Every day a gargantuan amount of data – at least 2.5 quintillion bytes – is created and distributed via services, networks and connected devices[1]. It is a figure likely to only keep expanding.

Given how digitally connected the world has become, it is no surprise that the number of cybersecurity incidents has doubled from some 82,000 in 2016 to an estimated 160,000 in 2017[2]. As such the significance of data security has grown exponentially, especially when privacy and data breaches are so closely linked to operational and reputational risks. But this is not the only risk posed by these rapid technological advances.

Below, we take a look at what we believe are the primary environmental, social and governance (ESG) risks and opportunities we consider when assessing the technology media and telecommunications (TMT) universe[3].

ENVIRONMENT

The exponential growth of digitalisation has meant that the potential impact TMT firms will have on climate change has risen. For instance, power consumption is expected to triple in the next five years[4] as one billion additional people come online in developing countries and as the “internet of things” (IoT) continues to flourish and expand worldwide.

As a result of this increase, massive growth in data traffic and supporting centres will be required, which in turn will push carbon emissions and water consumption higher. Without dramatic increases in efficiency, it is estimated that the information and communications technology industry[5] could use 20% of all electricity and emit up to 5.5% of the world’s carbon emissions by 2025[6]. Hence improved energy and emission efficiency of data centres appears crucial, including ensuring they are using energy efficient installations, and ideally running on renewable energy sources. Regulators need to look at how to achieve lower levels of power usage effectiveness too. The implementation of a robust water management system and a report on water recycling targets would also help, as would the development of recycling programmes in regards to end-of-life products.

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Indeed, many electronic devices are often replaced after only one or two years. As a consequence, in 2016 some 44.7m metric tonnes of electronic waste was generated – the equivalent of almost 4,500 Eiffel Towers. But problematically, it is understood that less than 16% of this waste is currently recycled, which is driving a rapid rise in so-called e-waste volumes.

Furthermore, this e-waste typically contains large amounts of hazardous substances, which pose risks to the environment and human health upon disposal.

Regulation is being reinforced to address this, notably the EU’s Waste Electrical and Electronic Equipment directive and further laws relating to chemical components for electronics appliances are also anticipated. In parallel to this though, consumer awareness is growing quickly.

SOCIAL

Privacy and data breaches can cause companies serious operational and reputational damage. These risks can adversely affect customer loyalty and can also result in financial penalties. But regulations are evolving quickly, in particular in Europe, via the European Union’s General Data Protection Regulation (GDPR) directive[7], which is designed to harmonise data privacy laws across Europe and give consumers more rights over their data. It provides a blueprint for how companies should go about earning their clients’ trust with regards to how they use their information.

See also: The Travelling Quant: Is your data ethically sourced?

But, inconsistencies remain when it comes to how regulatory frameworks are applied across geographies.

Another thing to consider are controversial sourcing risks. Several corporations have been publicly criticised recently and could face penalties in relation to conflict minerals regulations. We refer in particular to the so-called 3TG minerals i.e. tantalum, tin, tungsten and gold, which are sourced from artisanal mines in the Democratic Republic of Congo and surrounding countries. As investors become more responsibly minded, their attention to supply-chain transparency and controversial sourcing could have a considerable effect on brand value.

Then, and especially in R&D intense companies, given the huge competition for talent in the TMT sector, recruiting and retaining the best profiles are key to driving innovation and creating value. Another area gaining traction is gender diversity. The subject has become the focus of much media and regulatory attention, as has the representation of minority groups. As such, careful monitoring is required to ensure that the recent steps of technology companies to bolster gender and minority representation is sincere and not merely window dressing.

Corruption risks have to be monitored too. Companies may bribe regulators to gain access to markets, while others may consent to government censorship or limit access to information and deteriorate freedom of expression. Tech companies including giants such as Alphabet, Apple, Facebook and Amazon have also been criticized in regards to their tax practices and we consider this to be a growing concern.

GOVERNANCE

In terms of governance, the lack of independence of board members is an area of attention. Historically, boards of directors have had a strong “club culture”, with a number of board members involved with several companies at the same time.  The rapid increase of technology as a percentage of world indices has not been met with the same level of independence of boards. In addition, the practice within founder-led firms of protecting founder voting rights remains a questionable trend in the TMT sector specifically. Many founders claim that they should maintain voting rights beyond their shareholding levels – this practice needs to be challenged to overcome the dangers posed by entrenched founders.

See also: How to unpack responsible investment: Five key conversation starters

[1] IBM, 2016

[2] Online Trust Alliance (OTA), 2018

[3] We built macro sectors carrying various activities and covering different businesses.

[4] As per 2017 Cisco Visual Networking Index projections, with global internet traffic to increase nearly threefold in the next five years

[5] The Information and Communications Technology industry relates to the infrastructure and components that enable computing and digital interactions.

[6] According to 2016 peer-study, from the Swedish researcher Anders Andrae

[7] The EU General Data Protection Regulation (GDPR), which is regarded as the gold standard of privacy regulations was approved in April 2016 and will become enforceable in May 2018.