明晟 (MSCI) 2021 Q2 法說會逐字稿

Welcome to the MSCI Second Quarter 2021 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Salli Schwartz, Head of Investor Relations and Treasurer. You may begin.

Thank you, operator. Good day, and welcome to the MSCI Second Quarter 2021 Earnings Conference Call. Earlier this morning, we issued a press release announcing our results for the second quarter 2021. This press release, along with an earnings presentation we will reference on this call, as well as the brief quarterly update are available on our website, msci.com, under the Investor Relations tab.

Let me remind you that this call contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made and are governed by the language on the second slide of today's presentation. For a discussion of additional risks and uncertainties, please see the risk factors and forward-looking statements disclaimer in our most recent Form 10-K and in our other SEC filings.

During today's call, in addition to results presented on the basis of U.S. GAAP, we also refer to non-GAAP measures, including, but not limited to: organic operating revenue growth rates, adjusted EBITDA, adjusted EBITDA expenses, adjusted EPS and free cash flow. We believe our non-GAAP measures facilitate meaningful period-to-period comparisons and provide insight into our core operating performance. You'll find a reconciliation to the equivalent GAAP measures in the earnings materials and an explanation of why we deem this information to be meaningful as well as how management uses these measures in the appendix of the earnings presentation.

We will also discuss run rate, which estimates at a particular point in time the annualized value of the recurring revenues under our client agreements for the next 12 months subject to a variety of adjustments and exclusions that we detailed in our SEC filings. As a result of those adjustments and exclusions, the actual amount of recurring revenues we will realize over the following 12 months will differ from run rate. We, therefore, caution you not to place undue reliance on run rate to estimate or forecast recurring revenue.

Additionally, we will discuss organic run rate growth figures, which exclude the impact of changes in foreign currency and the impact of any acquisitions or divestitures.

On the call today are Henry Fernandez, our Chairman and CEO; Baer Pettit, our President and COO; and Andy Wiechmann, our Chief Financial Officer.

Finally, I would like to point out that members of the media may be on the call this morning in a listen-only mode.

With that, let me now turn the call over to Henry Fernandez. Henry?

Thank you, Salli. Hello, everyone, and thank you for joining us today. MSCI delivered exceptional results in the second quarter. This outcome was the direct result of our vision to be a change agent for the investment industry, our mission to help investors build better portfolios for a better world, and the Triple-Crown investments we are making to support these efforts. For the quarter, we achieved total revenue growth of 22%, adjusted EBITDA growth of 25% and adjusted EPS growth of 38%.

Last month, we held our annual strategy session with our Board of Directors. Our Board and our management team are incredibly excited about the many opportunities we have to significantly accelerate our growth, including in solutions like investment thesis indices, fixed income, private assets, and of course, ESG. And now, even more so, climate. We are making great progress with the newer client segments that we have previously highlighted to you, including wealth managers, insurance companies and corporates. And with respect to capabilities, we continue to transform and expand our technology and data infrastructure to align with our clients' needs.

Let me now highlight one area within each of solutions, client segments and capabilities.

Within solutions, MSCI intends to lead all participants in the investment ecosystem in addressing climate change and carbon intensity in their investment portfolios and in their business operations. We believe that addressing the impact of climate change will require the largest reconstruction of the global economy since the Industrial Revolution some 200 years ago.

Institutional investors will need to reallocate their enormous pools of capital to the decarbonizing companies that are on track to keep the world under a 1.5-degree Celsius rise and away from those companies that are moving too slowly or not acting at all. Investors and stakeholders are already exerting influence on companies and management teams to transform their business models to reduce their carbon emissions. Assets will be massively repriced, and we believe the net-zero revolution will produce spectacular winners and some losers. Moreover, this revolution will touch every company in the world. And for that matter, every part of our societies around the world. We believe this transformation will occur much sooner than companies and investors may see coming, and a number of market participants need to act faster and more decisively than they may appreciate. As you can imagine, this presents MSCI with enormous opportunities. We want to be the premier provider of all tools involved in portfolio decisions related to climate.

In the near term, we look ahead to the COP26 conference to be held in Glasgow later this year. And we expect policymakers, regulators, market participants, and various other constituents to push for more extensive climate-related disclosures. MSCI will play its part and will join with the Glasgow Financial Alliance for Net Zero in organizing a net-zero financial service providers alliance. This new alliance will galvanize the world's index and data providers, credit rating agencies, and accounting firms to lay the tracks that can take investors and companies to a net-zero world.

We are fast in reaching our suite of climate products and aggressively investing to provide the market with the climate models and reporting capabilities that can contribute to or even drive developing broader standards. We're also pursuing a multi-asset class coverage strategy within climate, which is beyond public securities. This strategy will include real estate, private equity and private debt.

