It’s Time for Wall Street to Get Serious About Closing the Global Broadband Gap
In this blog, I argue that institutional investors should make efforts to achieve universal affordable broadband access a key part of their environmental, social, and governance (ESG) investment criteria. If you have not heard of ESGs before you should be aware that they are a really big deal. The practice of ESG investing began in the 1960s as socially responsible investing, with investors excluding stocks or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime. Interest in ESGs has really taken off in the last few years as the concept of stakeholder capitalism has become mainstream. According to the Financial Times, ESG investments are currently thought to total about $32 trillion. MSCI, a leading ESG index provider, projects that over the next two to three decades the millennial generation alone could put between $15 trillion and $20 trillion into US-domiciled ESG investments, which would roughly double the size of the US equity market.
The major ESG ratings agencies include MSCI, Refinitiv, RepRisk, S&P Global, and Sustainalytics. The competing ESG ratings agencies generally apply a similar framework to ESG ratings for sectors and companies. For its part, MSCI has developed 1,500 equity and fixed income ESG indexes which are used by institutional investors for index-based investment products, risk and return analysis, and compliance with ESG mandates. As of June 2020, MSCI rated 8,500 companies and more than 680,000 equity and fixed income securities globally.
While sectoral and company efforts to address climate change get the most attention in ESG ratings, the ESG ratings agencies look at a wide range of socially important issues. ESG ratings are both carrot and stick — meant to both reward those companies that are leaders in their sectors regarding ESG issues and pressure those companies that are laggards to address key ESG issues. MSCI uses a comprehensive ESG ratings methodology, under which its research analysts assess “thousands of data points across 37 ESG Key Issues, focusing on the intersection between a company’s core business and the industry issues that can create significant risks and opportunities for the company.” The MSCI ESG Ratings model focuses only on issues that are determined as material for each industry and places greatest weight on those issues that create the most significant risk and opportunities for an industry and companies within it. While company-specific exceptions are allowed for companies with diversified business models, once identified, roughly 5–10 Key Issues are assigned to each industry and company and are most material to their ESG ratings.
Categorized under the Social Pillar and Social Opportunities Theme, “access to communications” is one of the 37 Key Issues that MSCI uses to develop ESG ratings for three Sub-Industries under the Communications Services Industry: Wireless Telecommunications Services (with a 5% average weighting), Integrated Telecommunications Services (with a 5% average weighting), and Alternative Carriers (with a 4.4% average weighting). It does not appear that access to communications is a Key Issue for any other sector or sub-sector. MSCI defines access to communications as “efforts to expand connectivity and access to information in developing countries and historically underserved markets (e.g., rural, elderly).”
These three Sub-Industries include many of the world’s major mobile and fixed line operators, and also includes tower and infrastructure companies, such as Crown Castle and American Tower Company. Companies are rated laggards, average, or leaders based on MSCI’s assessments. For example, in the access to communications Key Issue, Crown Castle, SoftBank, T-Mobile, and Verizon are rated as laggards. America Movil, AT&T and CenturyLink, Globe, NTT Docomo, PLDT, Rogers Communications, SingTel, and SK Telecom are rated as average. American Tower Company, British Telecom, China Telecom, MTN, Orange, Telefonica, Telenor, Vodacom, and Vodafone Group are rated as leaders. It is not clear from public documents which metrics MSCI uses to arrive at its ratings for companies placed in these Sub-Industries. It’s also unclear why the average weightings are no more than 5% — rated the least important Key Issue for these Sub-Industries.
What is interesting is all of the companies and industries that are not being rewarded or held accountable as a major contributor to increasing access to communications. This includes a wide array of companies across the Communications Services and Information Technology industry segments, which operate businesses that cannot be successful if people do not have affordable access to broadband. The following segments and companies are excluded: Software and Services (Microsoft, Oracle, IBM), Interactive Media & Services (Facebook, Alphabet (Google), Tencent Holdings), Semiconductors & Semiconductor Equipment (Qualcomm, Broadcom, Intel, MediaTek), Technology Hardware, Storage & Peripherals (Apple, Cisco, Ericsson, Hewlett Packard Enterprises, Juniper, Nokia, ZTE), Retail — Consumer Discretionary (Amazon), and Media & Entertainment (Altice, Charter Communications, Comcast, and Disney). Access to communications is an issue that can create significant risks and opportunities for these industry segments.
