The explosion in data traffic is creating a wealth of opportunities for investing in the telecoms sector, but investors need to keep a watchful eye on firms’ data security processes lest they get burned, warns Sarasin in its latest Sustainability Spotlight report.

As the cost of phone calls continues to fall, data services are regarded as the business of the future for telecoms firms, with estimates valuing this market as being worth €415 billion ($334 billion) by 2015. The growth prospects for the industry are predicated on two key trends: innovation from telecoms firms themselves and the provision of new services in new markets.

Taking the first trend, Sarasin notes that since data transmission is seen as the future many telecoms companies are setting up their own dedicated innovation departments and pushing into areas such as financial services, networking vehicles, e-health initiatives and  cloud computing.

In fact, an interesting example of telecoms companies invading the traditional territory of financial services firms is Vodafone’s new mobile payments system M-Pesa – a type of service not seen as being profitable by banks but which is making real headway in emerging markets. This feeds into the second trend supporting the growth of telecoms companies. In contrast to mature economies where mobile phone markets are saturated, in emerging economies we have penetration rates of less than 80 per cent at present. Additionally, several emerging countries (like India) are not even bothering with the infrastructure for fixed-line telephones and are instead focusing on mobile networks – making these markets ripe for the immediate introduction of innovative applications.

But while opportunities abound for innovative telecoms companies, the risks posed by data security threats should be front of mind for investors, warns Sarasin. Amazingly (or perhaps not, considering that globally 5 billion mobiles are connected to the internet) the WEF Risk Report 2012 deems the risk of cyber attacks as even more dangerous than the global threat of water shortage. As Sarasin points out, as well as financial damage, a cyber attack can cause huge reputational damage to a telecoms company as customers still tend to lay the blame for security breaches at their doors despite the fact that cyber attacks usually originate with third-party providers.

Telecoms companies are therefore under huge pressure to boost their data security measures, and while most (84 per cent) of the firms analysed by Sarasin have already introduced processes and guidelines to improve data protection and security, a fair chunk still have not.

Savvy investors should therefore be looking at names where improved data security measures are going to ensure that growth is sustainable, and on this basis Sarasin highlights Vodafone, Telefónica, Swisscom, Belgacom and Telenor as attractive picks. According to the Swiss bank, the link between performance and sustainability is marked in the telecoms sector: while over the past three years the MSCI World Telecom Service Sector Index has delivered a return of 12.7 per cent, stocks with above average sustainability ratings have returned 24.5 per cent.