Moody’s to many is an unknown brand but indirectly the company has touched each of their lives. Moody’s is one of the two leading global credit-rating agencies. Moody’s rates government, corporate and structured debt, which improves access to debt for these participants; that is, governments’ ability to fund budget deficits and the ability of banks to gain access to wholesale funding is aided by Moody’s issuing credit ratings. In addition, Moody’s has a strong data and analytics business.
Moody’s is a holding in the MFG Core ESG fund, and here’s why:
We view Moody’s as a high-quality business with a wide moat. Moody’s is one of two leading rating companies in an oligopolistic ratings industry. The key moat drivers are network effects, brand and economies of scale. The strength of Moody’s moat and proactive management we believe shields them from disruption. Moody’s ratings are embedded in tens of thousands of financial products globally, which are invested in by asset owners (including governments), often are an investment requirement and the Moody’s ratings scale is trusted and well understood.
ESG risk assessment
Like all companies, Moody’s has business and ESG risks that we assess and actively monitor in our investment process. At Magellan, we assess an array of ESG risks for what they might mean for cash flows and valuations.
- Environment: Environmental risks are not material for Moody’s. In saying that, however, Moody’s has worked to become carbon neutral, is powered by 100% renewable energy and is working to offset prior carbon emissions. In addition, Moody’s offers ‘green bond’ ratings (to help raise capital with environmental goals) and has an ESG research offering.
- Social: Given the exposure to governance risks discussed below, Moody’s seeks to foster its staff’s development. The intention is to create a positive working environment that reduces the likelihood of unethical behaviour. Moody’s has training, incentives and benefits to help develop employees.
- Governance: Moody’s has material exposure to two key governance issues: financial-system stability (Moody’s ratings are used to assess the risk of corporate, structured and government debt); and corruption (the issuer-pays ratings model leaves Moody’s vulnerable to bad actors). While we agree Moody’s is highly exposed to these issues, Moody’s management is aware of the risks and has in place policies and operating structures to significantly reduce the likelihood of such behaviour.
Moody’s is a capital-light business that has sustainable and growing revenues, strong margins and returns.
Risk assessment and continuous monitoring
We monitor Moody’s and the rating industry for key risks that may lead to its exclusion from our investable universe and for events that may lead to a change in view on business quality. Specific risks we monitor for Moody’s include changes to the regulatory and political environments, debt levels, litigation risks and active discussions on governance.