot more data, check the quality of it, store it properly, search, search it properly, and all of that. So we're very excited about the new discoveries, and we have partnership with both Google and Microsoft on their Gen AI efforts, especially Google, because Google is one of the largest data companies in the world, as I was saying before. So a lot of what we do, the other thing is, a lot of what we do cannot be maybe it's right, maybe it's wrong, and it's okay. No, no, a lot of what we do to serve it to all of you better be very right or close to right.
I think these neural models, like gen models and the like, large language models and the like, work best when you give them a very large amount of data, but they cannot wander off, you know, looking for data in the moon or in Mars or whatever, you know, they...
So, and therefore, they can give you very high levels of accuracy, and that's what we're very excited about, so that we can, our dream is to put our products and our services in front of clients, and then, at the same time, is the equivalent of saying, "And not only we give you this, but we give you 100 PhDs from Stanford, MIT, Imperial College, Carnegie Mellon, whatever, and they're gonna work for you at $0.20 an hour, or so, not an hour, $0.20 a year," or something like that. "And we're gonna train them to do the work for you, to look into your portfolios, to understand insights, to correlate things. They're gonna be there for you.
They're gonna be working for you all day, all night." They just happen to be artificial PhDs, not human PhDs, but it's okay.
It feels a little sci-fi almost, Henry, when you think about putting this into action, but-
Oh
...exciting the opportunity, I think that it's.
Well, it's very close.
... to harness for humanity.
Yeah, we're within a year of deploying that.
Yeah, exciting. Well, an area where we certainly need more data, more insights, and more rigor is in the carbon markets, and you recently made an acquisition of Trove Research exactly for that purpose. Tell me a little bit about how MSCI is thinking about opportunities in carbon markets and channeling capital towards that area.
Yeah, so a lot of people will come to us and, talk to us about the voluntary carbon markets, and, we realize that, voluntary carbon markets must be part of the solution to the risk and decarbonize the world. And why is the case? You know, as all of us know well, markets perform many functions, but two key functions the market performs, are they transfer value from one player to another, and they transfer risk from one entity to another. So if we have no mechanisms to transfer value and risk, you know, in the decarbonization and the de-risking process of the world, well, it's gonna be pretty limiting what we can do. So voluntary carbon markets are the place where we're gonna do that.
You know, by the way, I think the New York Stock Exchange is a voluntary market, too, right?
Yes, exactly.
You can, you can see the picture, right? As opposed to the compliance market, which are government-mandated, here's what you need. You could trade, you know, in terms of, carbon credits and things like that. So, so therefore, we were looking for an entry point, and we found through this, company called Trove Research, London-based company. It's about 85 professionals in the company, and what we do there is that we analyze about 15,000 projects, you know, carbon offset projects in the world. And we understand what they do, how they do it. We rank them. We're about to launch a rating system, you know, like an ESG rating system on those projects, and those projects then, that information gets sold to corporates or anybody buying carbon credits.
and therefore, we know what prices those entities are paying for, you know, in those projects, we know what they're using it for, et cetera. So then that gets us into the issuer that is looking to buy or a company or somebody, an organization, that is looking to buy the credits, and therefore, we learn about their own decarbonization processes-
Yeah
... their own purchases of credit. We have about 3,000, 4,000 companies that we're following on the basis of that, and that information then we sell it to investors. So investors can then have a transparent view of the total transition plan of a company, between the credits that they use and the decarbonization efforts that they follow. So yeah, so that's what we're doing. It's growing quite a lot. And so one important piece of research that they did before we bought the company is that they analyzed all of this, and they came to the conclusion that the companies that buy carbon credits decarbonize and de-risk the rest of their operations, you know, their internal operations, at a rate more than twice the companies that don't buy carbon credits-
Yeah
... which flies in the face of all the naysayers and all the zealots that don't want anybody buying carbon credits because they say if you buy carbon credits, it's a way, it's an easy way out, right? It flies in the face. So we're going through the data. We're gonna promote it. We're gonna advertise this, these findings and the like. So hopefully, that will give a boost to the development of the voluntary carbon markets. It's a long way. You know, there is a lot of other issues in these markets, but, you know, we're trying to do our part to get them live and going.
