A white paper published by former Genting executive and founder of the Praxis consultancy Steven Myers and Robert Montgomery, the investor and entrepreneur behind First Maximilian Associates, outlines plans for a new reporting product, ESG Fintel.
ESG Fintel is a tool combining current ESG metrics with approaches customised for gaming and leisure. It uses the UN Sustainable Development Goals (UNSDGs), then company performance data and industry-specific metrics.
These centre around responsible gambling, compliance and marketing to create a more accurate picture of an operator or supplier’s performance.
“It is clear that the benefits of an improved approach to ESG are financially significant for the gaming industry,” Montgomery explained. “The objective of ESG Fintel is to unlock these benefits for proactive companies and investors alike.”
The need for a new approach to ESG in gaming
Myers explained the gaming industry faces “significant ESG compliance and reputational issues”. These put both individual companies and the wider sector at a disadvantage. In particular the industry’s reputation among the investment community, banks, governments, regulators and consumers suffers.
“It is unquestionable that some of this has been influenced by the poor practices and performance of certain players,” the white paper explains. A series of regulatory settlements and investigations caused by poor governance or problem gambling dog the industry’s social standing. This has resulted in more than £40m in fines being paid to the GB Gambling Commission in the past year alone.
The performance of another age-restricted industry show there’s an alternative. Cooperation between the leading companies in the alcohol industry around sustainability helped reset the public perception of that sector. That, Myers and Montgomery claim, shows the potential upside for the gambling sector.
How can ESG benefit gambling?
They estimate the combined market caps of the top 40 listed gaming companies totals $271.91bn. Marginal improvements to their ESG standing could lead to a 2% improvement in valuations across the sector, equating to a possible $5.44bn increase in the total market cap.
Improved ESG compliance may also lower the cost of capital. Equity and debt financing, for a business viewed as less risky, could lower interest rates and ultimately boost gaming companies’ bottom lines.
Lower sector risk, and potentially higher returns, may even encourage ESG or sustainability-led funds to move into the sector.
But Myers and Montgomery warn this is not possible using current ESG metrics. The current approach investors and operators take is “too qualitatively and quantitatively simplistic”. It fails to address the “unique and intricate” facets of gambling.
For example, there’s currently an over-emphasis on environmental issues in ESG monitoring, something less applicable to igaming companies. The social and governance aspects specific to the industry are not given enough prominence.
As a result, financial and operational metrics provide a clearer insight into the impact of sustainable and responsible actions. The white paper picks out pre- and post-acquisition performance of acquired assets, as a good indicator of strong governance.
Hurdles still to clear
Myers and Montgomery aim to provide this new, more holistic view of ESG for gaming and leisure through the ESG Fintel solution. However there are a number of hurdles still to clear.
A lack of cohesive and relevant data to quantify the impact of the current approach to ESG may hold back the solution’s development and slow adoption by companies may hinder progress.
It remains to be seen whether the industry sees the upside of enhanced ESG reporting and compliance as attractive and the theory of valuations rising and borrowing rates falling must be stress-tested.
The pair question whether companies will be able to meet the additional compliance burden, while competing solutions may prevent adoption. Ultimately ESG Fintel must also secure buy-in from the investment community if it is to become embedded in the industry.
Myers and Montgomery see the white paper as a starting point for the solution, with a view to engaging industry stakeholders to develop ESG Fintel further.
“The goal is to layer a simple and effective reporting and performance tool on top of current practices in order to unlock an improved ESG standing for operating companies and to be able to support its sustainability on both individual company and industry-wide levels.”