MSCI and the other ESG rating organizations clearly need to prioritize access to communications across industry segments. For example, while it’s true that they are media and entertainment companies, it is hard to imagine why Altice, Charter, and Comcast, which are among the largest providers of broadband connectivity in the United States, would not be asked to be a major contributor to increasing access to communications. Indeed, each of these companies have programs — some highly successful — focused on expanding broadband subscriptions among low-income households. One would think that access to communications would be among the top issues for which these companies are rewarded. Likewise, companies like Alphabet, Amazon, Facebook, and Microsoft all control massive global communications networks and therefore have a vested interest in seeing billions more people connected to affordable broadband. To quote Satya Nadella, Microsoft’s CEO, from his book Hit Refresh “with no internet access, there is no cloud access.” The rest of the companies above literally do not exist without telecommunications networks, more bandwidth, and more connectivity, and therefore should also being playing a part in seeing broadband access extended to unserved communities around the world — and getting credit for those efforts.
As an aside, the ESG ratings agencies have come under a fair amount of criticism about their lack of transparency and lack of standardization. BlackRock’s CEO Larry Fink has warned that “the current proliferation of disclosure initiatives, many of which are overlapping, has led to duplicative efforts by reporters and a lack of consistent and comparable data.” Punit Renjen, Deloitte’s Global Chief Executive has complained that “right now, there is an alphabet soup of metrics . . . It is important for us to have a common set of standards and if there is widespread adoption it will lead to change in behaviour.” The leaders of the big four accounting firms are developing a standardized reporting framework for ESG ratings (albeit one that does not single out universal broadband as an ESG goal).
Many major financial institutions, like BlackRock, Vanguard, JP Morgan, and others, have made pledges to hold the companies they invest in accountable for meeting ESG goals. These major financial institutions are increasingly avoiding investments in certain industries and targeting investments in companies that prioritize environmental sustainability and other ESG goals. According to BlackRock’s Fink, as of April 30, 2020, “more than 70% of the 5,600 active portfolios managed by BlackRock are fully ESG integrated. We are committed by the end of the year to have ESG metrics integrated in all of our portfolios.”
These same financial institutions and their customers should also start rewarding companies that prioritize efforts to close the global broadband gap. One of the key lessons of the COVID-19 pandemic is the extent to which we all now rely on reliable broadband connectivity, for access to education, healthcare, working remotely, and for political participation. There is wide and growing agreement that broadband is part of our critical infrastructure and that affordable broadband access is a human right, on par with other basic needs. And, to the extent that ESG ratings are keyed on the United Nation’s Sustainable Development Goals (SDGs), one simply cannot achieve all or any of the SDGs without baseline universal broadband availability.
Yet, we see articles on a weekly basis lamenting lack of affordable broadband access, including in the US. According to the latest International Telecommunications Union (ITU) data, global internet user penetration is currently at 53.6% or about 4.1 billion people online, meaning that about 3.5 billion people are still not accessing the internet. Global internet user penetration is 47% in developing countries, and in least development countries (LDCs), internet adoption is at 19.1%. According to the ITU, the proportion women using the internet globally is 48%, compared to 58% for men.
The ITU Broadband Commission has set a goal of 75% of the world’s population, including 65% of people in emerging markets and 35% in the least development countries (LDCs), being connected to the internet by 2025 (albeit not necessary on a broadband connection and without a data consumption limit). To achieve its goals, the ITU Broadband Commission has also set a target that entry-level broadband services should be made affordable in developing countries, at less than two per cent of monthly gross national income per capita by 2025. The ITU tracks data on broadband as defined as more than 256 kbps (in essence, providing download speeds that are 100 times slower than required for broadband connections in the US).
The ITU Broadband Commission recently conceded that, at current rates of growth, it is unlikely that it will achieve its 2025 goals. While policymakers can adopt a range of measures to incentivize network operators to further increase broadband availability, institutional investors, representing large numbers of shareholders, also can be a potent force in rewarding network operators and other companies for efforts to close the global broadband gap. We have seen the power of shareholder groups in areas like environmental sustainability and social justice and there is reason to believe shareholder groups could exert similar influence over other goals like universal affordable broadband.
Bringing affordable broadband to unserved communities around the world is not just good corporate citizenship. Opening up new markets is good business. Clearly, network operators should be rewarded for increasing efforts to extend connectivity into unserved areas. Investors should also reward those companies that develop networking technologies that could be used to bring broadband to unserved communities. This could include traditional hardware vendors, as well as newer players developing alternative terrestrial fixed wireless technologies. This could include companies like Land O’Lakes, which has prioritized efforts to connect rural communities in the US. As my recent experience leading Microsoft’s Airband Initiative demonstrates, even companies that are not themselves broadband providers can develop programming focused on extending broadband access to unserved communities and can track and quantify their impacts.
ESG investing has become a powerful tool for major institutional investors and their clients to leverage their power to profitably further important social causes. The growing global broadband gap will be one of the most important factors contributing to economic inequality over the next 25 years. At the same time that governments have a critical role to play in helping to close the global broadband gap, these efforts need to be commercially led and by the companies with the greatest vested interest in connecting with customers. Given the importance of this issue, it is time that efforts to close the global broadband gap be included in ESG investment decisions across industry sectors and in a manner that rewards meaningful and measurable progress.
