Technology Saves the Day

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27/05/2020
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The resilience of the technology sector during this economic downturn has not gone unnoticed. Netflix has seen a dramatic increase in demand, with its subscriber count continuing to rise at a record rate[i]. Amazon’s share price continues to rally ever higher as its traditional brick and mortar rivals are temporarily out of business. Amazon’s web service (AWS), its cloud computing business, is seeing strong growth, powering some of the internet’s most recognisable brands; BBC, Airbnb, Netflix, Facebook and LinkedIn to name but a few[ii]. Then there is The Walt Disney Company, its traditional business of movie studios and theme parks may have stalled, but its new direct to consumer offering Disney+ is thriving. With parents around the world trying to entertain their children at home, it now boasts over fifty million subscribers worldwide[iii].

 

Technology is not the only sector performing strongly, the Environmental, Social and Governance (ESG) sector is also showing signs of resilience post lockdown. As both sectors show potential for growth in the recovery phase, we thought now could be an appropriate time to examine the suitability of big technology for responsible investing and to consider what could make these companies well placed to deliver the better future that they promise. 

Environmental

Technology companies often have intrinsically strong environmental attributes when compared to many other businesses operating in traditional industries. Very often technology companies’ products are sold as a service on a subscription basis, meaning the environmental impact of producing a physical product is negated. They have no factories pumping out CO2 emissions. There has of course been concerns over the energy consumption of the data centres the tech giants use to power their sites but, with healthy margins and vast profits being generated, many are investing millions in solving this problem.

One company demonstrating the determination of big tech to embrace and invest in environmentally friendly technology is Facebook. It has invested in building a green data centre in Sweden[iv]. This location provides easy access to renewable energy and the cold environment (100km south of the Arctic Circle) makes it an ideal location to keep the servers cool, without having to use large amounts of water. Microsoft, a stalwart of the technology sector is ahead of the curve when it comes to reducing carbon emissions. It has been carbon neutral across all direct operations including data centres, software development labs, air travel, and office buildings since 2012 and aims to be carbon negative by 2030. Carbon negative, in a nutshell, means Microsoft will have the net effect of removing carbon from the atmosphere by 2030, an impressive feat. It will then go one step further by removing from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975[v]. It is this kind of thinking and action that will ultimately mean we can reduce the devastating impact of climate change.

Social

The technology sector has come under huge criticism for the way it collects and handles people’s data, and rightfully so. The thought that anyone of us could have our private information sold to the highest bidder is certainly a worrying thought. How an individual’s data is collected continues to be a major concern from the social element of the ESG criteria. But big technology companies are responding. Billions are now being spent to meet new regulations imposed by governments globally. The PR disaster of losing or mishandling people’s data is seen as an enormous business risk.

The backlash against Facebook after the Cambridge Analytica scandal, is a good case in point of how bad things can get. But the money that is being spent to meet new regulations also act as barriers to entry, protecting the healthy margins enjoyed by many technology companies. Just think, could four people set up a social media company in the same way Mark Zuckerberg and three friends did from their dorm room at Harvard today? Although not impossible, there would certainly be more hurdles than experienced by Zuckerberg in 2004.

Governance

Long term thinking is needed in order to meet many of the ESG challenges the world faces. Netflix states that it sees its boards role as maximising long-term shareholder value, and this is best achieved through a diverse boardroom. A third of Netflix’s seats are occupied by women, bringing a diverse skill set in areas such as media, technology, marketing and government relations[vi]. Although we would like to see further progress in this area, the technology sector is clearly aware of the benefits of a diverse workforce and seems determined to keep improving. It is however impossible to examine the technology sector from a governance element without highlighting tax strategy. Many technology companies have been widely criticised for what they would call tax efficient policies. Whilst this is something that is not illegal, it could be considered morally questionable by those with the view that it is about paying ‘their fair share of tax’ because tax supports our society and funds education, health services and the police for example. 

As has been discussed there are a wide range of things technology companies are doing that make them strong from an ESG perspective however, there are also significant areas for improvement. This shows the complexities around the ESG sector, it is not a simple case of what is good and what is bad, the boundaries are often blurred. There is tremendous potential not only for growth in the underlying businesses within the tech sector, but also in the ability of these companies to help to tackle some of the major environmental, social and governance challenges the world faces today. We will no doubt see a range of potential opportunities in the future, something we will be keeping a close watch on.

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Rowan Dartington is part of the St. James’s Place Wealth Management Group. Rowan Dartington & Co. Limited is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 2752304 at St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.

 

[i] forbes.com Netflix Subscriber Growth 2x Expectations; Good News Or Peak?

[ii] aws.amazon.com AWS Customer Success

[iii] bloomberg.com With 54.5 Million Users, Disney+ Is Now Netflix’s Top Challenger

[iv] bloomberg.com Inside the Arctic Circle, Where Your Facebook Data Lives

[v] blogs.microsoft.com Microsoft will be carbon negative by 2030

[iv] Netflix 2019 Sustainability Accounting Standards Board