Within client segments, our spotlight are ongoing success with corporates, where we are providing public and private issuers of capital and their corporate advisors with solutions for TCFD reporting and ESG and climate benchmarking. Our greenfield success in this client segment and in others, such as wealth managers and insurance companies, directly reflects the investments that we have made not only in our product offerings, but also in our client coverage organization.

Our value proposition also remains very strong with asset managers and asset owners, which still represents the largest part of our client base. We are honored to have been selected by the California State Teachers Retirement System to provide their policy benchmark. CalSTRS adopted a custom MSCI All Country World Investable Market Index, displacing its prior domestic benchmark. The primary reason was to simplify their benchmarking process by moving away from a weighted calculation of separate U.S. and non-U.S. exposures. Using 1 index also simplifies performance attribution and better reflects CalSTRS' goal to target and manage active risk.

Within capabilities, I would like to focus on how data is playing a critical role in our vision of revolutionizing the investment industry. Data is the core building block of investment analysis, reporting, another processes and a competitive advantage for MSCI. For many years, we have made use of various technologies like artificial intelligence, machine learning and natural language processing, to harness the power of Big Data. More recently, our investments to develop MSCI Data Explorer and Data Lake aim to address our clients' strong appetite to ingest rich and extensive data in their operations.

Clients want to leverage our data for a variety of use cases, including custom indices, liquidity reporting, factor analysis, among many others. They also want to easily expose, download and manipulate massive volumes of underlying data for MSCI ESG ratings, SFDR metrics and climate models.

Before I turn the call over to Baer and Andy, I would like to take a few moments to note our current views on the global operating environment. We continue to be encouraged by the global economic recovery underway. While markets may oscillate day-to-day, the underlying trend is a positive one. Accordingly, we are aggressively positioned MSCI to take advantage of its many opportunities, and we will continue to increase our level of investment in the Triple-Crown areas we see for our company.

With that, let me pass the floor over to Baer. Baer?

Thank you, Henry, and greetings, everyone. We have quite a number of exciting areas that I could cover here today, but I will focus my comments on 3: One, our technology strategy and within that, our transition from Beon; two, climate where the market's focus and needs are accelerating; and three, data.

On technology, flexibility is paramount, and we are pursuing a modular open platform strategy across MSCI. As part of our enterprise-wide integrated Investment Solutions-as-a-Service or ISaaS offerings, we are moving our analytics products into modular components, integrated through APIs, and delivered through a consistent client experience. This allows us to offer clients access to offerings from across MSCI on a common infrastructure. Given our plans for and progress with this initiative, as we announced earlier this morning, we are discontinuing our investment in Beon.

Beon was originally conceived to consolidate analytics applications and distribute content in a unified way to our clients. With the investment industry increasingly converging around the use of cloud-based technologies for content production, distribution and consumption, we will instead, over time, offer a range of new experiences through the integration of existing and planned ISaaS services.

On climate, as Henry noted, we continue to enrich our suite of climate data models and tools. Our solutions help investors measure their portfolio companies and assets against emissions and temperature alignment goals, minimize transition risks and physical risks, and identify opportunities associated with the decarbonization of their portfolios.

MSCI's climate tools are strongly resonating with clients, and we have seen robust uptake of our climate value at risk solutions, climate change metrics and climate indexes. MSCI's run rate with climate offerings now totals more than $30 million, up nearly 2.5x year-over-year.

We also continue to launch new tools and products to address the quickly evolving landscape. We recently published a quarterly MSCI net-zero tracker. This tool gauges the level of climate change progress in meeting the 1.5-degree warming target. It currently covers the existing universe of public companies comprising the MSCI All Country World Investable Market Index.

Coming soon, we are introducing an implied temperature rise tool, which provides investors with an indication of how companies in their investment portfolios align to global temperature targets. MSCI is also helping address gaps in climate data in private assets. We have been collaborating with our partner, Burgiss, to source Scope 1 and Scope 2 carbon footprint estimates for private companies, and see significant opportunities to serve investors in these markets.

These are all good examples of how MSCI contributes to transparency and standards as investors reallocate capital to lower-carbon assets. Each of these tools is intended to respond to the increasing need for high-quality data sets that clients can access directly or via various tools and applications that MSCI provides or through platforms outside of MSCI.

Henry referenced SFDR, which imposes mandatory ESG disclosure obligations on asset managers and other financial market participants. MSCI has expanded its toolkit of climate data and reporting capabilities to address clients' SFDR-related needs, including issuer-level SFDR metrics for more than 10,000 companies and 175 sovereign issuers. We also provide index-level metrics that enable investors to easily report SFDR indicators for the benchmarks of their financial products.

Given the strong market backdrop and our financial performance year-to-date, we have increased our upturn playbook investments in areas such as ESG and climate, fixed income and private markets as well as to enhance our data and technology capabilities, our research, and our client coverage. As always, we will make these investments in the context of our rigorous Triple-Crown framework.

Let me now turn the call over to Andy. Andy?

