Having enjoyed a strong rally, technology stocks are now a key feature of both active and passive equity portfolios. This means understanding their ESG credentials has never been more important.

Daegal Tsang, Senior Investment Manager, Marie Dumas, Client Portfolio Manager and Stephen Freedman, Head of research and sustainability, Thematic Equities Pictet Asset Management.

Overview

Over the past 25 years, information and communication technology ( ICT ) has transformed both the economy and society. More than 5 billion people, or over two thirds of the global population, have access to the Internet,1 while three-quarters of the world now own a mobile phone.2

This vast, dynamic digital ecosystem has given birth to new industries, like social media, and revolutionised existing ones, such as finance, via innovations including digital banking and payments.

It’s no exaggeration to say technology has become a foundational tool to humanity’s attempt to solving many of our environmental and societal problems. Continued advances in fundamental technologies, in particular semiconductors and networking, are now giving rise to breakthroughs in artificial intelligence (AI) which will undoubtedly have profound impact on society in the years to come. The USD23 trillion ICT industry is becoming more complex and interconnected, affecting industries as diverse as retail, healthcare and industrials.3

It is no surprise, then, that due to a sustained outperformance, shares in technology companies account for an increasingly large part of investors’ portfolios, irrespective of whether they are passively or actively managed. More significantly, they are an even bigger allocation within ESG-aligned portfolios: the S&P 500 index’s tech sector makes up the largest allocation in many popular ESG funds.4 Tech’s growing sphere of influence will also mean investors might want to hold them to a higher standard of scrutiny. At first glance, the ICT sector's strong ESG credentials are easy to rationalise. Many large companies in the industry have low carbon footprints while the sector is also home to firms developing products and services that contribute to the building of a more sustainable economy. But that's not to say ESG investors can afford to be complacent. The tech sector's dynamism means that its ESG credentials will also be in flux. While many ESG considerations could apply to companies across all sectors, for the ICT industry, they gain a greater significance. All of which means it is more important than ever for investors to keep abreast of the ESG risks and opportunities emerging within the ICT industry at large.

ESG considerations for tech companies are diverse and complex. They fall into two broad categories:

Material financial risks and opportunities for the tech sector, or issues that can have an impact on the bottom line. These issues can adversely affect companies if managed poorly or be turned into a competitive advantage for those taking a leading role in addressing them. Positive impact of the tech sector on the environment or society through its products and services.

By understanding the evolution of ESG within tech, we believe investors can better distinguish leaders from laggards, allocate capital more appropriately, and engage with tech companies to achieve greater positive outcomes.