If You’re a Tech Stock, ESG Matters More Than You Might Think

Written By Elizabeth Saunders, Partner

November 28, 2018

Fast-growing technology companies often believe that their rapid, impressive growth is the only thing that matters when it comes to valuation. Leaders in these companies are so busy generating bottom-line results in an industry that moves at a lightning-fast clip that they often don’t have the time or bandwidth to devote to ESG. And, they often believe, nobody will care.

But, that’s where they’re wrong. True, churning out code doesn’t have nearly the impact on the environment that, say, manufacturing automobiles does. But tech companies still have very real societal and governance issues that make them susceptible to low ESG scores. They need to be thinking and talking about these factors. Because if they don’t, someone else will.

Tech companies are notoriously bad disclosers.
MSCI, one of the top ESG rating firms, recently stated that, on average, 65% of a company’s rating is driven by data sources beyond voluntary disclosure. In other words, much of what is measured by ESG raters does not come from the company in a voluntary way. Instead, it’s gathered from other sources. And those sources are often incorrect.

Technology companies – particularly those in fast growth mode, tend to have the weakest disclosures on ESG factors simply because they don’t have well developed internal teams to manage and report on these issues. And, they are notoriously weak in a few key areas – employee and board diversification, cybersecurity operating controls, and general areas of human capital. Others are just weak in the communications surrounding these areas, even though they often are doing the right things, just not talking about them.

Lack of diversity can be viewed as discrimination.
One area of ESG where tech companies tend to be hit harder than most is diversity—or the lack of it, specifically at the senior management and engineering levels. Pay parity is a big area for scrutiny, too, and it can be a delicate topic, especially for companies that have far flung operations where the standards can be quite different. If the Board or senior management teams are not diverse – either by gender or by race, a Nominating Committee and/or Governance Committee can adopt forward looking targets and principles to close the gap.

Customers are trusting you with their data, and you have a responsibility to take security seriously.
Several high-profile attacks and breaches have brought the issue of cybersecurity to the forefront of investors’ minds, and cybersecurity is rapidly moving up the agenda for institutional investors and their money managers as a responsible investment consideration. Cybersecurity is an ESG issue because it raises ethical and human rights concerns about data privacy and data security, such as who has control or ownership of personal data and whether consent has been sought and gained on the use of that data. Cybersecurity practices also have a direct impact on customer relations and their trust in and loyalty to your business.

Tech companies need to pay more attention to this ESG factor than most simply because they have the most customer data. Consider companies like Facebook and Google for example. Customers are trusting them with an enormous amount of personal data, and how those companies handle that data can greatly affect their customers’ financial well-being and privacy. The onus is on the tech companies to take the initiative, and the standard is much higher simply based on how much is at stake.

Human capital is a risk you need to address.
ISS Ratings Services calls human capital the number one source of risk. ESG rating companies have established the fact that strong human capital practices translate into greater productivity and growth because the more a company invests in engaging and taking care of its people, the more it can expect from those people in return.

Tech companies in particular rely heavily on their people. They also tend to have lots of employees spread out across multiple countries where the standards for employee treatment and benefits can be quite disparate. This makes it all the more important to address human capital issues head on.

Training, in particular, is critical. And this applies not only to the people who write code, but also to the customer service and support staff. Research shows that those who train experience higher average productivity growth than those who refrain. Training not only provides a way to share best practices with employees, it also opens up the door for feedback to travel in the other direction: Employees can share their experiences and insight into how processes can be improved, and they feel much more engaged as a result, ultimately maximizing their contributions to your company’s success.

The time to start talking is now.
In today’s invest environment with increasingly more money flowing into ESG type strategies (read our ESG Myths Debunked post  to learn more), all companies, even the fastest-growing tech firms, need to pay attention to more than financial results. First, you need to embrace the seriousness of issues like employee engagement, diversity, and cybersecurity and start putting time, thought, and resources behind them. Then, you need to proactively communicate what you’re doing. And that’s where Clermont Partners can help. To learn more about crafting an ESG communications strategy that highlights your ESG vision, priorities, and efforts in a way that resonates with your investors, contact us today.

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