Thank you, Baer, and hi, everyone. As Henry and Baer have noted, the exceptional performance in the quarter highlighted the massive strategic opportunities in front of us and our continued ability to execute. We had our best quarter ever for net new recurring subscription sales and have best second quarter on record for recurring subscription sales.

The client coverage footprint investments we've made in targeted subregions are also yielding strong business momentum. In EMEA, we had our best quarter ever for recurring subscription sales, and APAC had its second highest quarter on record for recurring subscription sales.

The operating environment remains constructive, and our sales pipeline remains healthy across products and regions. And we continue to see strong momentum in our key franchises. Index recorded subscription run rate growth of over 11%, marking the 30th consecutive quarter of double-digit growth. We continue to experience steady index subscription run rate growth of around 9% within the asset management client segment, complemented by outsized growth within hedge funds, broker dealers and wealth managers, collectively growing approximately 17%.

In the ESG and climate segment, we witnessed a further acceleration of growth as we continue to broaden adoption and use cases within existing clients, while successfully expanding into new clients with over half of subscription sales in the quarter coming from new clients to ESG and climate.

In all other private assets, run rate and revenue growth both benefited from solid new sales growth and FX tailwinds, and revenue growth also benefited from an elevated level of service deliveries relative to last year. I would note that a portion of our real estate business recognizes revenue upon delivery of service and typically sees more revenue in the first half versus second half of the year. Although the timing of the deliveries can shift between quarters, resulting in some swings in year-over-year revenue growth rates.

Turning to asset-based fees, where revenue grew 55% year-over-year, the strong market rally as well as healthy cash inflows drove record AUM levels with continued strength both in developed markets outside the U.S. and within U.S. exposures. On a product level, ETFs linked to MSCI ESG and climate equity indexes experienced cash inflows of nearly $17 billion during the quarter, continuing to represent the leading market share of global ESG and climate equity ETF flows.

Turning to our balance sheet. We ended the quarter with a cash balance of approximately $1.97 billion after issuing $600 million of notes in May. Our strong balance sheet affords us flexibility to support both organic investments in our business and other capital allocation opportunities. This includes actively pursuing both partnerships and potential acquisitions in key strategic growth areas. It also includes shareholder capital return, including dividends, which continue to grow with adjusted EPS. Yesterday, MSCI's Board approved a 33% increase to our quarterly dividend to $1.04 per share.

As we go forward, I would like to highlight that we continue to monitor the market and may raise additional debt, if we see an attractive opportunity to do so.

Before I turn to guidance, I'll review the impact of the Beon write-down, which was included in amortization of intangible assets. As a reminder, this was a $16 million noncash pretax charge that has been excluded from adjusted EPS. Importantly, it does not impact the opportunities we see for our business nor our high single digit long-term revenue growth target for analytics that we shared with you at our Investor Day in February.

Turning to our guidance. As we mentioned throughout the first half of this year and at Investor Day, our pace of investment may flex up and down based on the trajectory of our asset-based fees and the business more broadly. The strong trajectory year-to-date in equity markets and ETF AUM, exceptional top line growth and ongoing improvement in the macro backdrop give us further confidence to execute on our upturn playbook opportunities and continue to drive growth. Additionally, the strong business performance has led to increases in incentive compensation accruals. We've therefore increased our expense guidance range. We would note, however, that we remain committed to driving positive operating leverage and modest margin expansion.

Our increased interest expense guidance range takes into account our May notes offering of $600 million. And our depreciation and amortization expense guidance reflects the noncash write-off of $16 million from Beon in this quarter, partially offset by the benefit from the removal of projected amortization expense associated with Beon in the second half of 2021.

We reduced our tax rate guidance, taking into account the second quarter and our latest view on a number of discrete items, and we increased our free cash flow guidance primarily to reflect our strong asset-based fees in collections in the first half of the year, as well as lower interest expense, partially offset by higher operating expenses and cash taxes.

In summary, we continue to monitor risks from the pandemic, but are encouraged by the improving economic backdrop. We are pleased with the strong quarter we delivered, the investments we continue to make in our growing franchise, and the many opportunities we see ahead of us.

And with that, operator, please open the line for questions.

(Operator Instructions) Our first question comes from Manav Patnaik with Barclays.

My first question is just on the decision to stop the Beon initiative. I guess, the high single-digit long-term growth rate, I think I can appreciate that stays the same. But I think Beon was supposed to be the difference between that and low double digits in the past. Do you think low double digits is now out of the question for the analytics business? Just curious on the moving pieces there.

Manav, Baer here. So look, no, we -- in fact, I think the path that we're on now is one that is much more likely to lead to stronger results across MSCI as a whole and in analytics. So if you look back in time, before Jigar joined as CTO, we developed applications in a very product-specific environment and in a rather siloed way from a technology point of view. So subsequent to his joining and bringing in various new leadership, we were basically in a position where we were ready to launch Beon.

But in parallel, we had created or are in the process of creating a much more industry standard, MSCI standard common architecture and infrastructure that will be used, for example, in launching our index builder and that will be used for our new ESG manager.

