Looking for higher valuations, better liquidity and cheaper capital? Improve sustainability

The gaming industry has a once in a lifetime opportunity to grasp the prospect offered by sustainability.

Doing so allows the industry to rise from its current reputational milieu and divert its track back toward business inclusion. Of course, doing so captures increased benefits from competing in regulated markets and transparent reporting procedures.

Gaming can successfully respond to greenwashing issues and regulatory inadequacies – a recurring feature of other industries. This will forge a new reputation as a conscientious and considered actor in regulation-heavy markets. 

To do so would be taking a page out of the alcohol industry playbook. That sector embraced sustainability to its benefit. This was done through the harmonisation of performance criteria among leading companies, alongside a consistent approach to measurement. It is now reaping the benefits. 

Embracing applicable United Nations Sustainable Development Goals and addressing responsible gambling head on will forge an attractive and favoured approach to investors, analysts and shareholders alike.

There would seem to be no reason why the gaming industry cannot do the same. In short, achieving a substantially more beneficial outcome through embracing, coordinating and synchronising sustainability factors. 

As regulated gaming industry advisers and researchers, we set out to frame the issues at play in a white paper published in June 2023.

Emboldened by the response to our initiative, we formed FiNTEL Sustain. This rated and ranked 20 of gaming’s largest public companies in Europe and the US. Using the framework outlined in our white paper, we assessed a range of B2B and B2C companies. 

The results of this work pave the way for a critical roadmap to a state of financial optimisation for the industry. Essentially, these ratings frame where and how operating companies can develop and flex their sustainability muscles. Consequently, this results in significant financial benefits to their stakeholders. 

The need for gaming-specific sustainability metrics

Unlike many ESG and CSR reporting tools, FiNTEL Sustain incorporates operational and financial performance measures to create a valuable dataset. This then reflects where improvement can be made relative to industry peers.  

More pertinently, the measures are customised to regulated gaming. This includes critical factors and variables specific to the sector. While the vast majority of sustainability reporting is industry-agnostic, tailored metrics lead to more relevant and useful data for companies, capital allocators and regulators.

The scoring methodology is based entirely on publicly available data across 11 distinct data sets with a bias for complete transparency. Five of the 11 are premised on the United Nations Sustainable Development Goals (SDGs) within the ESG (Environmental, Social and Governance) areas of measurable development. 

The other six indicators importantly include:

• Compliance and financial
• Market exposure
• Responsible gambling
• Executive and non-executive board
• Regulatory performance across markets
• Asset performance and shareholder risk

The analysis then has a further granular layer containing a further 12 sub-data sets, which are in part weighted depending on the risk profile. This uses more than 170 separate datapoints across each business for these measurements.

All scores face a stringent review process before publication based on specific measures such as percentage tolerance or outlying position compared to the sector as a whole. Further assessment protocols exist where companies clearly have a capability around the measurement but are not transparent in reporting.

The ratings and rankings scores are generated around evidence, transparency, measurement and accessibility of information.

The result: Land-based outperforms igaming

Interestingly, it was regulated operators with a significant land-based footprint that ranked highest. This was despite increased exposure to environmental factors that may have pushed down ratings. This can be attributed in part to the relative underperformance of several igaming companies, our findings show. 

Businesses with a large land-based component appear to have a more structured and conscientious approach to reporting compared to their igaming-led counterparts. This is despite seemingly more onerous environmental requirements and little history of sustainability reporting.

As the industry is so compliance-focused by necessity, it would follow that we would see an excellent standard of compliance and reporting. The reality, however, is that significant progress is necessary in order to more fully reap the benefits, both on an individual and group basis. Or worse, to avoid adverse impacts. 

There is an obvious need for companies to streamline reporting and for the regulated gaming sector to speak as one industry as much as possible. Equally important is the need to focus on objectives that can be easily interpreted by most, if not all of the companies, within a competitive basket. 

Doing so enables investors to interpret sustainability performance on both an individual company and industry basis.

Room for improvement in industry sustainability

The detailed review of the 20 companies revealed some further critical insights:

• All companies measured had reporting weaknesses, inconsistencies and variances in what they focused upon/emphasised. In many cases, reporting shortcomings can be overcome relatively easily to improve scoring in many areas. For example, adding transparent measurement criteria or targets to responsible gambling approaches could raise ratings.

• Companies seem predisposed to providing information they felt reflected their strengths, or enabled them to shine according to their own perceptions. That is not necessarily what should be measured in sustainability terms generally, or indeed FiNTEL Sustain factors specifically, which enhance for example the UN SDG data, with specific operational and financial performance data. 

• Companies with a history of regulatory settlements (fines) are likely to have a more comprehensive responsible gaming approach than their peers. This shows itself to be the case in their reporting actions. However, sufficient detail and ongoing measurement is lacking in most cases.

• Acquisitive igaming companies increase their risk profile through an M&A strategy. This is especially if their targets are domiciled in markets with weaker regulatory frameworks. Further risks arise through the integration process, when companies look to connect or understand alien systems or process. The industry has seen numerous cases of breaches as a result of legacy and integration issues.

• Companies often focus on environmental issues in sustainability reports, often dumbing down responsible gaming reporting or even omitting it without achieving a balance. 

A unified approach to gaming sustainability: Benefits for all

Almost all of the companies scored could improve their FiNTEL Sustain rating and sustainability standing generally. All it requires is more detailed reporting, adherent to the broad spectrum of reporting criteria, not just what they see fit to focus on. 

Indeed, a lack of cohesion over what to focus on and what is important breeds confusion. Capital allocators do not necessarily look at the industry as united. Instead, they look in terms of its ability to size up and act upon the relative sustainability risk represented by the sector. 

The industry should not interpret individual sectors’ melancholy performances as the end of the world. Nor should the lagging of the industry in sustainability be met with doom and gloom. 

Rather, this represents a profound opportunity. The industry follows strict rules and provides numerous processes aimed at protecting the customer and company risk. In many ways, this is well beyond many other sectors. 

Transparent reporting

Transparent reporting of such actions can help to improve and refine the approach to sustainability and improve scores accordingly. In an era of ever-increasing reporting requirements, taking the industry to the next level of sustainability performance is eminently doable. It should be natural for a sector as wedded to compliance and reporting as regulated gaming. 

In order to take advantage of the clear financial benefits on offer, the regulated gaming sector needs to not just take sustainability more seriously, but to approach it in a unified and uniform fashion. 

Our exercise of rating and ranking the top 20 companies undertaken makes this clear. Despite many excellent initiatives and performances at the company level, what is not clear is whether the industry as a whole can actually bring itself to achieve a better standing, thus enabling its constituent parts to flourish just as other industries have. 

The upside is strikingly positive for all stakeholders.