European ESG Regulations May Create Higher Costs for ESG Providers, Could Benefit Large Players

Earlier this week, the European Commission issued a proposal for the regulation of environmental, social, and governance ratings providers that provide ESG opinions or ESG scores. We believe increased regulation will result in higher costs for ESG ratings providers but will also benefit large incumbent providers with more resources. By far, the company within our coverage universe with the largest exposure to ESG revenue is MSCI. ESG and climate revenue (including both data subscriptions and index) make up about 19% of the firm’s revenue and we estimate about 15% of the firm’s adjusted EBITDA. We keep our respective fair value estimates of $412, $370, and $315 on wide moat-rated MSCI, S&P Global, and Moody’s.