Ethics in tech has never been as important to investors nor as visible now that AI is enabling forensic analysis of big data. With companies with improving ESG now outperforming the market according to MSCI (the global provider of research based indexes and analytics) and Hermes Investment – by 5.2% in developed markets and by 14.4% in emerging – a companies’ social behaviour and performance is now directly linked to its financial value and investor attractiveness.
However, the high growth, young tech disruptors often do not meet traditional ESG standards and score quite poorly on governance factors.
ESG investing is now estimated at around a quarter of all professionally managed assets around the world and continues to grow rapidly. This is because many investors recognise that ESG information about corporations as vital to understand corporate purpose, strategy and management quality of companies.
With most businesses struggling with how to adapt to the new environment that favours smarter, cleaner and healthier products and those helping to address our global challenges, ESG investing is a leading example of how concepts of valuation are adapting to the changes.
Companies failing to meet ESG expectations are likely to suffer. Liontrust, a specialist fund management company, sold the Facebook stock it owned in 2018 as it branded the Facebook’s response to privacy, content moderation and fake news as ‘inadequate’ and hence a risk to its profitability.
Similarly, the rise of AI powered ESG analysis tools from providers such as Arabesque, means there is increasingly less room to hide for those not behaving responsibly. Combining long term data with Google Analytics as well as over 50,000 daily news stories, the tool is able to provide a sustainability score of over 7000 of the world’s listed companies to its subscriber base of banks and investment houses and national pension funds.
The race is on to deliver a global valuation model and framework that fuses pioneering tech such as AI with a widely accepted standardisation of ESG data. Meantime ESG reporting remains a primary method of proving the responsible business intent of most businesses. Technology is empowering investors with greater transparency and evidence on corporate good behaviour and management. The onus is now increasingly on the tech pioneers and disruptors currently lagging on ESG measurements to evidence that they are not an investment risk.