So we're going to use that common infrastructure for analytics. It's less idiosyncratic. It is much more industry standard. And it's much more one MSCI. And we're very confident that in doing so, we can create a great user experience for our clients going forward, and that the opportunities for analytics will be the same or greater than we had previously assumed.

Okay. And just a quick follow-up on the climate business you talked about, I mean, obviously, some pretty good growth, and I can understand the focus given all the press out there. But do you have the tool set to keep that growth going? Or is that where maybe partnerships and M&A will play a role as well?

Well, look, partnerships and M&A certainly play a role in everything we do, but our organic investments are the absolutely key thing here. We really believe that we have a lot of the right data, infrastructure and talent to make this happen. We -- as you know, we had made an acquisition in the climate field roughly, again, 18 months ago. I can be corrected. Time flies. But on top of that, the key thing we want to do is to invest in our people, in our models, in our data coverage. And we believe, if we do so, we have a very attractive opportunity ahead in this category.

Our next question comes from Alex Kramm with UBS.

I want to ask a question that I think I asked maybe last quarter already, but definitely have asked in the past, which is the impact of new regulations having on ESG and climate growth. When I've asked you previously, you've kind of said that new regs like SFDR is not having an impact on new sales, et cetera. But clearly, you started talking about it a little bit more.

So I guess my question is, are regulations helping? And if they're not helping yet, do you expect that, that could drive maybe acceleration from these high growth rates in the future? When we talk to some of your competitors, they're definitely acknowledging that regulation is a game changer. So maybe you can comment on that.

Yes. Sure, Alex. So look, maybe we understated it somewhat in the past or maybe it was a point of emphasis. But look, you're absolutely right. And by the way, this is changing rapidly, right? So I don't know when we last made that statement, that it's a rapidly changing environment. And for sure, the regulatory demands are driving increasing amounts of uptake for transparency from corporations. We're reporting from banks and risk management from banks, from reporting from asset managers. So we definitely think that this is an area that is going to drive a lot of growth for us. And it's both -- I would say, it's an exciting opportunity because it brings together both the new information, the new models, the new data that we have in climate. But as you know, we have been in the regulatory risk reporting and other reporting for many years.

So I think it's a really great opportunity for us to bring together our traditional risk management capabilities with the new climate emphasis, which plays to both of those strengths.

Okay. Thanks for acknowledging it finally, I guess. Secondarily, just as a quick one, but you highlighted the CalSTRS win, and maybe that's small or not. But like on the one hand, good that you're replacing some of -- some competitors, I guess. But I'm curious, is there a network effect or something like this? And I don't know how much CalSTRS outsources investments. But does somebody like a CalSTRS switching their, I guess, primary benchmark now drive incremental sales for maybe some of the asset managers that are trying to sell to them? Or is this kind of like one-off and doesn't really have a network effect? Maybe you could flesh it out a little bit.

It definitely has a fairly large network effect, and that's one of the reasons why we focus so much energy on this benchmark wins, as we call them, or benchmark displacements. And there is a little bit of revenue associated with the asset owner when they do this. But much more importantly to us is all the investment products that come out of that by either the active or the passive managers, ETFs, futures and options, et cetera.

So in the case of CalSTRS itself, they -- as you know, they're the second largest pension fund in the United States, largest teachers' pension fund in the world, 11th largest pension fund in the world as well. And they run about $175-or-so billion -- I'm sorry, $150 billion of assets under management in equities out of a total of over $300 billion of assets. And of that $150 billion, we were already benchmarked internationally on half of that. The other half of about $75 billion is now coming to an MSCI benchmark, displacing a domestic benchmark. And a lot of that money will be managed passively by asset manager, by index managers, and therefore, it will have a direct effect to our revenues in asset-based fees, right?

Right. But this is a custom index, right? So I guess, it's new custom sales coming out of that. That was my point, right?

Yes, yes. Obviously, the direct revenues from the creation of a custom index is there, but the monetization of this is largely at the asset manager level, not on the asset owner level. But whether it's a standard benchmark off the shelf or a custom benchmark or a thematic benchmark or an ESG benchmark, the concept that I just described applies across the board.

Our next question comes from Toni Kaplan with Morgan Stanley.

Your cash balance is up to roughly $2 billion. And historically, you've been opportunistic with repurchases. And, I guess, there haven't been too many opportunities to repurchase stock. So that probably led to the 33% dividend increase. So just help us understand, just given the large cash balance, just update us on your capital deployment priorities. And if you were to look at M&A, would it be sort of more tuck-in and what type of assets you'd be looking at?

Sure. It's Andy. I would say no major change to our approach to capital allocation more broadly. We continue to pay a regular dividend, which generates a steady return of capital. And then we use the balance of excess cash for opportunistic share repurchases and opportunistic MP&A.

