WEBVTT
X-TIMESTAMP-MAP=MPEGTS:900000,LOCAL:00:00:00.000

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Capitalism right now is
going through a reckoning.

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There has to be a way in which
profits and planet align.

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ESG in theory should help,

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but that's not what is happening today.

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Our sustainable investments benefit you

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and parts of the world that need it most.

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The whole business is built on the idea

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that you can invest in companies

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that will allow you to
do well as an investor,

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but also can do some good for the world.

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Perhaps the greatest
investment opportunity

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in modern history.

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ESG is now big business.

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It represents by some estimations,

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something like $35 trillion
worth of investments

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and in the last two
years, it's grown by 15%

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and that rate of growth
doesn't seem to be stopping.

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Underneath this entire system are ratings

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that look a lot like the
credit ratings of companies,

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but are based on completely
unregulated data

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and one company

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has come to completely
dominate that business

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and that's MSCI.

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So even though a lot of
people are talking about ESG,

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not many know what goes into

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making an ESG rating for example

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and that rating is what becomes the basis

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for decision-making for investors.

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ESG ratings focuses in
on what's significant

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to a company's bottom line.

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What we found is that the foundation

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of this multi-trillion dollar

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new cash machine for Wall Street,

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is not at all what it appears to be

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and that it's really
almost exactly the opposite

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of what people think it is.

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I'm Cam Simpson,

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I'm a Senior Editor and
Reporter for Investigations

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at Businessweek in Bloomberg.

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There are about 160 different
companies that sell data

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and ratings that report to rate companies

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on their environmental, social,

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and governance practices or factors.

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Because it's a completely
unregulated business,

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because it's completely subjective.

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The ratings can land
anywhere across the board.

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MSCI's rating system is built on scores

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and they're converted into ratings

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that look like credit ratings,

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AAA, top of the line, CCC, bottom.

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By mimicking a credit
rating which is regulated,

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which is based on regulated data,

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MSCI has created kind of
an aura of respectability,

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an aura of confidence
for the investing world

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around these ratings.

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I'm Akshat Rathi,

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and I'm a reporter with Bloomberg News.

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I write about all things climate.

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MSCI has been around for
more than two decades

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and it started its life

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as a company that would arrange stocks

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in an electronic index.

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As the company progressed,
it found this demand

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for ESG metrics, that
people were interested in,

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not just ensuring that
they were making profits

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from their portfolios,

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but that the companies
within those portfolios

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were also aligning with society's goals.

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And so about 15 years ago,

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MSCI acquired a number of companies,

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that gave it the ability to
be able to create ESG ratings.

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MSCI has become the giant in the field.

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By one estimate, 40 cents on every dollar

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that is spent on ESG
ratings, is owned by MSCI.

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So, what MSCI does with its ratings

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really matters to the entire industry.

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So if you're a company,
especially a bigger company,

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that's included in the
S&P 500 for example,

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your ESG rating can really significantly

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help you in the world,

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to get included in one of these funds.

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It can lower your cost of
capital, which also can help you

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and so they're really
keen to have good ratings

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and so when a company's rating goes up,

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MSCI produces an updated report

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that shows what the key factors were

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that led to the company moving
up the ESG ratings ladder,

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moving up its score, moving up its rating.

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And so I started just with that,

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with a list of companies and upgrades

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and to see how quickly and how high

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some of them could climb.

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We found half of the companies,

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out of the 155 that we looked at,

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got upgraded just for sitting still,

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because MSCI changed the
way it weighted the score

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or changed the methodology

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and so their scores went up as a result.

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Take McDonald's for example,

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its total emissions are those that match

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the entire country of Portugal or Hungary

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and much of those emissions
come from its use of beef.

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But when MSCI gave it an ESG
rating upgrade in April 2021,

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it did that by reducing
the rating of emissions

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from a mere 5% to nothing

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and instead replacing it

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with a new initiative that
McDonald's had launched

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around recycling.

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Except, that the recycling
initiative came from

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installing bins in select
locations, in the U.K. and France.

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And when we looked at that,

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we found that within U.K. and France,

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there was either an upcoming regulation

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or a threat of a regulation,

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which would have forced
fast food companies

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like McDonald's and others,

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to anyway install these recycling bins

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and so, McDonald's essentially
got a ratings upgrade

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for doing the bare minimum that
it should have done anyway

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and for not being counted
for all the emissions

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it was putting out into the atmosphere.

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And McDonald's is not a singular example,

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it's actually quite typical.

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When we looked at the 150 upgrades,

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nearly half of the companies

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got that upgrade in their ESG rating

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without even fully
disclosing their emissions.

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We found the factors that
were driving upgrades

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over and over again,

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were for things like, what
MSCI calls corporate behavior.

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The other one that also
was kind of surprising

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was data protection and
also the structure of boards,

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deemed to be a factor in potentially

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having better outcomes for shareholders.

