Since 2019 Moody’s, Standard &Poor, and the Dow Jones, have been pouring billions of dollars into the climate risk space as ESG investment becomes mainstream. In 2022 we will see a consolidation of this trend and the creation of robust climate data platforms to better structure ESG investments.
The recent acquisition frenzy around ESG is good and bad. It is good because the market finally believes there are climate and societal risks that need to be priced-in to assets, and it is bad because as market speculates on anything ESG (particularly skewed towards climate issues and net-zero trends), there will be more greenwashing as well as inflationary pressures. This is particularly true if the transition to ESG and the prioritized decarbonization efforts happen too rapidly without adequate policies.
This acquisition trend is driven by investors and companies demanding more reliable data-based analytics to support their investment and strategy decisions as they pertain to ESG, Impact Investment and Green Finance. As ESG consolidates itself throughout 2022, we will have more M&A activity around climate risk intelligence. This will help to fill the much-needed geospatial analysis, climate risk, vulnerability, and exposure assessment gap. The big firms leading these efforts aim to become the climate risk service providers of choice, as there will be a huge increase in climate risk data demand.
Here are a few striking examples of this M&Atrend. In August of last year, Moody's paid more than $2 billion to purchase one of the leading risk modeling firms, RMS. This is a global risk engineering firm with yearly revenues of about $300 million. Through this acquisition, Moody will be able to integrate cross-sectoral risk assessment and risk avoidance strategies for its clients in the insurance industry. Another key acquisition that shows this market trend, is the January 2022 S&P Global acquisition of the Climate Service, a North Carolina-based climate risk modeling firm. With this acquisition, as well as with the launch of its ESG focused fund in 2021, S&P Global becomes more competitive particularly with younger generation climate-friendly clients. The S&P Global can now offer its clients a comprehensive number of services such as risk data, benchmarking, and scoring to better integrate natural and technological risk (such as climate disasters, digital inequality, and cybersecurity shocks)in their investment decisions. As I write this article, another Wall Street institution, the Dow Jones launched its Sustainability Data Platform to streamline its ESG Investing processes. As reported by Yahoo Finance, through this data platform, the Dow Jones will be able to provide daily risk analysis and climate scoring on more than 6,000 publicly traded companies. This will guide financial firms to make better ESG investment decisions based on more dynamic, accurate and transparent sustainable data sources. In the banking sector, large US and Canadian banks such as Wells Fargo, Bank of America and Royal Bank of Canada have established a consortium to better measure climate risk, as they want to become the climate-conscious banks of the future.
Trend going forward
Andrea Zanon, an international ESG advisor who has advised International Financial Institutions and over 20 countries and Minister of Finance develop ESG, Resiliency and Sustainability Strategies, comments:
Financial markets have played catch up over the last two years to overcome the uncertainty around climate and natural disaster risk. These recent acquisitions coupled with US and EU policy actions are providing strong incentives to other capital markets institutions to follow their suit and become more active across the climate-focused ESG movement. This is also confirmed by the unprecedented participation of banks, investment funds and Fortune 500 companies to the COP26 Climate Summit that took place in the UK in Nov 2021. For the first time ever, the world’s big banks, insurance companies, and financial regulators are working together and are committed to incorporating carbon emissions into strategies and decisions to enable a more orderly transition to a “zero net carbon economy”.These M&A deals show that markets believe there is huge money to be made from selling data that analyzes changing climate risk and trends. Expect more in 2022 as the ESG bubble grows.