On the share repurchase front, as you know, we really factor in 3 components. One is, firstly, volatility in the shares. Secondly is value in the shares. And thirdly is availability of cash. And so we continue to use that discipline around the pace at which we repurchase our shares.

On the MP&A question, I would say we continue to be active in pursuing both acquisitions and partnerships. And our focus is really intensely on strategic growth areas for the firm. And so it's the areas you've heard us talk about in areas like real estate, private equity, ESG and climate, as well as in areas like fixed income. And within those categories, generally looking at assets that have unique and proprietary data as well as analytics and workflow software applications. And so no major changes.

I'd say, generally, we're focused on -- we call them strategic accelerators, which you might call bolt-ons, but it's acquisitions that are going to further our kind of current strategic endeavors, not be transformative-type acquisitions.

Great. Also wanted to ask about your fee rate on the ETF business moved down a little bit over the past few quarters -- 2 quarters. Is this a matter of more funds hitting the caps or is it the U.S. mix element? Or just any other factors that would explain that?

Yes. Toni, it's really, I think, the complex equation, I would say, that the decline in bps this quarter was really a combination of both mix shift and fee changes. And the mix shift equation is quite dynamic. To your point, there's geographical factors that can drive moves either up or down. There can be product area shifts. So if there are big disproportionate shifts into ESG and factor in certain areas that can also influence the overall rate. And then as you said, it can be just a broader blend of products that do have a varied range of fees.

And then the fee changes sometimes can be just -- and usually is the case, it's contractual changes that can adjust based on AUM levels. And sometimes, our partners are adjusting fees to just better position products in the market. So I'd say all of those considerations factored into the move this quarter.

Our next question comes from Owen Lau with Oppenheimer.

So at the Investor Day, MSCI estimated that TAM of ESG is about $3.9 billion. So given the recent trend in ESG and client mix, do you think the TAM has expanded, especially when we start talking about climate being somehow separate from ESG? And also please remind us how MSCI estimate the TAM?

It certainly is increasing and increasing rapidly. As we have seen in the last 18 months, there's been a huge embrace of ESG investing in the world, and some of the evidence of that have been the performance of the ETFs that are linked to MSCI ESG indices as one example, but you could see that in institutional passive and active management, et cetera. And therefore, the addressable market of ESG investing is going to continue to increase.

And people ask us all the time, how far? Well, I think ultimately, there won't be any such thing as ESG investing. Every investment decision that is made needs to be taking ESG into account. So the addressable market will be the entire global investing process.

With respect to climate, it's the same, and it could be even bigger than ESG. ESG, clearly, is very important to the world, but climate is an existential threat to the world and it needs to be solved in the next 20, 30 years and a lot of solving needs to be front-ended, because as we know markets are discounting mechanisms, and they're going to start and they have already started discounting carbonizing companies and penalizing them, and putting more money into green technology, clean energy and less carbonizing companies.

So the market, the TAM for climate tools is going to be the same. Every investment needs to take climate emissions into account; every company that you invest in, private, public; every real estate investment that you make, especially in real estate in coastal cities; every bond; everything. So I think the addressable market is extremely large.

Now in terms of we, at MSCI, will spend a great deal of time trying to measure and report on that time and the sort of the comments and goings of that. We don't think it's a very useful exercise. It's just huge, and we're just at the early, early stages of penetration of all of that.

Yes. Just to put a finer point on that, Owen, to your question about how we came up with the TAM that you referenced, it very much was what I like to call a tangible addressable market. So as looking at each client type and then cohorts within those client types, what are they willing to pay for the products that we have today based on the largest sales that we can generate with each of those client categories. And then we extrapolate to, if we were able to sell to each of the clients in those cohorts, how big would that be.

To Henry's point, what that misses is new use cases, new client types and new products that we continue to issue in climate scenario, given how new it is, where we're just not even starting to gauge how big the opportunity can be within -- in any single client and then ultimately across all the potential products that we can issue.

Got it. That's very, very helpful. A quick follow-up on the cryptocurrency index. Could you please talk about MSCI's interest in relaunching any cryptocurrency impacts? Do you think MSCI (inaudible)

Yes. Very good question. Let me just start by saying that we, at MSCI, as you all know, are at the nexus, at the leading edge of the investment process between asset owners, managers and financial intermediaries. And therefore, a lot of our clients always come to us first with new ideas, new concepts that are not even beginning to be invested in. So we are always exploring every single type of opportunity about enhancing our tools and our investment products and services for taking clients to that leading edge of investing.

Examples are obviously thematic investing. And obviously, with where we're talking about emerging market investments over the decades and all of that. So cryptocurrency is one example of that. That we've had a number of institutional clients come to us and say, tell us more about this? How could I make an investment in this? What are the potential implications of this to climate, for example? I mean, there is a lot of carbon emission associated with the mining of cryptocurrencies. What is the disruption associated with the underlying blockchain technology? And who are the winners and losers? Et cetera. So it's a broader sort of universe and ecosystem that's just cryptocurrency.

