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The digital divide, fracturing society

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BNP Paribas Asset Management
 

Without connectivity and digital skills large sections of society are at risk of being marginalised in the new economy. Senior investment strategist Daniel Morris talks to Anu Rames, technology and healthcare analyst for our Sustainability Centre, about the digital divide and the implications for investors. 

What is digital inequality?  

In its most basic sense, digital inequality has two main components:

1. Access to the digital economy for which you need connectivity,

2. Having the necessary skills to benefit from this access.

This divide between the ‘haves’ and ‘have nots’ is based on layers of socio-economic, gender, regional and racial inequalities, and is now a critical global issue. Indeed, the United Nations has designated access to the Internet along with information and communications technology (ICT) as one of the targets for Sustainable Development Goal (SDG) 9.

What impact did the pandemic have on the divide? 

In our view, the pandemic has highlighted – and in some cases accentuated – the digital divide that exists between different families and communities and the corresponding inequalities that come into play. It has helped move the issues of digital access and skills centre stage.

For example, in the United States, according to the Federal Communications Commission, more than 21 million Americans have no access to a broadband connection with acceptable download speeds of 25 megabits per second. Other estimates suggest this number is as high as 42 million. If we add to this the lack of access due to affordability, the number goes up further.

We can easily see why this would be an issue when looking at the Pew Research Center data which shows that 15% of households with school-age children don’t have a high-speed internet connection at home. When basic services like education move online overnight, those most impacted are often low-income students and students of colour.

The issue with the digital divide or gap is that the impact will be over the medium to long term. It will tend to take a backseat to ‘here-and-now’ type issues like food insecurity and unemployment. However, when it starts to impact access to basic services such as education and subsequently employment, it becomes more structural in nature. Closing this gap will be hard unless we act now. Without access, whole sections of society will be marginalised even further.

Turning to the second component of the digital divide, the skills gap. That is, a lack of skills in the existing workforce or not having workers trained for the skills needed in the future.

Today, more than 80% of current middle-skill jobs in the US, which are jobs that require less than a bachelors degree, need digital skills. We have seen companies taking an active role in programmes to close the skills gap. A good example is the certification programmes provided by some of the large digital platforms on data analytics, project management and so on. These certifications can be used in place of a 4-year college degree when applying for jobs at the company in question.

The bottom line is that over the medium to long term, we expect the penetration of digital methodologies to increase significantly in key areas like education and healthcare. As we build a post-pandemic world, we need to ensure that we build a more resilient one too. Closing the digital gap from an access and skills perspective will lead to healthier communities in the long run.

What role can the public and private sector play in reducing digital inequality?

There is great divergence across countries when it comes to broadband access and closing this gap is a priority in several countries. Having a cohesive framework is important to ensure that the digital economy benefits all sections of society. The UN recently released a report called “the age of digital interdependence” which laid out recommendations for global collaboration to ensure an inclusive global digital economy and society aligned with the SDG goals of 2030.

With regard to government and public funding, if we focus on the here and now, when the pandemic started in the US, the Federal Communications Commission (FCC) called on broadband service providers to take a pledge to “ensure that those impacted by the pandemic don’t lose their broadband or telephone access.” Almost 200 companies agreed not to cut off service for non-payment. On the funding side, the Coronavirus Aid, Relief, and Economic Security (CARES) act allocated a few hundred million US dollars as loans and grants to expand broadband for essential services. Separately, many states and municipalities have targeted local plans as well.

In the private sector, there are investment options across all asset classes when it comes to digital infrastructure. There is a wide array of opportunities from mature models like data centres and telecom towers where the economics are well established, to more complex projects involving broadband buildout and financing the last mile. Depending on the risk/reward requirements of the investor, opportunities range from public equities to private debt.

Can social bonds be part of the solution?

Absolutely. By now, most people are aware of green bonds, which are used to finance eligible environmental projects. In the case of social bonds, the proceeds are earmarked for projects or assets that target a positive social outcome. This debt obligation is backed by the entire balance sheet of the issuer – so this is credit equivalent to a normal bond.

To give an example, in 2019 a communication service provider with a large emerging market footprint issued a social  bond. The proceeds could be used for capital expenditure needs such as network rollout and spectrum acquisition. The logic being that expansion of the network infrastructure, especially in underserved communities, would improve digital access. The proceeds could also be used to finance projects such as training women and children in digital technologies.

When the company issued the bond, there was also guidance on impact metrics that the firm would report, such as number of homes passed, homes connected, number of women trained on online skills and so forth. Reporting on such metrics is key to ensuring that positive social outcomes are achieved.

What are the prospects for the social bond market?

The market is still in its infancy but growing very strongly. Recently, one of the largest internet companies issued a sustainability bond of US Dollar 5.75 billion, which is by far the largest issuance of its kind. The bond was oversubscribed suggesting strong demand among investors. So the market is definitely growing and raising interest.

In addition, the COVID-19 crisis has highlighted a greater awareness of social considerations in investment decision-making. BNP Paribas Asset Management  sponsored a study by Greenwich Associates which showed that social factors have become more of a focus for almost a quarter of surveyed investors as a result of the pandemic and 70% also said social considerations – the ‘S’ of ‘ESG’ – will become extremely or very important as we move forward.

The COVID-19 pandemic has caused a global socioeconomic crisis. If we are to come out of this as a more resilient society, we must address key issues like reducing the digital divide, and there’s a role for social bonds and investors more broadly in working towards this goal.


 

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

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