ESG: Forgetting to give the social a sporting chance

By Richard Bicknell

When children start playing sport, we often offer two contradictory pearls of wisdom – to play in the spirit of the game and to play to the whistle. Like many an all-too-eager defender in the dying throws of a match, the consequences of ignoring the former in pursuit of the latter can cost your team dearly.  Nowhere is this truer than in sports investment, where one global power has made a mistake that another – eager for promotion – looks set to repeat. 

Financial services as an industry has developed an unfortunate reputation for playing to the regulatory and moral whistle. Attempts to cast this aside has seen the meteoric rise in the importance placed on Environment, Social and Governance (ESG), both in terms of investment decisions and corporate citizenship.    

These days, when navigating almost any major financial services firm’s website, you will be met with a wall of noise about their belief in ESG best practice that would make the most ardent home fan proud. Beyond the bluster, however, failing to fully grasp the depth and meaning of the true social element of ESG can be a bruising encounter, with things quickly spiralling out of control to become a reputational and communications quagmire.

JP Morgan recently scored an own goal with its ill-fated backing of the proposed European Super League. The financial services powerhouse has admitted that it failed to fully appreciate the depth of fan feeling, which exploded immediately and forced the collapse of the project within 48 hours. Like a seasoned studio pundit, Italian Prime Minister Mario Draghi summed it up when he said that it cut to the heart of “meritocratic values and the social function of sport”. 

While more of a temporary sin bin than a red card for JP Morgan, for a company that has slated ESG as a key priority it’s far from the performance of a global superstar. As a result of the fiasco, ESG rating agency Standard Ethics downgraded JP Morgan from EE- (adequate) to E+ (non-compliant). 

Ultimately, ESG is more important to businesses than the sum of its metrics. Not only was this an investment failure, it has also thrown up wider reputational implications for JP Morgan. You don’t have to be a Government Relations expert to know that taking simultaneous blows from the leaders of the UK, France, Italy and Spain isn’t great for a politically exposed business. 

It appears, however, that JP Morgan’s misfortunes are set to be repeated with an attempt to partially privatise the world’s most valuable rugby brand: the All Blacks.

It emerged recently that the owner of the All Blacks, New Zealand Rugby (NZR), is now in advanced negotiations with Silicon Valley based investment company Silver Lake to sell a 15 per cent stake in its commercial operations for more than £200 million. Silver Lake was famously a major backer of the Ultimate Fighting Championship (UFC) helping it make it the global behemoth it is today.  

Like JP Morgan, Silver Lake appears to have come up short in grasping the social dimension of sports investment, and the resulting risks for a brand that is core to New Zealand’s national identity. While Silver Lake is clearly used to watching a fight unfold, it may be surprised to see it directed towards, rather than within, its investment.   

Despite NZR having found itself in financial difficulty because of COVID-19, both players and fans see the arrival of private equity as affront to the All Black’s proud long history. All Black’s hooker Dane Coles told New Zealand media: “It’s about leaving the game in the best hands, and having the future as bright as we can, and looking after everyone, and not selling a percentage of it.

The Government in New Zealand, where true privatisation of rugby is yet to happen in the way it has across much of the rest of the world, has taken a wait-and-see approach, but politicians have a sixth sense for the public mood. While the Government will be acutely aware of the financial realities facing rugby, political pragmatism will often win the day when push comes to shove.  

The addition of private equity could also fundamentally change the national interest element that has seen market regulators in New Zealand take a largely hands-off approach to NZR. Serious questions arise therefore, as to where NZR sits within anti-monopoly legislation if its newfound imperative is to deliver returns to investors as much as to the nation.  

Further screwing the scrum against Silver Lake are serious concerns surrounding indigenous rights. Media reports suggest that NZR have not yet spoken to Ngāti Toa, the Māori Iwi [tribe] who’s tipuna [forebear] Te Rauparaha wrote the iconic haka, Ka Mate. Ka Mate, which is so famously associated All Blacks, is heavily leveraged by NZR’s commercial output. The very thing Silver Lake is buying. The haka, however, is a scared taonga [treasure] to Ngāti Toa and its commercial use has been a bone of contention for some time.

While the final whistle is yet to blow on the deal, Silver Lake is unlikely to be the bookies favourite. Once again, by taking their eye off the ball and simply looking at immediate investment metrics rather than fully grasping the all-encompassing aspects of ESG, Silver Lake may have dropped the ball. The reality is no matter how great the excel model, the emotional investment fans have can never be truly quantified when history and loyalty means more than money.