So we are evaluating all of that, analyzing that. We're talking to a lot of experts. We're looking for partnerships with some of those experts in order to then launch a variety of models and data and indices per se as well, and more to come over the next few months about all that.

Our next question comes from Simon Clinch with Atlantic Equities.

I'd love to follow-up on the climate business as well. Could you remind me, in terms of the split of how -- of your customers of the ESG and the climate side, between the providers of capital, financial intermediaries and uses of capital, what is the actual split there?

And on the corporate side in particular, where I think companies are really sort of only now just starting to get the grips with collecting the data for climate and reporting it, how -- what is your -- I think the right word is market share. But in terms of how many of those companies do you actually touch that are actually delivering and already reporting that kind of information?

Yes. So Simon, I don't have all of the data in front of me, but we take the picture and then we can flex that out further. So the main historic relationship is between the asset managers and the asset owners that we play. And the -- that is both the adoption of information and benchmarks to create portfolios. And I would say that the -- roughly the balance of revenues between the asset owners and the asset managers is roughly the same. And (inaudible) new opportunities...

Let me -- Baer, let me interrupt you, if you don't mind, because your call is -- your line is broken. If you want to dial back in and let me answer the question while you do that.

So the first thing to recognize is that the climate tools apply to everyone: asset owners, managers, banks and obviously, corporates and the like. So we are present across the entire spectrum.

So the -- it starts, obviously, with helping the asset owner, the pension fund, the endowment, the foundation, the sovereign wealth fund, understand how are they going to decarbonize their portfolios. And therefore, we do a lot of work, a lot of research as to how -- what do they intend to do there. And especially, what kind of policy benchmarks they need to have that are going to measure the impact of that.

So that is a benchmark win, similarly to what we talked about in the context of the CalSTRS transition, but -- not in climate, but in terms of in general. And it doesn't generate a significant amount of revenue at that point. But then, that benchmark then gets into operation by the asset owner looking for the asset managers that are going to run portfolios according to this Paris aligned, for example, climate indices and the like. And therefore, that's the way we're monetizing that.

So a great deal of revenues, currently, the majority -- large majority of our revenue come from asset managers that are helping the asset owners run climate-aligned portfolios. In the last couple of years, there's been -- particularly the last 18 months, we've had a rapidly growing presence with banks in which a lot of the banks are incorporating climate into their capital markets in terms of green bonds, for example, and IPOs and all of that. They're also creating a variety of investment vehicles like swaps and options and all of that. And clearly, they are incorporating climate into their equity research area.

So in summary, right now, the majority of the revenue asset managers, probably second best -- second number is banks and growing rapidly. And then thirdly is the asset owner. But the importance of the asset owner is way beyond the revenue because they're the one that started the food chain in imposing this.

We also have an increasing amount of revenue coming from corporates because we're helping corporates understand their carbon footprint, how is it that they need to disclose their own carbon data, how is it that they can measure their temperature alignment and the like.

And just to give you some figures on that. Of the $30 million of climate run rate that Baer mentioned earlier, about $9-and-change million is coming from asset-based fees, which is, by its nature, almost entirely asset managers. And then of the balance, the subscription portion, as Henry said, it is the largest -- the majority of that is coming from asset managers as well.

Okay. Great. That's very useful. And if I might just fit in just one question. Just quickly on retention rates overall. I'm just wondering, is there anything -- any changes or any dynamics going on in the market that's causing a bit more volatility in, say, the analytics retention rate that you've seen?

Yes. I'd say no notable changes this quarter. As we've said in the past, analytics will tend to be a little bit lumpier where we, in certain periods, may have large cancellations and it can bounce around. I'd say there were no client segment specific indicators of note within analytics or across any of the other segments here.

Our next question comes from Ashish Sabadra with RBC Capital.

Congrats on a solid quarter. I had 2 questions on ESG. I'll ask them both upfront. First one is just on the competitive environment on ESG. Obviously, you have S&P with acquisition of IHS Markit increasing their presence there, but also there's just a lot more consolidation happening in the space. So how do you expect that competitive environment to evolve as we -- going forward? So that's one.

And second is there was -- the global regulator, IOSCO, is looking to regulate the ESG rating providers, And do you expect that to -- or do you expect that to have any influence on the market going forward? And how does that help MSCI acquisition much better?

Yes. So our ESG offering, in terms of competitive positioning, is extremely advantageous because it's across the whole spectrum. We are the only provider of ESG tools that goes from ESG screening, ESG ratings, ESG indices, incorporation of ESG into factor models. We're doing all of that across the equity spectrum. We have significantly expanded our capabilities in the whole fixed income sector as well for ESG, especially in the partnership with Bloomberg and Barclays for us -- for index funds and the like. So quite a broad category.

