July 12, 2023

  • Reuben Portanier, Advisory and Compliance Partner, GTG

Can ESG turn around negative opinions on the gaming industry?

Reuben Portanier suggests that environmental social and corporate governance (ESG) may be beneficial for the gaming sector’s reputation

A reputational challenge

In recent years, we have seen an exponential increase in negative public opinion towards the gaming industry. This has not been helped by the political class, who despite voting for their own country-bound licensing systems (and the gaming tax revenues they earn), have increased their pronouncements on the harm that gambling addiction do to society and that the promotion of gambling services entices more people towards gambling who go on to develop problem gambling behaviour.

Over five years, the position of law makers on advertising and mass media promotion has shifted from it being a necessary regulatory element to inform the public as to who is licensed in their jurisdiction so as to achieve a high channelization rate, to a situation were promotion in general is something which needs to be curbed and in some jurisdictions even outlawed completely. This has given the rise (at least in Europe) to advertising and sponsorship bans, and bonus scheme limitations amongst other measures.

This situation was mainly fuelled by two elements. The first was that the gaming industry itself swamped their markets with mass media advertising campaigns. In certain jurisdictions these were so ubiquitous they amounted to shooting themselves in the foot. The second was the result of media representation of gaming. The golden rule of a newsroom is that bad news sells, and every story about how gambling addiction ruined the life of an individual or their family, it is framed as a widespread problem, when the reality is that such unfortunate situations represent statistically less than one percent of people who engage in gaming.

Regrettably, the gaming industry has not done enough to dispel the negativity and promote itself as entertainment industry not vice. Recent examples of excessive advertising such as that seen in Italy, Sweden and the UK have induced social discomfort among non-gamblers (the majority of society) who in turn have brought significant pressure to bear on politicians to act. This has created a tsunami of advertising restrictions which has flowed from one regulated country to another. We have now reached a position where the industry needs to find a solution fast to stop the negative perception becoming worse to a point where public opinion considers gaming not as a form of entertainment, which they may like or dislike, but something inherently harmful and wrong. In this context the emergence of ESG may offer the chance for the sector to prevent a further slide in public perception and maybe even reverse it.

ESG – principles and applicability

Environmental, Social, and Governance (ESG) refers to a set of principles that guide responsible business practices.

The ‘E’ refers to environmental criteria, which consider how a company seeks to implement mitigation measures that reduce any negative impact on the environment, such as reducing by its carbon footprint. In the context of online gaming, this could be, for example, a decision to host its servers in territories where the carbon footprint is lowest.

The ‘S’ refers to social criteria, which examine how a company manages relationships with its customers, its employees, its suppliers, and the communities where it operates. Responsible gaming measures, good cause funding, gender pay gap reduction, and inclusivity measures all represent examples of how a gaming operator may already be unknowingly addressing the ’S’ in ESG.

The ‘G’ refers to governance and considers a company’s adoption of good governance standards, including compliance with laws and the regulatory framework that governs it. In the case of gaming, good governance and regulatory good standing would include licensing compliance, AML measures, adherence to company law, gaming tax compliance as well as leadership, internal controls and shareholder rights among other things.

The adoption of ESG is relentlessly becoming a mandatory requirement for listed companies s in financial services and other industries where responsibilities around the ‘E’ and the ‘G’ of ESG may be familiar, but ‘S’ less so.

In Europe, where EU Corporate Sustainability Reporting Disclosure (CSRD) requirements will soon come into force, ESG will take centre stage for all listed companies (including those in gaming), but could spill-over to other areas, albeit on a voluntary basis. CSRD requirements will apply to all large companies, including foreign subsidiaries, which meet at least two of the following criteria:

  1. Balance sheet total: €20 million+
  2. Revenue: €40 million+
  3. Average number of employees in the year: 250

CSRD will start on the 1st of January 2024 and apply as follows:

Financial years starting on 01/01/2024 – CSRD will apply to companies currently covered by the Non-Financial Reporting Directive (NFRD). This requires large public-interest entities to disclose information on Environmental, Societal, and Governmental (ESG) practices in regular non-financial statements

Financial years starting on 01/01/2025 – CSRD will extend to companies that are not presently subject to the NFRD, but meet at least 2 out of 3 criteria mentioned above

Financial years starting on 01/01/2026 – CSRD will further extend to small and medium-sized enterprises (SMEs)

European gaming operators covered by the CSRD will be obliged to comply and have their ESG framework. There are other frameworks and standards in place beyond the EU which are similar to the CSRD such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SABS) which provide guidelines for sustainability reporting with ESG at their heart. However, it will remain the case that a sizeable part of the gaming sector in Europe will not have to adopt any ESG reporting. This begs the question as to why the gaming sector should step up and embrace ESG even if it is not be mandatory.

