Read part one of the series, looking at environmental issues in relation to the industry, and part two, focused on the need for more detail on the social responsibility front.
Remember, ICE365 is collecting responses for the first industry-wide materiality assessment. Share your views here.
If one looks at the origins of the modern gambling industry, it’s fair to say it hasn’t always screamed ‘good governance’. From organised crime links on the land-based side to tales of CEO arrests on the online front, gambling has not historically been necessarily synonymous with above-board administration.
But as regulation has spread and tightened across the world, the industry has (mostly) shrugged off its less salubrious associations and the stock market listings of many of the market’s biggest players have ensured a much higher level of legitimacy.
Despite this, failures related to business ethics remain the most important ESG risk for the industry, says Anna Yuryeva, senior analyst at ESG ratings agency Sustainalytics.
“Business ethics is probably the key MEI [material ESG issue] because if there is any type of misconduct or if there is any scandal at this level, this could lead to the withdrawal of casino or gaming licences… for example, if a company has been involved in a money laundering scheme which is connected to criminal schemes, that could potentially lead to their operations being ceased or paused for the time being until the case is resolved,” she explains. “I would say the most prominent example I have recently looked into is Crown Resorts in Australia.”
And it’s not just physical casinos at risk – if one looks at the regulatory actions taken by the Great Britain’s Gambling Commission, it’s clear that quite a number of online licensees have gotten it wrong in terms of anti-money laundering, terrorism financing and having the right customer checks in place in terms of affordability.
In fact, Yuryeva says risks related to the online industry have risen in prominence among investors over the past year as the closure of land-based venues contributed to a surge in online play. This saw Sustainalytics receive multiple requests from clients for explanations on how they differentiate online operators ratings from physical casinos.
For a start, she says, “any casino that would have online operations would need to have very strong robust programmes – internal audits and systems – that would verify their clients’ real profile, as well as programmes aimed at preventing gambling addiction, because that is also a very important issue.”
Another key requirement is that they have methods for reporting any wrongdoing, she adds. “For example, they could implement an independent hotline with provisions for anonymous reporting as well as protection against retaliation so employees or customers could reach out to this hotline and report any misconduct or suspicious activity. This is very important because most often people will not point out such mistakes in the open, they need to be protected.
“A company could formally prohibit the solicitation of money laundering and terrorism financing but if it doesn’t disclose guidance for unusual transactions indications or if it doesn’t commit to undertake measures against clients who use their services to finance criminal conduct, that definitely would be a pretty substantial gap in reporting or disclosure.”
All of this needs to be overseen from right at the top of an organisation, says Louise Barber, partner at law firm Squire Patton Boggs.
“It is about having the right audits and assurance processes and policies in place – that means that actually the board right at the top of the tree has visibility on how those policies and procedures are being enforced within the business and adhered to and also acting. In the event that the board does become aware that the policies and procedures and standards that they put in place are being breached, that this is acted on and rectified.
“In much the same way as if you misstate your accounts and get your financial information wrong, if you report on practices and say in your annual report this is what you are doing when actually you are not, if investors have relied on that and suffered losses as a result then the board can be liable for that, so having that audit and assurance in place is really important and will help decrease that risk.”
Lack of clarity on reporting…
However, when it comes to reporting, Barber says there’s a more fundamental issue for operators and that is that they aren’t sure what exactly they should be reporting on in terms of ESG.
“I would say across the board, including in this sector, the number one question I get asked is ‘what should we be reporting on in the absence of legislation?” she says. “There isn’t a specific ESG act out there that says what you are supposed to be saying on ESG, it is very much left to the company to determine what the key ESG metrics are.”
Compounding the issue for gambling companies is the fact that the more developed area in this regard is in the ‘E’ (environment) pillar of ESG, whereas it’s the ‘S’ and ‘G’ that are most likely to cause concern among investors when it comes to the industry. Barber says this has left smaller firms – for example, those at the bottom of FTSE 250 level – really struggling with what reporting framework to adopt.
Stakeholders are a good place to start, she says. “My first advice is to go and speak to your shareholders and your employees, the key stakeholders in your business. Find out what is important to them, what is important to you as a company and then that is what becomes your narrative and your framework for reporting going forward.”
This is an approach endorsed by Sisal, says Giovanni Emilio Maggi, chief institutional affairs and communication officer. “Since 2008 we have voluntarily published our Sustainability Report and we have set up an integrated engagement process to anticipate and better understand the expectations of our stakeholders.
