ESG risk scores for TMT companies and investors

Companies are working hard on environmental, social, and governance (ESG) issues: It’s the right thing to do; it can act as a core growth driver; and it’s also increasingly important to investors.

Funds invested according to ESG guidelines have doubled in 2021, growing three times faster than non-ESG assets.¹ They are predicted to grow to US$53 trillion by 2025, or almost 40% of all investments globally.² But investors are focusing more on environmental considerations than social: According to a 2020 survey of CFA Institute members, more were taking environmental risk into account for investment analysis or decisions than social, and that percentage was rising faster compared to a similar survey in 2017.³

There are many groups that provide ESG risk scores for investors, and one is S&P Global. Its 2019 ESG Risk Atlas and industry report cards shows that the TMT industry should focus on social risks even more than on environmental risks. Although the Risk Atlas is from 2019, industry-level risks have not altered materially since then. Governance tends to be company specific, not industry-wide, so S&P Global only does industry scoring on the first two parts of ESG.⁴ Four TMT subsectors were scored by S&P (see figure). The figure also shows six other industries for context.⁵

S&P Global’s environmental risks include greenhouse gas emissions; sensitivity to extreme weather events; sensitivity to water scarcity; waste, pollution, and toxicity; and land use and biodiversity.

TMT companies have improved their environmental risks recently. Hyperscale cloud companies are focusing on decarbonization, chip companies are designing semiconductor fabs that are more energy efficient and use less water, tech devices at the end of their lives are increasingly being recycled, and media companies are reducing the carbon footprint of video streaming. The industries’ efforts around reducing environmental risks are paying off: A 2021 academic study on the sector showed that tech and telecom companies are much more efficient in their power use than is generally believed.⁶

They have more to do, but given the relative size of social scores, TMT companies should think about how to do even better on social risks too. Their social risks include human capital management, changing consumer or user preference, demographic changes, safety management, and social cohesion.

According to S&P Global, social factors present a host of risks for TMT industry subsectors.

• Tech software and service: Social risks include privacy and data security concerns, but also risk of increased regulation, and lack of gender equality and diversity in the workforce.⁷
• Hardware and semiconductors: Social risks are led by concerns over labor practices, but the industry’s supply chain is another source of risk, as it relies on resources mined in geopolitically unstable areas, and the concentration of manufacturing in East Asia exposes it to risk from geopolitical concerns and trade disputes.⁸
• Media: Social risks are data privacy and security, regulation, social media activism, IP theft, and key person risk (media companies often rely on a single star actor, singer, or director).⁹
• Telecoms: Social risks tend to come from demographic trends, but also include fears of overuse, misinformation, data security and network reliability, as well as issues around labor forces.¹⁰

Implications for executives to consider

• Take it piecemeal and start now: Some social risk scores are relatively harder for an industry to improve on, but others are easier. Every improvement helps reduce risk: For example, the semiconductor industry is already working on improving its supply chain and localizing manufacturing to reduce geographic concentration risks.
• Diversity will move the needle: More diverse workforces and/or having more diverse content can be some of the fastest and most controllable levers TMT can use to reduce risk scores.
• Winning the war for talent: Every industry is struggling to attract and retain the right talent. Reducing social (and environmental) risks make industries and companies more attractive to employees, especially those critical younger employees, for whom ESG issues matter more than the average worker.¹¹
• You should do both at the same time: Although social risk scores for the industry are as large or larger than environmental risk scores, companies don’t need to choose one or the other. Investors, stakeholders, shareholders, regulators, and journalists all pay attention—perhaps even more attention—to environmental issues and risks. Improving social risk scores cannot come at the cost of a reduced focus on the environment.