MSCI Downgraded: Analyst Highlights ESG Sales Slowdown And Persistent Political Headwinds

Raymond James analyst Patrick O'Shaughnessy downgraded MSCI Inc MSCI to Market Perform from Outperform ahead of Q4 earnings. 

The analyst stated that the net recurring ESG & Climate sales through the first three quarters of 2023 stood at $31 million (vs. $52 million in 2022 and $43 million in 2021) on headwinds from political pushback in the U.S. and regulatory uncertainty in Europe. 

The analyst expects political headwinds to remain persistent throughout at least 2024. 

The analyst also cited that ESG is maturing as an investment strategy, including moderating ETF/ETP asset growth. 

Consequently, O'Shaughnessy estimates ESG & Climate segment revenue growth to decelerate further to 17% in 2024, well below MSCI’s medium-term aspirations of mid-to-high 20% growth. 

Apart from this, the analyst expects index subscription growth to fall below 10% in 2024, with the company expected to be a bit less aggressive on pricing in 2024, given moderating inflation.

The analyst says the strong equity markets in recent months will provide a healthy tailwind to Q4 FY23 and forward EPS.

O'Shaughnessy continues to view MSCI as a premier business model that will benefit from pricing power, high barriers to entry, recurring revenue models, and structural growth drivers. 

The analyst estimates ETFs linked to MSCI indices to see ~$50 billion of net inflows in 2023, down from $55 billion in 2022 and the slowest pace since 2016. 

O'Shaughnessy raised the adjusted EPS estimate to $3.37 from $3.33 in Q4 and adjusted EPS estimate to $13.23 from $13.19 to reflect market performance in the quarter. 

The analyst increased the adjusted EPS estimate to $14.75 from $14.40 for FY24, primarily due to a higher asset-based fee outlook.

Also Read: MSCI Expands Portfolio Solutions With Strategic Acquisition Of Wealth Tech Platform Fabric

Price Action: MSCI shares are trading lower by 2.11% at $547.93 on the last check Friday.