As the world grows increasingly digital, we are simultaneously seeing an increase in the frequency, severity, and inventiveness of cyber-attacks. Digital databases are growing, and can be lucrative targets for criminal actors, with significant financial – and more real-world – implications for targets and stakeholders. From an investment perspective, the evolving, contrasting landscape of digital opportunity and cyber threat provides an array of opportunities and challenges.
As we emerge into a post-Covid world, it is evident that the businesses best positioned to continue to take advantage of the drive to digitisation are not only the most innovative and technologically advanced, but those with access to sizable digital assets and databases which can be leveraged to enormous value.
However, every rose has its thorn: the accelerating digital shift and escalating data harvest means companies are also becoming more exposed to a variety of new-age challenges and threats.
The maths is simple – the increasing prominence of digital assets, technologies, and databases mean individuals, businesses, and governments are becoming increasingly exposed to criminal cyber security threats which are evolving pari passu with cyber-security defences.
James O’Connor, Deputy Manager of the Liontrust Income Fund, says: “Digital hacks, leaks, and breaches can have significant financial, operational, reputational, and more “real-world” consequences for not only the intended targets, but also for stakeholders such as customers, staff, constituents, shareholders, suppliers, communities, and governments.”
O’Connor also highlights that heightened geopolitical tensions serve to add fuel to the fire as state-sponsored bad actors are increasingly deployed in attempts to disrupt and destabilise public and private targets as a form of covert warfare; this is reflected in political discourse and the increased allocation of defence spending towards areas such as electronic systems and cyber defence.
”Even in the case of a slowdown in Russia/Ukraine war activity, management teams we have met with express concern that this will result in an increase in bad-actors shifting attention back to the corporate market.”
While public sector targets may be desirable for state-sponsored disruption, private businesses are often more lucrative quarry for criminal actors, and the digital evolution is in part to blame − avenues of exposure are growing, accelerated by a confluence of factors such as the shift to remote working (more potential attack points), increasingly complex supply chains (less line-of-sight on exposure), the transition to cloud computing (more data stored off-premise), and the digitisation of previously analogue operations and services (more parts of a business can be disrupted).
Some businesses are more at risk than others. Companies with poorly integrated, under-invested, or legacy systems are low-hanging fruit, as digital defences are more readily breached. Companies with significant digital datasets – particularly sensitive personal customer data – are lucrative targets for activities such as phishing, as extracted information can be sold or exploited to enormous value. Meanwhile, businesses that are highly sensitive to operational disruption are more susceptible to ransomware attacks, as the cost of operational delays can outweigh the ransom demanded from criminals holding their operations hostage.
One need only open a newspaper to see FTSE-listed companies continue to suffer from breaches of varying severity. Recent examples include Royal Mail Group, WH Smith, Reckitts, WPP, Vesuvius, Morgan Advanced Materials, Intercontinental Hotels Group, Genuit, JD Sports, and Weir.
Investment challenges arise from both sides of the equation. In terms of digital opportunity: companies that lag peers in terms of digital technologies, appropriate skills (e.g., tech-savvy staff and management), or access to databases will either need to invest to play catch-up or cede ground to competitors and new disruptive challengers, posing risks to both competitive positioning and earnings growth.
From a cyber-threat perspective: companies that have outdated or poorly integrated legacy systems, have vast amounts of personal customer data, or are highly sensitive to disruption are lucrative targets for criminals and thus at higher risk of an attack. These breaches can have significant financial, operational, reputational, and regulatory repercussions for companies and stakeholders. Put simply, strong cyber-security management is a must-have to mitigate these risks.
On balance, this dynamic structural backdrop serves to highlight the importance of engagement as a key part of company analysis. O’Connor adds: “As investors, we engage with hundreds of companies every year through one-one-one meetings, conferences, and company and industry events; this level of engagement not only allows us to probe any key issues that we have identified in our analysis, but also helps us to understand management’s thinking process and business insights in a way that is difficult to replicate through other means.”
“Direct interactions with management allow us to paint a clearer picture on this front, and we are increasingly using this channel to ensure that management are well invested to capture digital opportunities and manage the ever changing cyber threats that may lie ahead.”
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