This analysis is by Bloomberg Intelligence Senior Industry Analyst Paul Gulberg and Bloomberg Intelligence Senior Associate Analyst Ethan L. Kaye. It appeared first on the Bloomberg Terminal.
Exchanges including ICE, CME, Deutsche Boerse and Nasdaq could see meaningful ESG product revenue over time, though the cycle may be transitioning from accelerated early adoption to a more sustainable — but still elevated — trajectory. Index providers’ opportunity is aided by the SEC’s climate plan, which could support growth well into the double digits. Data services, reporting and clearing are incremental.
Buyside spending plans drive ESG data demand
Spending on ESG products looks to remain a priority for buyside firms, driven largely by disclosure requirements and corporate initiatives, though the rate of increase may begin to taper. Demand should benefit operators, such as exchanges, that have access to relevant and proprietary data sets and analytics tools. More than 50% of respondents to an Aite Group study indicated their intention to spend more on ESG data, analytics and ratings products over the next 12-18 months, with global outlays potentially rising 28% to $937 million in 2023.
Aite Group’s projections suggest the ESG spending ramp-up may slow after this year, with 24% growth in 2024 and 19% in 2025. Still, this represents among the fastest-growing segments for providers.
Early demand for ESG derivatives holds
CME Group, Eurex (Deutsche Boerse), Nasdaq and Intercontinental Exchange are leading the innovation in ESG futures and options. Though the contracts are nascent and have yet to become meaningful contributors to exchanges’ volume and revenue, uptake in ESG-related assets and investor demand for derivatives offer a product-development opportunity. More recently, demand has flattened, with open interest challenged to expand since 2021. As liquidity grows amid a focus on several new contracts, early movers may have a competitive advantage. Regulation and industry standardization could accelerate the adoption of ESG derivatives.
BI research shows over $500 billion in ESG exchange-traded funds and related assets.
Index popularity leads ESG growth
Robust growth in ESG indexes provides exchanges with a two-pronged revenue opportunity. Internal and external ESG index growth may drive more gains in related ETFs and derivative products. Internal index generation can feed data revenue. ESG indexes have experienced the most rapid gains, at 55% in 2022 per a study from the Index Industry Association. MSCI, which generates a revenue run rate of $453 million from ESG, climate indexes and related research revenue anticipates mid- to high-20% annual growth in the area, though expansion looks to have peaked in 2022.
Improved disclosures could be index opportunity
Standardized and expanded company disclosures around ESG practices, via the SEC’s proposed climate plan, could accelerate the pace of global ESG indexing revenue growth. Additional reporting requirements, particularly for emissions, should enable index providers to capture a greater share of the market by creating more informed and robust products. This would fuel the already fast-growing ESG index segment, which is leading other index categories per a 2022 Burton-Taylor report, at roughly 30% annually over the past five years.
The report suggests that these products are gaining traction from asset owners, with nearly 60% of respondents saying ESG has become more important to their investment strategy, and only 4% not actively using or not considering using these products in their strategy, down from 24% in 2021.
Broad-reaching sustainable stock exchanges initiative
The Sustainable Stock Exchanges (SSE) initiative recorded continued ESG adoption, with a larger number of exchanges focused on the asset class as well as resources and platforms. However, we note more a marginal expansion in our most recent observation vs. prior periods. SSE looks at a wide range of factors, including boardroom diversity, regulations, reporting, climate action and sustainable partnerships. We believe the growth highlights investor demand for ESG products and exchanges’ commitment to related analytics tools, as well as their self-regulatory power that can encourage company reporting.
SSE partnered with 130 exchanges, listing more than 62,000 companies. Over a decade, the network grew from several founding partners to covering over 90% of global exchanges.
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