SASB Speaks: Are companies in your portfolio covering their digital assets?

Why investors should research companies’ digital stewardship

Silicon Valley has become one of the most significant sites for wealth creation in human history. A substantial portion of this wealth, especially recently, has stemmed from technological advances that have allowed for the increasing collection and storage of a new type of asset – consumer data. This data has some unique and fantastic qualities. Its acquisition is remarkably scalable; relatively few employees are needed for panning in this modern day gold rush. The “use” of data generally doesn’t diminish its value as the same object can often be sold to many people. Further, once the collection infrastructure is in place, the marginal cost of getting updated information from users is generally relatively low.
However, data doesn’t hold its value for long. One cannot make much money, no matter how ‘Big Data’ the data set is, on outdated consumer information, and keeping this data fresh requires varying degrees of consent from consumers. Companies operating in this space (chiefly Internet Media & Services companies, although many traditional industry classifications are being blurred as the Internet of Things gives many companies a shot at the coveted title of “tech company”) have something else in common with miners: the need to maintain their social license to operate. If companies fail to safeguard consumer data, use it in ways that consumers find unpalatable in advertising, or give it over to governments without due cause, consumers may resolve to limit companies’ ability to use this asset.
Data security presents both challenges and opportunities. Corporate management and mismanagement of this issue can affect brand value and consumer demand, which warrants the attention of investors and analysts.

On the opportunity side, there are clear economic benefits that have come from company’s inventive uses of customer data. A recent report from PWC found that internet advertising, which largely depends on the ability to specifically target consumers instead of shouting into the vast digital void, was a $59.6-billion-dollar industry in 2015, a 20.4 percent increase over 2014.

On the risk side, one only needs to be a casual reader of financial news to frequently find companies publically apologizing for mishandling consumer privacy. For example, in 2014 Facebook purchased the messaging service Whatsapp for $22 Billion, when it only had $10.2 million in revenue the previous year.

Facebook clearly saw value in access to its user base. This messaging service was prized for its strict privacy policy, which initially Facebook made no indication of changing. However, after reversing this stance earlier this year, Facebook came under intense scrutiny from users and eventually European regulators.This November, after a German privacy regulator ordered Facebook to delete and stop collecting their citizen’s data, Facebook stopped collecting Whatsapp user data across Europe. It is difficult to estimate how many customers left the service over this issue, but certainly losing access entirely to this customer data represents a loss of revenue, and potentially a loss of asset value for Facebook.
A recent survey by TRUSTe and the National Cyber Security Alliance found that more American consumers are worried about how their personal information is collected online than they are about losing their primary source of income. Eighty-nine percent said they avoided companies that they felt did not adequately protect their data. This is likely an upward trend: 45 percent of respondents said they are more worried about their online privacy now than they were a year ago.
Companies are responding to consumer concern by launching more products focused on consumer privacy. Recently, the Wall Street Journal reported that Mozilla has launched a new version of Firefox, Firefox Focus. This browser has tight privacy controls that prevents company websites from storing and tracking visitor data. The creation of this product not only speaks to the growing consumer demand, but also hints a future where these types of consumer privacy measures are the norm.
Data privacy can also affect valuations. Snapchat, who recently filed papers for an IPO rumored to be valued at $25 billion, has most of this valuation (I assume, as the filing is not public) based on continuing to provide hyper specific data to marketers about their users. As a potential investor, I would hope that their S-1 filing (and subsequent 10-K filings) address how they plan on maintaining the value of this asset and ensuring that customers continue to be comfortable using their product.
Investors interested in data can look for company’s transparency reports, which over 40 companies provide (here’s an example from Google). Further, New America’s Open Technology Institute has produced two dovetailing efforts, the Transparency Reporting Toolkit and the Ranking Digital Rights project, that examine companies’ privacy disclosures and practices which investors could examine to find out-performers on this key issue.
Investors who are examining long-term sustainability of their portfolio holdings should be researching companies’ digital stewardship alongside their environmental and governance stewardship efforts and considering how all of these factors can affect company value.

Quinn Underriner is the Technology & Communications Sector analyst for the Sustainability Accounting Standards Board (SASB).