And in terms of competition, a lot of the competition that we have is in the various sectors. So there are certain competitors in the screening part, there are other competitors on ratings, and the like. We are the largest provider, by far, of ESG indices, both equity and fixed income. So there is competition, but not as much compared to the screening part, for example. And we are among a few, if not the only one, that is incorporating ESG as a factor and risk model and ESG in analytics reporting for portfolios.

So we believe that the summation of all of this and the availability of all these tools is going to make us win over the competition over time. Clearly, there will be more competitors coming our way. But we believe that given our leadership and given our completeness of the product line, that will be an advantage to us.

The regulation is coming. There are a lot of securities commissioned around the world that are trying to see what gets included in terms of ESG in some of these indices and especially in the investment products. So I think there's direct regulation and indirect regulation. It will -- it has started with indirect regulation, meaning the clients that we license our indices to are being regulated, have been regulated. So they need to report certain things, and we need to help them with that. And then there may be direct regulation of the index providers or the ESG rating entities.

Regulation is always a winner for us because it shrinks the number of competitors in the market because we have the ability to deal with the regulation and scale up our business dramatically, create efficiencies in doing that. So that is something that we don't necessarily ask for or push for it. But when it comes, it's a competitive advantage for us.

Our next question comes from Craig Huber with Huber Research Partners.

My first question, can you just touch on further the futures and options area and the opportunity there you see going forward here? And maybe touch on maybe some more partnerships with some of the exchanges out there globally? And I have a follow-up.

Yes. So this is an area that we are extremely focused on growing and building. It's a lot of white space. As you know, listed index futures and options around the world are largely domestic, meaning country exposures. And in the cases that, that is multi-country exposure, they're single currency, like in the Eurozone with the euro. So we are developing with our partners the exchanges the market for multi-country, multi-currency index futures and options and have been added for a bit of time.

We have been very successful in futures, as we reported in the past. We are looking to expand that in not only -- continue with the market cap indices in equities, but with ESG indices, for example, climate change indices, and so on and so forth.

The area that we're now very focused on, which is because it's very small and incipient, is listed options. The market for the multi-country multi-currency-listed, index-listed options is very, very small. We think it can be a huge market. We're taking steps to strengthen our partnerships in developing that, especially in the U.S.

As you have noticed this quarter, index futures and options and the licensing fees that we generate from that are definitely countercyclical to the AUM levels, and that is one area that we're focused on because we -- as the AUM -- if you have a bull market and the AUM goes up dramatically in the ETF and index -- other index products, there may be a lot less volatility, and therefore, a lot lower volume in these areas. But the other way around is also going to happen when you have a bearish markets or highly volatile markets, we will be making a lot more money in derivatives compared to the cash products.

So that's something that we're doing it not only because it's a great growth area and revenue, but also in order to diversify this great all-weather franchise that we have at MSCI.

And Craig, one point to keep in mind there, as Henry alluded to, volumes have been light given the low volatility in the market generally. But one very encouraging trend for us is the continued growth in open interest in futures contracts based on our indexes, which is up 50% year-over-year. So we continue to see kind of healthy adoption and use of the products despite the lower volatility.

I appreciate that. My other quick question, if I could ask, on your hedge fund business. Can we just touch on that how well that's doing? How do you feel about the health of that market? And are they adopting your products?

Yes. So I would say that there is not a fundamental change from previous quarters. There's been nothing that has changed dramatically since we last spoke. It's -- there's been -- I would say, we have good growth in index. It's a little more patchy -- and good growth in ESG. There's not really been a change in the environment as it relates to analytics. So I think the main headline is no dramatic change since the last time we spoke.

Our next question comes from Keith Housum with Northcoast Research.

A question for you on the upturn playbook and the investments in the business. I guess, just remind us there, how quickly can you guys turn up and turn down those investments? And are these investments more on people, or is it in technology? How should we think about that over the next several quarters?

Sure. Yes. So there typically is a little bit of a lag, especially when the driver of the upturn is asset-based fees, which can move up quite significantly in a short period of time. And while we can bring in some expenses, namely some non-comp expenses, the comp expenses take some time to ramp up here. And so we are, as you know, going to actively our upturn playbook now. As we've said in the past, the asset-based fees continue to grow at a very rapid growth rate, and the broader business health continues to be quite strong. And so that's the driver of our guidance going up where we are turning to the upturn here, and it's investing both in people and key areas as well as technology and other non-comp areas.

I would highlight 2 other factors that relate to the all-weather franchise that we have. One is around compensation, where just based on the better business performance that we're seeing relative to where we started the year, compensation accruals naturally go up. I would highlight that the opposite happens when we enter a challenging period. And so that's a kind of nice all-weather franchise hedge.

And similarly, on the FX side. So we have seen some FX headwinds on the expense side as the dollar has depreciated against several currencies. And so that's put some pressure on the year-to-date expenses as well as factored into the guidance. And that's something that also moves in the opposite direction sometimes. The nice thing about that is we get an offset on the revenue side. So we have benefited a bit on the revenue side from the U.S. dollar depreciation.

