How Sustainability Plus can unlock new value in gaming

Environmental, social, and corporate governance standards (ESG) have become an unlikely culture war topic. From public boycotts over brands’ support for LGBTQ+ rights to politicians claiming corporations’ focus on ESG comes at the expense of shareholder returns, it’s suddenly positioned as a contentious focus. 

A 2023 research paper from Northeastern University’s D’Amore-McKim School of Business suggests the case against is somewhat overcooked. 

For every 10% increase in emphasis on material ESG concerns, company value increased by 1.4%, according to the research.

It’s more valuable to consider ESG factors in broader terms, however. In our view these form part of a category we call ‘Sustainability Plus’. 

‘Sustainability’ factors are typical measures of environmental, social and governance that form a given company’s compliance profile. The ‘Plus’ part is the measures which factor in key financial performance and operational factors which are specific to an industry. In this case, that’s regulated gaming. 

Companies that are delivering strong results within this overall package of performance measures are well-managed businesses that are executing well. In so doing, long-term value is inherently generated as long as it is recognised as such by investors. 

How ESG can broaden gambling’s investment pool

After all, the holy grail for companies is to be acceptable to the broadest selection of investment allocators as possible from both an equity and a debt perspective. Gambling is not on the acceptable list for some investors no matter what the metrics. 

However, for those investors that do allocate capital to regulated gaming having the best performing metrics is critical and can mean the difference between receiving an equity allocation or not and can make a huge difference in terms of cost of capital for debt. Hundreds of millions are at stake. 

Put simply, regulated gaming companies that do not pay attention to a broad-based productive compact with stakeholders, employees, customers and society, are less likely to deliver value for shareholders. 

There’s also the employee angle to consider. Taken at a rudimentary level, many employees own shares in their company. They generally want and expect their employer to act and deliver in a sustainable manner. 

By adopting Sustainability Plus principles, companies incentivise and offer the potential for rewards to all stakeholders from the workforce to shareholders. We know how hard gaming companies have to work to retain staff and provide the best possible environment. This is certainly of further appeal when added to other current employee incentives.

A bet on the future

But while the Northeastern research shows how a small change in allocation can have significant impact on value, currently only a small percentage of investors profess to be concerned about sustainability scores in the US. Indeed, there’s still an element of choice in reporting against some of the key metrics. 

But it’s increasingly likely to become a regulatory requirement. The introduction of the Corporate Sustainability Reporting Directive (CSRD) in Europe, mandating in-depth disclosures, will have a significant impact. The first batch of eligible companies are required to submit their reports for FY2024, and those that are not prepared will be less attractive to investors. 

Similarly, smaller companies need to prepare now for the reporting requirement as they too will be required to report in due course.

How is regulated gambling performing when it comes to ESG?

For regulated gambling specifically, we have not seen evidence of ESG metrics having a positive impact on company valuations. 

We undertook to rate and rank 30 of the top publicly-listed gambling companies and the results were all over the map. However, one aspect that was consistently the case was that many companies were either underperforming from a Sustainability Plus perspective or else were not given proper credit for the positive things they were doing. 

Even the best performing companies lacked a consistency and uniformity of approach that would benefit their cause. It is staggering really, for an industry that is so compliance focused.

This presents a huge opportunity. Today, it seems every company focuses on what is important to them in sustainability terms. Some even ignore the matter altogether. 

Our contention is that if the industry were to speak with a more unified voice and demonstrate consistency in terms of focus investors would take notice. 

This, in turn, could be beneficial in terms of equity allocation, debt cost of capital and also in terms of matters such as M&A passing muster. The alcohol industry, for example, has a much more stratified and consistent approach to sustainability reporting and benefit significantly from this in terms of higher valuations and lower cost of capital. 

In contrast, we have had discussions with one major gaming operator that reckons they pay as much as 4% more for debt than companies in other sectors. Other companies in the sector are having the same issue. If this could be rectified the benefits to operating companies would be stratospheric.

The impact for investors

It’s also important to focus on the benefits for investors. Asset allocators are chasing returns and many want to be able to put capital to work in the regulated gaming sector. Individually and collectively, the regulated gaming sector needs to provide the reasons for investors to act in this way.

A deep dive into sector specific data is important for companies and investors to fully understand the whole picture. Leading companies in the industry have started to do this but at present, the sector is lagging in its overall consistency and transparency of reporting. In our view, companies all have specific key risks that affect the sector they are involved in. 

The gaming industry has a tremendous opportunity to achieve beneficial impact if it is prepared to report consistently and be more transparent in its business reporting. 