Reasons for the gaming industry to embrace ESG

One key reason that the gaming sector should embrace ESG is that it is a quick win. The sector already has the basis of ESG by virtue of the highly regulated environment it operates in, thus it makes sense to embrace it. Unlike other sectors, online gaming has by default already implemented many ESG measures. The Social element (which is heavily regulated through responsible gaming measures, good causes funding or the obligation to donate to charitable institutions) is already inbuilt in the culture of a regulated entity. The Governance part is a core competence of a gaming outfit second to that of offering games due to the plethora of regulations and license conditions that need to be complied with. The sector may not be as prepared on the environmental aspect, but neither it is a big polluter, and in any case, this is something that can be worked upon.

The second big argument in favour of the sector’s adoption of ESG is that ESG rankings are rapidly becoming very influential in the formation of public opinion and can play a key role in shaping positive public perceptions about the sector.

Early in 2023, the Malta Gaming Authority (MGA) announced that it had started work on a voluntary ESG Code of Good Practice for online gaming operators licensed by the MGA. This initiative, which was put out for consultation in July 2023, will create an opportunity for operators licensed by the MGA to bolster their public image with the voluntary adoption of ESG. The MGA sees the adoption of ESG as a step in the right direction in terms of positive public opinion.

When they launched the ESG Code of Good Practice project, the MGA stated: “Looking ahead, we expect to see more and more companies taking concrete actions towards becoming more sustainable, and we believe that reporting such efforts contributes positively to implementing change within the sector and improving its overall perception, while also addressing the increasing demand for transparency and accountability in the industry.”

Hopefully, this highly commendable approach by the MGA will be followed by other regulators who may consider substituting advertising bans with the mandatory adoption of ESG. A well thought out ESG framework can establish clear parameters for responsible advertising, which instead of being a blazoned promotion of bonus schemes or new games, would instead promote how responsible the gaming operator is.

Examples of initiatives that would be part of ESG reporting

ESG Circle

Here are some ways in which ESG can change public perception about the online gambling industry

  1. Transparency and Governance: Online gambling companies can improve their governance practices beyond what is required by regulators in order to enhance transparency and accountability. This includes implementing ethical guidelines, conducting regular self-driven audits, and ensuring fair gambling practices, for example, by assisting sports associations in their sport integrity efforts. Demonstrating strong governance can help build trust with the public and alleviate concerns about the industry’s integrity
  2. Responsible Gambling Measures: Implementing responsible gambling measures is essential and a legal requirement for any regulated online gambling company. There are a range of initiatives mandated by regulators that promote responsible behaviour among customers including self-exclusion programs, setting deposit limits, and providing resources for gambling addiction support. These are already in place, however the industry may not have capitalized on them to engage with the media, and in turn educate the public that such measures demonstrate a commitment to customer well-being. So comprehensive are the support mechanisms for responsible gambling that gaming companies that adopt an ESG ranking framework can achieve higher rankings than the financial services industry on the ‘S’ element. Communicating the industry’s social responsibility can help to mitigate the negative perception of the industry as exploitative.
  3. Social Impact Initiatives: Online gambling companies can engage in social impact initiatives to improve public perception. This may involve supporting and funding initiatives related to mental health, addiction treatment, or education programs on responsible gambling. Sport betting companies can, for example, actively assist in fight against match fixing by funding educational programmes at youth sport level on the importance of integrity in sport. By actively contributing to society and addressing the potential negative consequences of gambling, companies can show their commitment to social responsibility
  4. Environmental Sustainability: Online gambling companies can focus on reducing their environmental impact. This can include adopting sustainable practices in their operations, such as choosing a hosting provider with a low carbon footprint, selecting office space that is environmental friendly and which minimizes energy consumption, using renewable energy sources, and implementing recycling and waste management programs. Demonstrating a commitment to environmental sustainability can positively influence public perception by showing that the industry is conscious of its ecological footprint.
  5. Promoting Equality through Opportunities in the workplace: Efforts have been made to provide more opportunities for women to move into key positions and to address the gender pay gap, however recent studies show that the sector is still a long way from reaching its goals. The ‘S’ and the ‘G’ typically include data on equal opportunities and a zero gender pay gap. Addressing this element, not only attracts more talent in a competitive skills market, it also enhances public perception of gaming companies which are seen as workplaces that address what really counts. The same applies at workplaces that embrace diversity.

Let the Gaming Industry Adopt ESG

There are numerous other reasons why ESG needs to be embraced by the gaming sector apart from the need to boost public perception and public opinion. ESG fosters values of responsibility, accountability, equality, fairness, ethical leadership, solidarity, and environmental protection amongst others. ESG also comes with rules for suppliers who have a mandatory requirement to have an ESG framework if they work for ESG reporting companies. These include credit and financial institutions, crypto asset exchanges and operators licensed under the EU’s Markets in Crypto Assets Regulation (MICAR), and listed B2B gaming operators. Such suppliers will be ‘forced’ by their ESG framework to supply their services/products only to like-minded corporate customers, and the voluntary adoption of ESG by the sector is one way that gaming operators can influence the behavior and practices of it suppliers. It is vital that steps are taken to improve the gaming industry’s reputation and in my view ESG may be a key tool which the industry can use to do so.