If I can spend just a minute highlighting where the investments are going, these are really around the key growth areas of the firm. So we are very much sticking to our Triple-Crown framework and putting the incremental dollars to those areas that are going to drive growth for us. So an index, it's areas like the new index platform, innovative new index, product development. In ESG, significant investments, which you can see just based on the ESG expense growth rate, where we are using some of this improved business performance to really double down in ESG. So we're investing in areas like data sourcing and data quality as well, as Baer alluded to earlier, our new ESG platform, ESG manager platform, and then go to market on the sales side. And then more generally, in the technology area, continuing to invest in our cloud migration in areas like DevOps. So it's similar messages to what we've delivered in the past, just we're enacting that right now to a higher extent.

Great. And just a follow-up question, if I may. Assuming that businesses do come back in line and employees come back to work, how does that affect your business? Is there anything you weren't able to do over the past year because customers weren't there or you guys weren't in the office, that perhaps gives you a new opportunity assuming we go back -- people go back to work before the end of the year?

Yes. So the impact that we had last year, for example, in the lockdown was in the large enterprise analytics deals that require a fairly large coordination in the client organization between the C level and the mid levels and the more junior levels. So a lot of that dried up for us. It's gradually returning, but it's not at the level that we have seen it in the past. So that will be a benefit as people come back to the office.

Overall, in general, we have done exceptionally well in a virtual world. In general, our clients are being very receptive. We've been -- except for the large enterprise deals, and the implementation of those deals, by the way, the implementation fees, which we normally recognize when we're putting all of that. Once the sale is done, when we put all of that to work, that has slowed down significantly. So the 2 areas that just to summarize that we were hurt were the large sales in enterprise analytics and the implementation, and therefore, the recognition of those fees.

But in general, after that, we've been very effective at communicating with clients, relating to clients, and internally, the productivity levels of our people working virtually has gone through the roof. It's been quite a great experience in the context of a horrible pandemic with a lot of loss of lives and disruption in people's lives and employment.

Our next question is a follow-up from Alex Kramm with UBS.

Sorry for dragging out the call. Just a couple of quick follow-ups. One, Andy, you talked about preserving operating leverage and margin expansion. So can you just remind us, when you think longer term, do you actually have a range in terms of margin expansion that you think about? I know you've laid out subscription growth and EBITDA cost growth, but like where does that arrive in terms of margin expansion on an annual basis?

Yes. And it's a very dynamic equation. So we have not been prescriptive about targeted operating leverage or margin expansion. There are going to be periods, like we've seen in the last couple of quarters, where ABF just runs up significantly, and we can't adjust our pace of investment to keep up with it, and you'll see the margin go up. Similarly, there will likely be periods at some point where the market goes in the opposite direction, and we continue to invest. And we might see at times the margin go down in periods. But our longer-term objective is to drive that positive operating leverage. And as we've said, it's going to be at a more modest pace than what we've seen in the future. Our core focus here is driving long-term growth. And to do that, we want to continue to invest at a healthy rate.

So not willing to put numbers around what modest means from a long-term perspective? Am I getting it right?

Yes. You've seen our long-term targets and what we've said on the expense side. And yes, I haven't been more prescriptive than that.

Fair. And then just one quick follow-up to the competition question on ESG and climate, maybe particularly on climate. And not to single out one firm in particular, but I know you have a big relationship with BlackRock in a lot of areas. And I think they are also talking a lot about climate and when it relates to the Aladdin products, et cetera. Like is that more of a partnership? Or are you viewing them as a competitor when it comes to these climate opportunities and climate modeling?

So it's the same as the overall relationship with BlackRock, which is, on one hand, we're strong partners in index and all the tools, all the climate tools and models and all of that, that go into construction of indices. On the other hand, clearly, their analytics business competes with our analytics business, and embedded in there are a number of models and tools and analytics and reporting and all of that. So that is obviously a bit more competitive.

But having said that, one of the things to emphasize is MSCI is an open architecture company. And therefore, all of our content is available in any platform that wants to work with us, even if those platforms are in competition with our own software platforms. So in that vein, we have a number of collaborations and partnership with BlackRock in their analytics Aladdin business in terms of putting a lot of our content, ESG content, climate content and climate models and all of that, in their platform. So there is an element of partnership there as well in the context of the competition on the overall workflow software and platforms.

There are no further questions. I'd like to turn the call back over to Henry Fernandez, CEO and Chairman, for closing remarks.

Well, thank you for joining us today. As you have heard, we have enormous opportunities in front of us at MSCI. Therefore, we're stepping up our pace of investing, and at the same time, obviously, try to achieve some modest margin expansion. We like the revenue growth that we've achieved and the performance, and we're going to like it even more if we invest more to achieve even higher levels of revenue growth. So we look forward to speaking with you further. In the meantime, please enjoy your summer, and stay safe.

This concludes the conference. You may now disconnect. Everyone, have a great day.