Many technology companies have risen to dominance in a relatively short space of time, with legislators struggling to keep up the speed. Large investors should do their bit by constantly reminding these companies of their responsibilities, say Jon Guinness (photo) and Sumant Wahi, managers of Fidelity International’s Global Communication Fund.
The pair spoke out on this digital ethics in the margin of the annual (now virtual) Sustainable Investment Week of sustainability label Luxflag.
Technology was only a relatively small part of the economy and was barely in the spotlight until recently, Guinness points out. ‘However, over the last 10 years, technology has taken off and has taken an extremely important place in our lives. Given the speed at which technology has emerged, it should come as no surprise that legislators today are lagging behind. After all, it takes time for governments and regulators to realise how important these tech companies have become.’
Guinness underlines that although big tech is not really interested in politics today, politics is increasingly interested in them. ‘With their huge reach, low costs to acquire new customers and high margins, these companies are growing into monopolies from which the winner benefits most - be it Alphabet and Facebook in digital ads, Amazon in e-commerce, or Uber in transport. This of course catches the eye.’
Underregulated
Sumant Wahi adds that today the tech sector is being underregulated compared to other industries. ‘If I want to put it bluntly, it is not being regulated at all.’ There are good reasons for that though, he notes. ‘Large tech companies operate globally while governments operate nationally, and they also move at a much faster rate than regulators and bureaucrats. The latter do not always understand what they are talking about either’.
Guinness adds that recent legislation, especially in the area of privacy, has unintended side-effects. ‘Tech companies use these stricter laws to strengthen their position and restrict competition. They can also pay for the practical implementation of the new legislation, which is more difficult for smaller players. What’s more, the big boys already have all our data at their disposal, so this new legislation will have little impact.’
And because the regulator does not actually understand technology properly, the pair say there is now a risk that this will be compensated for by imposing even tougher rules. ‘We do not, however, see the break-up of big technology happening in the medium term. Shareholders would benefit from this, however, because there is still a lot of hidden value in technology,’ they conclude.
Practical aspects
The two Fidelity managers feel it is up to investors to insist on clarity and to put pressure on technology companies to regulate themselves. According to them, it is therefore important for (institutional) investors to give digital ethics an important place in the investment process and to enter into a constant dialogue with technology companies so that they stay on the right track. ‘In our interaction with these companies, we focus on four pillars: disinformation, privacy, online fraud and online well-being. It is important to identify weak spots and point out to them what can be done better.’
In practical terms, the two managers have divided their universe into three blocks: companies that make technology practically possible (tech hardware, telecom equipment, semiconductors), networks (telecom, cable, internet and telecom infrastructure) and innovators (media, internet, e-commerce, digital apps, gaming and software).
‘For each segment, we look at the greatest sustainability risks and list the most important environmental, social and governance challenges, i.e. ESG. In e-commerce, for example, we look at how the footprint can be reduced and how data protection and the fight against fraud can be improved. Ultimately, we map out the risks and try to estimate how big they are before entering those companies. The aim of all this is that companies will transform themselves under that constant pressure’, explains Wahi. ‘By insisting on all these things, we want to have a positive impact. In addition, we are convinced that the more sustainable the business model and the better tech companies deal with ESG, the greater the outperformance on the stock exchange will be’, Guiness adds.
Technology war
Last but not least, the two managers of Fidelity International’s Communication Fund shared a comment on the trade war between China and the US. ‘This trade conflict is actually a tech trade war and especially a battle around 5G. After all, whoever owns the standard of a certain technology is actually in control of the market and will benefit from it enormously, partly thanks to a huge boost in job creation. Not so long ago, the Americans established the idea that China had a lead of at least 12 months on 5G. And the US has imposed restrictions on the Chinese with the goal to catch up with them.’
Trade tensions have also triggered a decoupling of the global supply chain, they added. The latter, will continue even if Joe Biden wins the presidential election. ‘In the meantime, China will continue to make unrelenting progress on 5G.’
The fund has returned 22% year-to-date. Since its launch in 2019, the Fidelity International Global Communication Fund has cumulatively made a 52% return.