“Our 2020 Sustainability Report is now based on Global Reporting Initiative standards and linked to 2030 UN Sustainable Development Goals: more than 14,000 stakeholders have been involved in the stakeholder engagement activity to identify and update the issues affecting our business. In the next few months we will organise stakeholder forums and workshops to discuss our sustainability strategy with several stakeholder groups.
“Listening to our stakeholders is not only a ‘nice to have’ approach but it is fundamental to succeed in our business and have a very credible sustainable strategy well beyond the compliance in responsible gambling.”
The next step in the journey is perhaps obtaining a rating from a rating agency specialising in ESG, but again Barber says this can throw up as many questions as answers. “There are a lot of them and so a lot of companies are struggling with, ‘well, which ones should I pick to report against?’ and ‘Is that recognised in the market?’ But once they’ve got over that hurdle then I think it is helpful to companies.
“Because ESG is such a huge area and one of the questions is ‘where do we even start?’ those ratings agencies are very helpful because they do, by the metrics against which they are measuring, give companies an idea of, ‘well, actually if I hit those and report on those things then I am part of the way there’.”
Maggi says Sisal has taken a similar view. “We also believe that it is important to have external validation. Recently we have obtained a silver rating from EcoVadis, which has evaluated our sustainability approach based on international standards within four main areas: environment, labour and human rights, ethics and sustainable procurement.
“Sisal ranked in the 89th percentile, meaning that our score is greater than or equal to that of 89% of all companies evaluated by EcoVadis up to March 2021. We are now defining further ESG targets relevant to the assessment for the purpose of assigning other ESG ratings in the next months.”
Of course, another key issue when it comes to governance is the composition and remuneration of boards, particularly given the recent focus on diversity. In fact, such has been the rise in scrutiny on the latter that for the first time, last year Warren Buffett – regarded by most as one of the most successful investors of all time – addressed it in his 43rd annual letter to shareholders.
“During the first 30 or so years of my services, it was rare to find a woman in the room unless she represented a family controlling the enterprise. This year, it should be noted, marks the 100th anniversary of the 19th Amendment, which guaranteed American women the right to have their voices heard in a voting booth. Their attaining similar status in a board room remains a work in progress,” he wrote.
Not ‘picture perfect’
While Buffett was clearly not speaking of the gambling industry specifically, it fair to say that as an industry it has been widely recognised as something of a laggard when it comes to gender equality at board and executive level – and there has even been some evidence to suggest things are getting worse.
The All-Index 2019 Annual Report, published by the All-in Diversity Project in November last year, found that only 22.5% of non-executive board members in the industry were female, and more worryingly, that this had fallen 5.5% since the previous year.
However, Yuryeva says: “A lack of women at board level is a very common issue and unfortunately is not just limited to casinos.
“This is something that we have a corporate governance team specifically looking into with corporate governance indicators such as remuneration and board structure.”
Even if gender remains an issue on the remuneration front, there have been some encouraging signs that sustainability is at least starting to become a factor in pay structures. For example, Kindred announced in its 2020 Group Sustainability Report that it had changed its bonus structure to make group sustainability a core element of bonus plans.
Similarly, Entain’s most recent ESG report said it was this year introducing a safer betting and gaming metric that would “account for 15% of 2021 bonus payments for all office based employees”.
Maggi says Sisal has also followed suit: “Since 2021 a percentage of the remuneration of top management has been linked to the achievement of sustainability objectives while Responsible Gambling KPI’s have been defined across all business unit in order to effectively embed the program into our operations.”
All of this points to gambling companies really starting to put their money where their mouth is when it comes to sustainability. How far this extends across the industry and what impact it has remains to be seen, but Yuryeva sounds a note of caution on the potential here.
“[Most gambling companies] fall into the medium risk category and actually for them to get to low is pretty much impossible if I’m absolutely honest. They would need to get 100 points for every research indicator across the board and they would need to be completely clean in terms of their controversies, which is very, very difficult to achieve simply due to the nature of this business. It’s a very controversial one and because there are so many ongoing developments in terms of regulations and market trends, I am not really sure how a company could achieve perfect scores across the board.”
However, she concedes that this is something most in the financial community are well aware of: “Investors who are interested in this specific industry are aware of the fact that this will never be a picture perfect area.”
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