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Sector Reports - 06/12/2018

Amidst the high-profile controversies, how do Software & IT Services companies really perform on CSR?

With critical data privacy issues, growing competition and a responsibility to adapt both workers and operations to fast-emerging technologies, this comprehensive new report presents Vigeo Eiris' analysis of 214 companies in the Software & IT Services sector.

The report provides Vigeo Eiris’ exclusive opinion on sector vulnerabilities, controversies and emerging risks, as well as strengths, innovations and best practice in terms of CSR. The report highlights sector ESG challenges and emerging issues, as well as performance scores and advanced indicators on critical issues such as human rights – including the right to privacy, business ethics, human capital and energy transition, governance, executive remuneration, transparency on taxes, integrity of lobbying practices, the level of sustainable products & services, and contribution to the UN Sustainable Development Goals.

Key Findings:

  • The Software and IT Services sector is composed of companies involved in the development, implementation, production, maintenance, distribution and publication of software products and services, including web based and online services in different industries (such as healthcare, food, travel and tourism, entertainment and media, gambling, etc).
  • The sector’s advances and innovations – such as the Internet of Things (IoT), artificial intelligence (AI), cloud computing and applications – are shaping the future of the technology industry and playing a strategic role in the global economy.
  • Software & IT Services companies demonstrate a disparate but generally weak performance towards sustainability commitments. Vigeo Eiris awarded an average overall score of 26.7 to companies in the sector, on a scale of 0 to 100. The sector’s performance remains unchanged since our previous analysis in 2017.
  • The sector ranks 35th out of Vigeo Eiris’ 39 sectors, covering a total research universe of 4,500 companies. In 2017, the sector ranked 36th.
  • Companies with the highest market capitalisation are mostly listed in North America; however they demonstrate an overall weak CSR performance and a high level of involvement in controversies. In contrast, five of the seven companies displaying robust to advanced ESG performance are listed in Europe, while one is listed in India and the other in the United States. Laggards are mostly listed in Asia Pacific and Emerging Market countries.
  • The Software & IT Services sector reporting rate is 51%, below the universe average (55%), with European companies showing a higher capacity and willingness to commit to CSR issues.
  • ESG risk mitigation scores are limited in relation to reputation (34/100) and legal security (34/100), and weak in relation to operational efficiency (26/100). In terms of managing issues affecting human capital, companies display a weak average score (21/100), below the universe average (27/100). Although the sector is known for its competitive wages and salaries, Software & IT Services companies face the complex challenge of attracting and retaining talent. The sector is considered highly demanding in terms of knowledge and skills, and employees face high levels of stress and pressure due to increasing competition as technology is incorporated more and more into daily life. Heavy workloads and working over contracted hours are commonplace as demand fluctuates significantly within the sector. The low level of reporting on these issues suggests a lack of commitment and readiness by companies to face these challenges. Additionally, the overall lack of information on efforts to promote social dialogue contributes to a weak Human Resources performance.
  • The willingness and commitment of Software & IT Services companies to tackle climate change and support the transition to a low-carbon economy remains weak (14/100). This issue should not be underestimated: companies are increasingly exposed to potential damage due to severe climatic events that could impact data centres, cause potential operational disruption and increase costs. Overall, European companies lead the sector in efforts to integrate climate risk management into their strategy, for example by strengthening their infrastructure against climatic events, creating back-up facilities, etc. In contrast, North American companies display overall weak commitment to address the impacts of climate change. It is worth mentioning that Facebook and Alphabet have engaged with different stakeholders to reiterate their commitment to the Paris Agreement, despite President Donald Trump’s announcement to formally withdraw the USA from it.
  • Vigeo Eiris has identified 272 Software & IT Services controversies over the last four years, making this one of the most controversial sectors in our research universe. Most controversies are faced by North American companies (77%) which mainly operate on a B2C business model. It’s interesting to note that two of the five companies facing the highest number of allegations within Vigeo Eiris’ universe – Facebook and Alphabet – belong to the Software & IT services sector. For companies facing controversies, the severity level is critical for 1% of cases, high for 9%, significant for 16% and minor for 3%. The most recurrent controversies relate to the respect of fundamental human rights; particularly the right to privacy, the promotion of responsible customer relations and the involvement in anti-competitive practices. 71% of companies do not face any controversies.

Key Takeaways:

  • Efforts to address human rights issues, particularly the right to privacy, remain limited (39.4/100). Whilst companies face increasing scrutiny and criticism of the way they safeguard user data, the enforcement of the EU General Data Protection Regulation (GDPR) could force companies to be more transparent and accountable about the way they manage customers’ confidential information and the ever-increasing risk of cyber-attacks and data breaches. Most companies commit to respect the right to privacy; however, an overall lack of information on measures to tackle related issues and a high level of involvement in controversies have been observed in the sector. The most common actions include awareness-raising and training programmes for employees on human rights issues.
  • As social media networks increasingly integrate into social processes, enabling people around the world to freely communicate with each other, ensuring the legality of the content being shared becomes a complex issue. On one hand, failure to ‘police’ online content could expose social media companies to legal risks, as controversies relating to misinformation and hate speech are on the rise. On the other hand, limiting user access to certain content could be considered a restriction of freedom of expression, potentially exposing companies to both legal and reputational risks. To illustrate: Google’s launch of a censored version of its search engine in China was condemned by many human right activists.
  • The Software & IT Services industry is continuously evolving, mainly due to its fast-paced and constant technological development. This rate of change creates several challenges for companies in attracting and maintaining a skilled workforce. An overall weak performance (19.5/100) on the topic of career management and promotion of employability is displayed by companies in the sector, largely due to an apparent lack of comprehensive strategies to promote and support employees’ professional development.
  • In a highly competitive industry that consists of three of the five biggest tech companies in terms of global market value (Alphabet, Microsoft and Facebook – worth USD 2 trillion in total as of May 2018, according to Statista), anti-trust practices such as abusing a dominant market position are very common, as demonstrated by the high number of controversies faced by the sector in this regard. Although most companies commit to preventing anti-trust practices, the limited performance in this area (29.9/100) can be explained by a lack of actual measures to address the issue, which is currently limited to reporting systems.

Best performing areas:
o Shareholders
o Audit & internal controls
o Fundamental human rights

Worst performing areas:
o Transportation
o Working hours
o Social dialogue

Top Performing Companies:
o Europe: Technicolor (68/100)
o North America: DXC Technology (51/100)
o Asia Pacific: NTT Data Corporation (38/100)
o Emerging Markets: Wipro (61/100)

Companies making best progress since 2017:
o Europe: Technicolor (+14)
o North America: VMware (+10)
o Asia Pacific: KAKAKU.COM (+1)
o Emerging Markets: NetEase (+1)

To view an excerpt of our 2018 Software & IT Services sector report, download the document below.
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icon-download-34x36 Key Findings_Software and IT Services_September 2018
Keywords : ESG