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Of the 155 rating upgrades
that we looked at,

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we found only one where a
reduction in carbon emissions,

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was cited as a significant
factor in the upgrade.

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The rating system and
the ratings themselves,

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create exactly the opposite

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of what many investors
believe they're looking at

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when they see a highly-rated company,

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they think that company
has strong environmental,

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social and governance practices,

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in terms of, its impact on the
world, its sustainability.

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But what they're actually
measuring is exactly the opposite,

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is the company sustainable?

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Is the value to shareholders sustainable?

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What's the impact of the world?

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Climate change, water shortages,
potentially on the company,

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it was a hard thing to
get our heads around

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until we saw it all together in the data.

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MSCI is the leading provider

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of investment tools in the world

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and as such, in our basic raw material

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our sophisticated models, big
data and advanced technology.

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Henry Fernandez is the
CEO and Chairman of MSCI

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and has been since the
founding of the company

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and we met Henry at COP26
where governments meet,

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but increasingly, businesses
have been playing a role

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in shaping the conversation
around climate change

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and how much they are doing
to help fight climate change.

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We asked him, do you
think ordinary investors,

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retail investors have any idea

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that the entire lens of the system

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is the impact of the world on the company

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and not the impact of
the company on the world?

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And he said, no, that
they didn't have any idea.

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And in fact, he said he thought
even investment managers

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who were putting together
these funds, didn't grasp it.

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You know, they're not really concerned

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about the impact on the world
the investment managers,

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their fiduciaries and their
interest is in their fees.

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He said, he's a libertarian

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and that he would like as
little government intervention

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as possible and wanted to
ensure that the use of ESG

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would be one way in which he
can stop any socialist ideas

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from creeping into capitalism at any cost.

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This is a permanent change
in the way capitalism works

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and by the way, we're doing
this to protect capitalism.

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Otherwise government
intervention is going to come,

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socialist ideas are
going to come and the like.

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So it's not against
capitalism, it's about,

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you know, dealing with the externalities

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that are created in capitalism.

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Henry Fernandez was born into

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an incredibly privileged
family in Latin America.

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Henry wound up at Stanford,
where he decided to get an MBA,

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that was really kind of at the height of

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the "greed is good"
movement on Wall Street

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and Henry then decided that
he would go into finance.

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He ultimately found
himself at Morgan Stanley

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and Morgan Stanley had a partnership

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with a company called the Capital Group,

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Capital Group International.

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By the start of 2019, it was
clear that this massive shift

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driven significantly by millennials
and their pension funds,

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was really going to take hold

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and that created demand
for investment managers

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all over the world to sell
investments to the public,

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that purported to make
the world a better place.

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So Henry Fernandez took his bland

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kind of back office Wall Street company

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and he rebranded it and he's
done pretty well from it since.

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Your company has had an amazing run

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since it was spun off from Morgan Stanley.

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What'd you say up 10 times since 2009?

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We went public at $18
a share 12 years ago,

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and it's $220 today.

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Henry appears to be the first
ESG investing billionaire.

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His shares are now worth
about $1.3 billion,

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which makes him almost
as wealthy as Tim Cook,

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the CEO of Apple.

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Companies have a hard time,

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often time getting their founders,

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getting their directors,
getting their executives

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to invest in their businesses.

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Henry has his whole net
worth in his business

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and basically his board
actually said to him,

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"We'd like you to sell a
little bit of stock Henry."

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And Henry said, "I'm not gonna sell stock.

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I think I'm going to make
three or four times that money

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in the next 10 years. Why
should I sell any stock?"

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ESG ratings have come under
the scanner in recent years

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and so in this Wild West of ESG ratings,

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regulators now are honing
in, on figuring out a way

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in which they can standardize
how ESG ratings are made

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and make sure that ESG ratings

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don't end up green washing
a company's activities.

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The Securities and Exchange Commission

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has come up with a regulatory agenda

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to bring in more regulation,

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as far as ESG disclosures are concerned.

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It will be critical I think
in the next several months

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to see what the Securities
and Exchange Commission does

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and whether or not
they're going to crack down

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on some of the claims
that are really critical

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to bolstering ESG investing versus

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what ESG investing really is.

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Society hasn't changed.

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You know, you would have been intolerant

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of our transgression a hundred years ago,

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except that you didn't know
it, it was not prevalent.

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Now today you can find out very quickly

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if somebody is doing something wrong

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and therefore societies
tolerance towards that

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is very limited.

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There's no question
that shareholder action

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can move companies, can move companies
away from things that are,

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you know, really driving climate change

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or other ills in the world,

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but those moments are incredibly rare

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and the idea that these funds,
investing in these funds

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is doing anything to
make the world better,

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it's really, really hard
to see how that's the case

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and there is a huge demand from people,

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especially young people around the world,

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to not have their pensions
and their investments

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destroy the planet that they live on.

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Whether it will be met
with anything that's real

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is a really hard to answer question.