Increased regulatory scrutiny is on tap for big tech in 2021 — one of the main risks for the sector this year.
“Regulatory risks and pressures are going to significantly increase” for mega-cap tech companies, said Jonathan Mzengeza, portfolio manager for technology at CIBC Asset Management, in a December interview.
Mzengeza was speaking before major tech platforms blocked U.S. President Donald Trump from their services for inciting violence at the U.S. Capitol earlier this month.
He said intensified oversight of Big Tech would build on developments from last year.
“If you look at what has happened in 2020, a lot of these firms have been hit with lawsuits,” Mzengeza said.
The U.S. Department of Justice filed an antitrust lawsuit against Google in October, citing the firm’s dominance in web search and digital advertising. The U.S. Federal Trade Commission filed an antitrust suit against Facebook in December over anti-competitive behaviour, including its acquisitions of WhatsApp and Instagram.
Video game maker Epic Games is suing Apple over the fees it charges to developers to sell apps through the App Store, and Apple is also facing increased scrutiny from U.S. legislators.
“All three of these companies are facing possible fines and penalties from the European Union of up to 10% of annual revenue if they fail to follow ever more stringent antitrust obligations,” Mzengeza said.
The EU’s new Digital Markets Act, introduced in December but not yet law, targets tech firms that act as gatekeepers to prevent competition.
The EU has previously fined Google billions of dollars for antitrust behaviour and is investigating Apple and Amazon for potentially breaching antitrust rules.
Mzengeza also noted the risks arising from consumer data use.
“Any company focused on internet advertising — those firms would be at risk in terms of leveraging that user data,” he said. “That’s something that is very top of mind for us in terms of regulatory risk for 2021.”
With the increased scrutiny, tech companies must consider regulatory risks in terms of their social and governance frameworks, Mzengeza said.
Along with regulators, investors are watching tech through an ESG lens — perhaps more so as a result of the pandemic.
“We have been using our firm’s environmental, social and governance frameworks to evaluate some of the stocks that we put into our funds,” Mzengeza said.
“In technology, we particularly look at social and governance as being the top two, with environmental coming really close to those.”
During the pandemic, social considerations have included how well companies have maintained their payrolls and supported employees.
“We looked at how they were able to foster a good work environment, being that a lot of people were working in circumstances that they hadn’t even thought were possible,” Mzengeza said.
In terms of governance, his firm considers companies “focused on maintaining a good ownership structure of decision-making,” he said. In those that make the cut, management is held accountable for decisions, with shareholders having access to management to directly discuss issues.
Climate change is a top environmental consideration — one for which mega-cap tech scores points.
Companies such as Google, Microsoft and Amazon have stringent rules aimed at reducing their carbon footprints, Mzengeza said.
“They have very aggressive goals on being carbon neutral and maintaining that carbon neutrality over the long term and using sustainable energy to power their large data centres.”
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.