Activision Blizzard, which Microsoft plans to purchase for $75 billion, has been 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 rightfully questioned the seemingly apparent disconnect between Activision’s public persona and its behind-closed-doors behavior. They are also asking how ESG investment managers missed it.
We are among the many who got it wrong. As proponents of ESG investing, we ask ourselves why and what lessons we can draw from this example.
Many ESG-focused managers, including Seeds, held Activision’s stock in funds and strategies, in part because of the way various ESG data providers have historically scored the company. It’s essential to understand this history and learn from it.
A Look Back at Activision’s ESG Scoring
According to various data providers, Activision has scored favorably across ESG factors but scored highest for E- and G-related issues. In our data assessment, Activision scored 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 weren’t always above thresholds to warrant exclusion from many ESG-focused investment strategies in the industry. (For Seeds, Activision appeared in just one customized portfolio skew, in which investors prioritized “People” issues in the last position.)
In July, The New York Times reported on the details of a State of California Department of Fair Employment and Housing lawsuit against Activision alleging the company was a “breeding ground” for “sexual harassment and discrimination.” According to the suit, executives not only failed to fix these problems but also sought to conceal them.
The Activision situation begs a critical question about ESG assessment, both regarding ethical values and the limitation of investment risk. Should early accusations of company malfeasance alone warrant an investment change? It also raises whether some ESG data can ever indeed be quantified. How many workforce accusations are enough before a company’s social or governance scores should change? One? Five? Or should it not change until charges are proved?
In hindsight, the allegations foreshadowed revelations—and admissions—of genuine, systemic problems at Activision. A Nov. 16 story in The Wall Street Journal revealed that Activision CEO Bobby Kotick knew of the company’s systemic sexual misconduct and harassment problems for years. Two weeks prior, the company announced it would delay the planned 2022 release of two games, perhaps resulting from high voluntary employee turnover and low workforce morale. ATVI stock fell 28% (vs. S&P 500 up 27%) as of year-end 2021.
A Double-Edged Sword for ESG
The Activision-ESG story is a double-edged sword for ESG. On one edge, its plummeting stock—and the reasonable beliefs that it could take years for it to recover—serve as an all-too-clear reminder why investors must take the cost of poor ESG performance seriously.
On the other edge, this case highlights problems not just with the inherent subjectivity of some ESG data, but how a company’s words—in the form of glossy CSR reports and TV talk points—can still speak louder than their actions, until it’s too late.
The current criticism around ESG is fair and important, right up until the all-or-nothing argument that ESG data must be fully standardized and quantifiable before it’s useful. The human assessment of real time events and human behaviors inside companies has plenty of room for improvement, especially in how to recognize and disregard a company’s greenwashed stage presence. Yet, some data will forever remain subjective and unquantifiable; as an outside observer, even the best analyst can’t fully know what’s happening behind the curtain.
Lessons for ESG Investment Managers
What’s essential to improve is how analysts might better see backstage in companies and for investment managers to gut-check the data to see what might be missing in the headline numbers. Ironically, more human involvement—in the form of assessing subjective data beyond its face value—could be a vital part of the solution. We also see the need to course-correct when the data—and our interpretation of it—gets it wrong.
Beyond human intervention and proactive management, AI and machine-learning assessments of corporate behavior can complement the more subjective assessments. Quantitative data that captures aggregated consumer sentiment based on real time online news can be used to spot trends sooner than human analysts can recognize, assess and adjust based on a particular set of corporate behaviors.
Many of us focused on enabling ESG investing got it wrong on Activision. Acknowledging that and understanding how and why is essential to the credibility and trust that girds the foundation of investing with purpose and furthering the mission of aligning financial goals with personal values.
Kuni Chen, CFA, is head of investments and ESG for Seeds Investor, a platform that allows investment advisors to auto-deliver multi-asset class, values-aligned investing portfolios.
See the published article on WealthManagement.com.