As we know, ESG investing is when an investor considers Environmental, Social and Governance factors alongside financial factors in the decision-making process.

More people are coming around to the idea of being a responsible investor and can understand the environmental and governance aspects. However, the ‘social’ impact doesn’t always get the same level of attention, but that doesn’t make it any less important.

The growing influence of technology on our lives means that focusing on issues such as data security, privacy, labour standards and ‘human capital’ – the ‘S’ in ESG – is even more crucial if we want to be responsible investors.

Why digital currencies can spell a particular social problem

Let’s start with one of the most headline-grabbing technology innovations of recent years – digital currency.

There’s been a great deal of focus on ESG around cryptocurrency, but this is usually centred on the environmental impact of large Bitcoin-mining operations, which have massive power requirements. We don’t discuss too much about the technology’s potential social impact.

Cryptocurrencies currently belong to the ‘wild west’ of the investment world – they offer a highly risky option with huge swings in performance, but they dazzle some investors with the promise of eye-watering returns.

However, they’ve caught the eye of central banks – the Bank of England is among those giving serious thought to introducing their own cryptocurrency, available alongside the usual paper and coins.

The theory is a central bank digital currency (CBDC) would be more stable than conventional cryptocurrency as it would be ‘fiat money’ – legal tender on a par with the US dollar and the Euro. Central banks hope it could increase financial inclusion – reducing the numbers of people who don’t have access to any traditional financial services – and make the financial system in general more efficient.

From an ESG perspective though, there’s also a big downside. According to the economist and former US presidential adviser Pippa Malmgren, while the arrival of blockchain and CBDC could bring greater transparency on government spending, it’s also “a surveillance system designed to look like money.”

If a central bank issues its own digital currency it could track that money wherever it goes, among other things that could mean governments being able to take fines automatically.

In essence, users could be giving up their privacy and freedom in exchange for convenience. Looking through an ESG lens, that’s a really big red flag in the ‘S’ column.

Move fast and break things

We can see the importance of focusing on social factors when we spread the net wider to look at tech companies in general.

Facebook’s internal motto was famously “move fast and break things”. This referred to a culture that rewarded speed and experimentation to increase innovation – acknowledging that you might make mistakes along the way.

But in recent years (especially with the Cambridge Analytica scandal, where millions of users’ personal data was collected without their consent), the mantra has come to signify something else – a company that’s playing fast and loose with the issues like transparency and privacy.

Facebook is by no means the only tech company where social issues have emerged.

Google suffered a data breach in 2018, exposing the personal data of more than 500,000 users of its former Google+ platform. Ride-hailing app Uber has its own history of scandals, including harassment, piracy and industrial spying. More recently, the UK’s Competition and Markets Authority is investigating Amazon over concerns its UK marketplace may be anti-competitive.

All of these are most definitely of interest to an ESG analyst.

Delving deeper – materiality matters

Do these scandals mean we should stop investing in technology? Of course not.

But they do show that investors need to be more aware of potentially significant social impacts and what the long-term effect could be. A data breach or court case won’t necessarily cause immediate damage, but it can tarnish a company’s brand, and could influence whether the business (and with it the future of your investment) is sustainable in the longer term.

To make this assessment, materiality matters. MSCI ESG, which provides scores for thousands of listed companies, produces an industry materiality map to assess long-term resilience on ESG issues.

Look at an energy company, and the most important issues in compiling its ESG score will naturally be environmental ones – carbon emissions or how it dispenses with waste. In the Communication Services sector, which contains Facebook and Google, around half of the weighting is in social factors, with privacy and data security the largest overall. By comparison, environmental issues make up only a small proportion of the overall weighting.

Source: MSCI ESG industry materiality map

What we look for

Social impact takes many forms, including human rights, equality and diversity, labour standards, and data protection. And it’s clear that investors ignore social impact at their peril.

All the asset managers we work with have their own approach to assessing ESG, whether it’s scoring companies according to their ESG metrics, screening out companies that don’t meet certain criteria, investing in companies that make a positive impact on the world, or aiming to influence companies via active engagement and voting. You can find out more about our approach here.