Tech Investments Expose Investors to Social Risks

Tax, data privacy, workforce and other S factors highlighted by S&P’s 451 Research, as investments flow to low carbon-emitting tech firms.

Dependence on investments in technology firms to drive financial performance and reduce their environmental impact leaves investors open to a number of social-related risks. This is according to a report published by 451 Research, part of S&P Global Market Intelligence, which identifies the main ESG-related challenges faced by technology and IT corporates.

Making up 26% of the S&P 500 index, the technology industry is a “significant employer globally” and needs to “become more diverse, inclusive and reflective of the societies that Big Tech serves”, the report said. However, ongoing issues with data privacy, treatment of workers and tax avoidance are all cited as major hurdles the industry needs to overcome.

Despite social-related concerns, technology firms remain popular amongst investors looking to reduce their portfolio emissions, due to their generally lower carbon footprints.

Misuse of data through AI-driven technologies is a prevalent concern, according to the report, including questions over ethical use of facial recognition or user profiling.

“Even if a use case for AI is considered to be ethical, there remain issues that need to be addressed in terms of responsible use of models to mitigate against bias (particularly gender and racial) and ensure models are used fairly and in a transparent manner,” the report said.

Engagement with Big Tech on poor social performance and tax avoidance has been cited as an increasing focus by the Church of England Pensions Board, according to its 2021 Stewardship Report. The Pensions Board represents £3 billion in assets under management.

The new policy, developed in partnership with the CoE’s Ethical Investment Advisory Group, will be published later this year.

Lowering emissions

Big Tech seems to be more willing to address environmental-related performance than social issues, with Microsoft pledging last year that it would be carbon negative by 2030. However, both Microsoft and Alphabet recently pushed back against calls to include ESG-related disclosures within key US regulatory filings, noting this could open them up to legal risks.

UK tech companies have also banded together to form Tech Zero. By joining, these firms have pledges to measure their Scope 1-3 emissions and set an ambitious net-zero target by the end of this year.

The sector will also continue to be a source of much-needed innovation as the world decarbonises towards a low-carbon economy. “Technologies will underpin new products, processes and practices that will support more data-driven decisions that will help mature ESG commitments,” the 451 Research report said.

“The importance of IT in shaping our increasingly digital future means the industry will have a huge bearing on the evolution of ESG, and in creating a more sustainable and equitable society. There are multiple challenges and risks for the technology industry to address, but also massive opportunities to help drive changes that will be positive for society at large,” said lead author of the report Chris Marsh, Principal Analyst at 451 Research.

Taxing tech

Policymakers are in talks to develop and introduce a global minimum corporate tax rate, which could subject multinational big tech companies to pay at least US$100 billion a year more in taxes, with the new rules expected to be implemented in 2023. This is designed to address a number of multinationals’ use of low-tax jurisdictions to limit tax liabilities.

A 2020 report by Big Four accountancy firm KPMG noted that 86% of global tech executives believe that the sector requires more regulation and standards on promoting sustainability.

As highlighted in the ‘Advancing Tax Transparency’ report by the UN-backed Principles for Responsible Investment (PRI), a number of technology firms refused to provide any information on their tax practices between 2017-2019. These companies included Alphabet, Amazon and Facebook.

As noted in a previous ESG Investor feature, Big Tech firms also make it more challenging for shareholders to use their voting powers to enact real change. For example, Facebook CEO Mark Zuckerberg has implemented a dual-class structure, meaning individual and institutional shareholders with Class A shares only have one vote per share. In comparison, Class B shares – of which Zuckerberg owned 78% in 2019 – are worth 10 votes each.

“Investors, consumers, technology buyers, end users and suppliers are still trying to understand the implications of ESG and what it means for how technology is used. We anticipate the range of discussions around technology and ESG will rapidly become more frequent, specific and strategic,” the 451 Research report said.

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