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Why ESG Manager Activision missed out on ‘Blizzard’

Activision Blizzard, which Microsoft plans to buy for $75 billion, is facing lawsuits and a Securities and Exchange Commission investigation stemming from alleged employee gender discrimination and sexual harassment. Many critics of environmental, social and governance investing have questioned the apparently apparent disconnect between Activision’s public persona and its closed-door behavior. They are also asking how ESG Investment Managers went wrong.

We are among those who did it wrong. As proponents of ESG investing, we ask ourselves why and what lessons can we learn from this example.

Many ESG-focused managers, including Seeds, place Activision’s stock in funds and strategies because of the way various ESG data providers have historically scored the company. It is important to understand and learn from this history.

A Look at Activision’s ESG Scoring

According to various data providers, Activision scored favorably in ESG factors, but scored highest for E- and G-related issues. In our data assessment, Activision scored the weakest in social issues including data privacy and human capital. This may reflect the nature of its business model or the notoriously difficult organizational culture in gaming. But these risks were not always above the threshold to warrant exclusion from many ESG-focused investment strategies in the industry. (For SEEDS, Activision only appeared to slant a customized portfolio, with investors preferring “people” issues to the last position.)

In July, the new York Times Reported on details of the California Department of Fair Employment and Housing lawsuit against Activision, which accused the company of being a “breeding ground” for “sexual harassment and discrimination.” According to the suit, officials not only failed to fix these problems but tried to hide them.

The Activision position asks an important question about ESG assessment, both regarding ethical values ​​and the extent of investment risk. Should initial allegations of company malfeasance alone turn into investment? It also raises whether some ESG data can ever actually be determined. How many workforce charges are enough before a company can change its social or governance score? One? Five? Or should it not be changed until the charges are proved?

In the past, the allegations foreshadowed the revelations and admissions of real, systemic problems at Activision. 16 November story in wall street journal revealed that Activision CEO Bobby Kotick had known about the company’s systemic sexual misconduct and harassment problems for years. Two weeks ago, the company announced that it would delay the planned 2022 release of the two games, probably as a result of high voluntary employee turnover and low workforce morale. ATVI stock is down 28% (versus the S&P 500 up 27%) by the end of 2021.

ESG. a double-edged sword for

The Activision-ESG story is a double-edged sword for ESG. On one hand, its falling stocks—and the reasonable belief that it could take years to recover—serve as a fairly clear reminder of why investors should take the cost of poor ESG performance seriously.

On the other hand, the case highlights not only problems with the inherent subjectivity of some ESG data, but how a company’s words—as glossy CSR reports and TV talk points—can still speak louder than its actions. until it is too late.

The current criticism surrounding ESG is reasonable and significant, until the all-or-nothing argument that ESG data needs to be fully standardized and quantifiable before it can be useful. There is much room for improvement in human assessment of real-time events and human behaviors within companies, particularly in how to recognize and disregard a company’s greenwashed stage presence. Nevertheless, some data will forever remain subjective and indisputable; As an outside observer, even the best analyst cannot fully know what is happening behind the scenes.

Lessons for ESG Investment Managers

Improving how analysts can better see backstage at companies and for investment managers to examine data to see what may be missing in headline numbers. Ironically, greater human participation – in the form of assessing subjective data beyond its face value – may be an important part of the solution. We also see that when data—and its interpretation—goes wrong, we definitely need to correct.

Beyond human intervention and proactive management, AI and machine-learning assessments of corporate behavior can complement more subjective assessments. Quantitative data capturing overall consumer sentiment based on real-time online news can be used by human analysts to spot trends sooner than they can identify, evaluate, and adjust based on a particular set of corporate behaviors. could.

So many of us focused on enabling ESG investing got it wrong at Activision. Recognizing and understanding how and why is essential to the credibility and trust that lay the foundation for investing with purpose and pursuing a mission to align financial goals with personal values.

Kuni Chen, CFA, is Head of Investment and ESG for Seeds Investor, a platform that allows investment advisors to auto-deliver multiasset class, value-aligned investment portfolios.

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