Siding with the angels: gambling and ESG

Some trends are just inescapable – lockdown haircuts, for instance – and in the world of asset management, the rise of investing along environmental, social and governance (ESG) lines is impossible to ignore. It is a trend driven from the very top. Larry Fink is the chief executive of the world’s largest asset manager, BlackRock, and his annual letter to CEOs has in recent years consistently foregrounded ESG investment and the wider conversation around sustainability.

In his latest missive, Fink was clear that ESG-driven investing represented a “tectonic shift” which will only gather pace. “And because this will have such a dramatic impact on how capital is allocated, every management team and board will need to consider how this will impact their company’s stock,” he wrote.

With assets under management of $8.7trn – yes, that’s trillions – what Fink says, and BlackRock does, truly matters. “There has been a big re-allocation of capital in the last few years led by BlackRock and that really matters because it is the marginal mover of dollars,” says Patrick Thomas, investment director and head of ESG investments at Canaccord Genuity Wealth Management.

Like every other sector, the gambling industry needs to find a response lest it be left out of the conversation entirely. “At the top of the pyramid, it is people like BlackRock and Columbia Threadneedle that are driving the debate,” says Ivor Jones, leisure analyst at Peel Hunt. “There are very few investors left that will look at investing in a company which doesn’t run along ESG principles.”

“There is such competition for capital,” says James Newman, director of corporate affairs at Playtech. “Lots of boards are switching on to this and for the gambling sector it is even more important because we, as a sector, are excluded from the indices, so there is a smaller pool of money anyway.”

Out in the cold

The issue of exclusion is important. Ethical investment is an idea which dates back to the Quakers, says Kelly Perry, ESG specialist at Edison. To some eyes, gambling companies, alongside those working in areas such as tobacco and alcohol (and, according to some wider definitions, oil and gas) are “sin stocks”, warranting automatic exclusions.

When it comes to gambling, then, “there will be some purist and impact investors that will exclude them”, Perry says. “However, we are seeing the investment community mature their approach from exclusions to investing in companies demonstrating improvement in their ESG standing.”

Looking at the ESG indices compiled by some of the biggest index providers, there are indeed some high-profile exclusions of gambling stocks. New York-based MSCI, for instance, excludes gambling from its SRI (Socially Responsible Investment) indexes and certain USA Select ESG indexes. Here, it is worth mentioning that the US is in a different place. Will Hershey, CEO at US-based ETF provider Roundhill Investments, says there is a “100% different” attitude to gaming compared to European attitudes. He notes, for instance, that the world’s biggest ETF, State Street’s S&P 500 fund, includes Penn National Gaming, Caesars, MGM and other gaming giants.

But the European sector exclusions are by no means across the board, meaning gambling companies are in the mix when it comes to burnishing their sustainability credentials. It is an opportunity that some of the biggest names in the sector have gladly taken up. Jay Dossetter, head of ESG at Entain, says the company recognised that sustainability was an area it had to address at the time of the merger between GVC, as the company was then known, and Ladbrokes Coral.

“It has really been something that has grown in focus ever since then,” he adds, suggesting that part of our “Entain pitch” is to be a betting and gaming entertainment provider. “When you are competing for capital, you have to be a sustainable business and address your stakeholder concerns.”

Newman says the gambling sector, particularly the online side, has “matured” in recent years and the adoption of sustainability agendas fits with that trend. “We’ve worked very hard to integrate sustainability into our business purpose,” he says. “That’s about creating tech that changes the way the end user experiences gambling entertainment.”

It leads, Newman contends, “inevitably” to the area of player protection. “As a technology leader working in gambling, that is our biggest impact,” he points out. “That is now integrated into everything we do. The player journey, the games, the tech. That is good business. Any business that churns and burns the customers is not a sustainable business, but one that builds a brand is a business that will have customers returning.”

The one drives the other, suggests Kevin Clegg, director of sustainability at Gamesys. “The broader sustainability agenda and support from shareholders in our responsible gambling initiatives has only accelerated our capabilities in this area, as we continue to focus on providing an entertaining but safe experience for all,” he says.

Work in progress

The central argument about ESG investing is the companies that follow this path will perform better because of their adherence to sustainability. This will lead to their share prices reacting accordingly. This outperformance is the driver of BlackRock’s ESG convictions, that companies with an ESG focus outperform their rivals and enjoy what Fink terms a “sustainability premium”.

Canaccord’s Thomas says this means investors won’t want to be left behind. “With ESG, we think about whether we can invest in disruptive areas and engage with companies and make them better,” he says. “That is the interesting bit. There is a middle ground where companies are working on making things less harmful and that is really important.”

Another approach, says Peter Sleep, senior portfolio manager at 7IM, a UK-based wealth manager, has been to score each company on multiple facets of its ESG conduct and “either exclude the worst scoring companies in a sector or only pick from the top companies”. “This allows investors to keep a balanced fund that includes resource stocks like the ‘best’ oil stocks,” he adds.

A greater concern shown for ESG also comes with added benefits when it comes to wider stakeholder concerns. “ESG is high on the agenda in society at large,” says Patrick Kortman, head of corporate development at Kindred, and that includes the employees. Companies in the gambling space are competing for talent and being able to demonstrate fealty to corporate good citizenship is an important asset. “We are out in the market trying to attract talent,” says Dossetter. “Sustainability can’t be about paying lip service – it has to be embodied throughout the company, otherwise people will see through it.”

“When you look at what people expect from the companies they work for, people expect their companies to be contributors to society,” says Newman. “They expect corporates to do more than just make money, and expect more in terms of positive social impact. That is now business critical.”

It is an increasingly competitive environment, particularly in technology, says Perry. “If you think about the next generation, they are the ones where a lot of our money is going to come from and they are selecting companies they want to work for on the basis of their sustainability commitments.”

Roll with the punches

Sustainability is obviously about companies being around for the long term. Newman says: “As a technology company we are trying to build a better industry so that we can continue to exist.”
The right to continue doing business underlies the ESG discussion and addresses the question of how gambling fits in with wider society. Clegg says Gamesys recognises it can “improve its social impact” or, as Jones at Peel Hunt suggests, “gambling has been on a journey” and it has to be viewed in light of a trend among the public to look beyond profit and to companies to “have a higher purpose”.

In the gambling sector, this means improving standards and ESG investment themes neatly interlace with regulatory scrutiny. Investors and fund managers will follow the newsflow on regulation and the industry response is crucial. “If you have a question from a fund manager, they will look from a long-term view,” says Newman. “We have Playtech Protect, so we can talk about that and how we’re developing new ways of looking at responsible gambling and helping our licensees meet the challenges.”

As Dossetter concludes, “we all share the focus on improving standards”, and this sentiment suggests ESG investment and the work on RG are both pushing in the same direction. Much as with the latter debate, the exclusionists can never be placated. But that still leaves room for inclusion elsewhere, in the realm of investment as much as with society.