The standardisation challenge

It’s a noble goal, but it’s a big ask. Our data shows a chaotic picture whether looking on a qualitative or quantitative basis. The measurement around what is likely the riskiest area, responsible gambling, is at best opaque in reporting terms. We often see little detail compared to the narrative provided by a company. 

Inconsistent methodology surrounding KPIs and lack of measurement on an ongoing basis clearly does not place the gaming industry in a space where some investors feel comfortable. But this does not have to be the case. 

The industry does much good work. Its downfall is an unwillingness to share and report on a consistent basis. Many of the larger gaming companies are customers of one or more ratings agencies. The biggest issue we have heard from investors is a lack of industry-specific data and a lack of confidence in the data itself, full stop. 

Furthermore, in the case of gambling, ESG has a wider risk context than many sectors. Responsible gambling actions are at the forefront of this, and investors, institutions and others struggle to fully understand the actions of a company.

The elephant in the room is self-reporting of data by companies to the traditional ratings agencies. Many investors just don’t believe the numbers. 

Simply put, in terms of standardisation, there is no standard for regulated gaming today.

Creating a new benchmark for ESG reporting

Yet standardisation is eminently possible. Our FiNTEL Sustain platform considers 170 different factors spanning financial performance and operations metrics as well as typical ESG metrics. This is all gleaned from publicly available data and using AI rather than self-reporting. 

The breadth of factors enables the ability to compare companies in all components of the gaming sector and indeed enables the comparison between regulated gaming and myriad other industries. Or is the importance of identifying material ESG metrics the key thing here?

The one area which always comes to mind is climate and seems to have been the most important factor at play in the politicisation of sustainability such as in the United States. However, climate is only a small component of the metrics considered. 

A good way to think about sustainability reporting is to consider it to be a measure of the overall efficacy of management, strategy and execution taking into account short, medium and long-term considerations.

In the case of gaming, materiality tends to focus on regulatory intervention. This may be in the form of fines, changes in legislation or guidance, or possibly legacy findings in a period after M&A activity. Much of the consequential regulatory action could have been mitigated by better management of the risk involved earlier in the acquisition process.  

Ultimately we aim to provide a level playing field, measuring the open source data comparatively to the sector peer group. Eleven sub-sector scores provide a key analysis of how companies perform delivered though our AI-based modelling. 

The results elicit key themes and findings that are in the public domain but have previously not been assessed on such a comprehensive basis.  

Material matters

Materiality is a key factor here. Northeastern University’s research also suggests companies that increase emphasis on nonmaterial ESG actually see a 3% decline in value. 

And greenwashing is said to be rampant generally, especially as sustainability reporting gets more stringent. We have also found that companies have tended to focus on passion projects or arcane examples as a way of perceivably “ticking the box” in sustainability reporting. 

Companies such as igaming operators can be less exposed to environmental issues – it is always the social or governance aspects that provide the pain point. 

Some other industries have managed to forge a way forward through more transparent and consistent reporting across the sector. This is clearly not the case in the gaming industry, which would benefit significantly from a more uniform way to present its sustainability performance.

However, we are convinced the industry will improve its standing from both an individual company and collective perspective over time, as well as decrease the gap between gaming and other sectors, including other “sin” sectors. For example, alcohol has spent close to 20 years developing and honing its outward facing reputation. 

The reality is that the gaming sector could actually improve its fortunes much more quickly in comparison due to many of the things it already does within its expansive compliance function. This would dovetail nicely with increasing ESG and wider reporting requirements.

Sustainability Plus: The key to unlocking value creation?

Ultimately value is controlled by the actions of investors. The more the gaming sector can do to demonstrate the performance of the motherhood actions within Sustainability Plus reporting, the more it will reap the benefits. 

At present we have noted that land-based operators have better sustainability performance than igaming operators, for example. This is despite the environmental compliance, and its corresponding costs, that need to be carried. 

While this may be due to a younger industry with an emerging management cadre, we see this gap closing over time as the industry gets more serious about reaping the benefits of framing and documenting performance. 

In all honesty, we see numerous companies in the sector at a loss for the best way to approach this. It doesn’t sit naturally with their skillsets. 

Introducing a sustainability officer and promoting ESG across their companies is an important step in the right direction, but from the evidence we have seen leadership in the C-suite is as yet unable to unlock the undoubted potential of delivery of what we refer to Sustainability Plus achievements. 

Our focus is to ultimately unlock value for companies and unlock returns opportunities for investors as the gaming market continues to be increasingly pressured by costs, regulatory burden and significant reputational issues.