Yeah, us, too. We at RBC are also quite encouraged by what we see-
Yeah
... as the potential opportunity for carbon markets. We've developed our own partnership with a company called ClearBlue. And I take great, great courage and confidence from the fact that you say leading companies are doing that, because I think if you have an offset strategy, you acknowledge that you're not 100%, net zero yet.
Yeah.
You can take tactics and initiatives to get there, but offsetting your residual emissions-
Right
... is a really important dimension of looking at your full portfolio.
Yeah, let me give you an example, I mean, to sort of try to nail this point, and that is, you know, there's a whole industry called the reinsurance industry, right? In which if you run an insurance company, and you think you have too much risk on your balance sheet, and you wanna take more, you lay off that risk with a reinsurer. That's a market, right? There is a market that is an over-the-counter market, so to speak, relationship-driven or whatever. But if you don't have a market like that, you know, in a lot of other asset, like carbon, you know, it, it's gonna be very hard to... So we are very bullish in the development of the voluntary carbon markets, but it won't be a straight line.
No.
It will be a zigzag, and up and down, and hopefully... By the way, at COP28 in Dubai, there was a group of people that met, and I attended a lot of their meetings, in which they're putting their full weight behind the voluntary carbon markets. Politically, John Kerry, you know, his proposal was, "There's no way we can transfer wealth from the Developed North to the Global South free." I mean, "We're just gonna give it to you because we're nice people." I mean, we have our own problems, too, right, in all the other countries.
So therefore, you know, he came up with a scheme which is proposing that the way to transfer wealth from the north to the south to solve some of these climate problems is through the carbon offset markets. Because a lot that can happen in the, in emerging markets, you know, can be, can help, you know, this transition, and that's a way to channel funds and to channel money into these places. So, but, you know, GFANZ, you know, the Glasgow Financial Alliance for Net Zero, has thrown its weight behind the protocols and the structure, so they're doing a lot of work. I'm on the board there. They're doing a lot of work in voluntary carbon markets.
Mike Bloomberg has thrown the weight of Bloomberg LP, and Bloomberg Philanthropies behind that, and so has Mark Carney, and with Brookfield and other, other places that he works at, right?
Yeah. It's a fast, fast-developing space, and one that I think holds incredible potential for both of our organizations. Let's speak a little bit about the importance of convening partners. You're a convener of asset managers-
Mm
... and corporates. We're a similar... play a similar convening role. But on sustainability, it is important to bring together different groups of people, and to share areas where we can work together in advance, but also challenge some of the conventional norms. So you launched the MSCI Sustainability Institute at Climate Week here in New York last year. Tell us a little bit about why that was important for you, and why, you know, we need some leadership on these societal issues?
Yeah, so this is a fast-moving problem in the world. We may not feel, we may not think it's fast-moving. We may think we have till the year 2050 to start working on it but that's not gonna happen, given all the physical risk that we see happening in the world, droughts and fires, and we have the second-largest fires going on in Texas, second-largest, I guess, in the history of the U.S. going on. And, so one-third of Pakistan was under water last year, right? I mean, so, you know, we don't pay attention to that. You know, if anybody, anybody was in the Mediterranean last summer, you probably felt it, too, right? So, there are a lot of physical issues going on in the world, and, we're not sometimes combining all those stories into one big story as to what is happening.
So physical risk will continue to accelerate, and therefore, all of us don't have the luxury of waiting a very long time to come up with solutions. We need to convene. We need to talk. We need to debate, you know, what are the best ways and the accelerated ways that we can, you know, tackle these problems. So at MSCI, some of you who know us well, we're an extremely commercial organization, right? So a lot of our people, you know, didn't have any time to deal with academics, or NGOs, or think tanks, like, you know, policy entities or government officials and policymakers, and all of that. And we felt that those people have...
They deserve a seat at the table as well, not just, you know, people in the private markets, in order to come up with solutions. So we created the MSCI Institute to precisely do that. We allocated resources, we allocated people, and what we're doing is trying to get people together, you know, from different walks of life and say, "How do we solve this problem together?" The world is too siloed, you know. One example of that, speaking about climate, my first time at a COP was COP26 in Glasgow. Right? COP26. COP means Conference of Parties, UN Conference of Parties, right? That's, they meet. All these parties meet to talk about climate in, you know, countries.
I was shocked to know that 20 years, 25 years have gone by, and it was not until the 26th year that they invited the capital industry, meaning investment and finance. They had never been invited. It was only these UN countries talking about policy, talking about that, and when I went there, I told somebody, "Last time I checked, the world runs on capital, not on policy only." You know, you know, the role of governments is to create the conditions for economic activity to take place. Not all governments, unless you live in a socialist economy or a communist economy, the government is not the economic agent of the economy of the society. It is a facilitator of the economic activity in a society, and they had never invited the investment and finance industry.
Great. Yeah.
So, so we had our own capital day organized by Mark Carney, and we achieved a lot. That's how GFANZ got created, et cetera, et cetera. So now, that ability to convene, that desire to get people together is what prompted us to do this, and I encourage all of you to get involved, to get engaged in a lot of these discussions for your own business, for your own investment, for your own, you know, institutions. But also, it's your contribution to your kids and to your grandchildren. I'm not an environmentalist. I'm actually a conservative, conservative fellow in many respects. I grew up in a country that went communist, so I'd be the last person to talk about planned economies and things like that.
I was actually a banker in the oil and gas industry in the 1980s. So I've attacked this problem more from the economics of the problem, the pricing of the assets, the allocation of capital, and I'd recommend that everyone does. This is not a, you know, it's not a political call or an agenda or anything like that. It's a way to say to all of you, "We need to get engaged here. We need to take matters in our own hands." You know, some of the things that I tell my fellow conservatives is that one of the tenets of conservatism is that, you know, we want limited government. We don't want government sort of infringing on every aspect of society.
I normally tell my conservative friends, I say, "If we don't take matters in our own hand and try to solve some of these problems, climate change is gonna be the mother of all socializing factors in the economy in the world." Because as physical risk increases and society gets confronted by that problem, the citizens are gonna demand their elected officials to do something about it, and fast. And what they're going to do is they're gonna come up with highly prescriptive policies that are gonna tell us what to wear. "Don't wear that, anything made out of petrochemicals," right? They're gonna tell us when to commute, you know, because we need to use fuel efficiently. They're gonna tell us where to work. They're gonna tell us a lot of things. So therefore, it is...
I mean, all of us, you know, I normally say to you that, unfortunately, we've been the generation that has been stuck with this problem, and we wish we weren't. We don't deserve it. You know, we wish we were doing something else, but we're stuck with the problem, and therefore, we need to sort of rise up to the, to the responsibility and say, "There's no alternative.
Yeah.
We need to deal with this problem, you know, and tackle it, and hopefully people after us will say that we took, you know, our own responsibility for the problems that we had in the world, and we did something about it.
Yeah. Terrific, and I think no better place than to have this discussion-
No
... at our financial institutions conference, where the allocation of capital and the role of the financial sector is so important. And like you, at RBC, we've created our own Climate Action Institute away from the core business to do exactly that, allow the core business to engage with these factors that continue to contribute the value that our stakeholders and our shareholders expect, but allow a venue and a mechanism for the dialogue to increase.
Yeah, let me say one thing about that, is that one of the real pleasures of us at MSCI has been working with RBC. Because think about this: major bank in the world, major bank in Canada. Canada is an oil and gas producer. It's a mining country, which could easily be said that nobody wants them to work on these issues, right?
Mm-hmm.
But they've taken the leadership. They've said, "No, we gotta be a leader in the world to do this." Other places in the U.S. haven't, because they wanna stay away from the pressures, right? But they have confronted the issue, and it's a real pleasure, and I was really looking forward to this event, not only because of what RBC represents-
Thank you
... to the world and to us, but also because they want to be in the leadership. You all want to be in the leadership of these issues.
Well, thank you very much, Henry. That's a great way, I think, to end the conversation. In my experience, it really is, and since creating the Sustainable Finance Group at RBC Capital Markets and helping steward the enterprise, a key success factor to advance any of these agendas is committed leadership, and leadership that has the vision. It has that medium-term, longer-term plan. It sees the disruptive forces at play. I wanna thank you for your leadership of MSCI.
Thank you.
I wanna thank you for your stewardship of some, some, what can be tricky issues at times, and I wanna thank you for your partnership, for joining us here today. Ladies and gentlemen, please join me in thanking Henry Fernandez.
Thank you.