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Facebook Faces ESG Index Music

Drew Voros

You’d think in the world of environmental, social and governance (ESG) index investing, the giant of social media—Facebook—would be a natural fit. But that’s not the case.

The $550 billion social media giant doesn’t impact the “environment” in any way near the way a fossil fuel company like Chevron does. Facebook is similar to other tech giants like Microsoft, Apple and Google. There are no belching smoke stacks in the tech world. These companies, which include Facebook, typically rank well when it comes to their environmental-friendly footprint.

As for “social”—the “S” in ESG—you’d think Facebook is the poster child of that mission: all about social. Facebook brought the world together on its platform, making the world feel more accessible by connecting billions of users globally.

However, the company sees a dramatic drop-off in ESG rankings in the social category. The issue here is transparency of actions, which is a critical element in the “social” rankings.

Facebook has a spotty transparency track record, including when it didn’t make public how it goes about selling user data or to whom it provides access to that data.

Then there’s “governance,” the ESG tripwire for Facebook. “Governance” sets Facebook apart from other tech giants, and not in a good way.

Understanding Governance

In the world of ESG investing, governance means operating a business in a responsible manner for shareholders, employees and—more importantly—customers. It’s in the latter where Facebook has failed.

The list of user-data breaches and personal privacy policy violations at Facebook have been well-documented over the years. Now, as early as this week, the company’s governance troubles are expected to come to a head.

The Federal Trade Commission reportedly will announce a $5 billion settlement with Facebook for repeated personal privacy policy violations and violations of a 2011 FTC agreement. The fine will be the biggest levied by the FTC against a tech company, according to news reports.

While the fine only represents a month of revenue for the company, the settlement also includes a new strict set of rules, and policies centered on customers’ privacy on Facebook must follow.

Not Keeping Up With Peers

Facebook’s fall from ESG graces started well before word news broke of an expected record FTC fine this week.

For instance, last month, Facebook was dropped from the relatively new S&P 500 ESG Index after failing to meet the index’s criteria. While registering high rankings for “environmental,” S&P ranked Facebook in the lowest quartile for “social.“ As for “governance,” the ranking was dismal, barely even registering a score.

Earlier this year, when the index was launched, Facebook had a 2.5% weighting. That’s a quick tumble to zero in five months.

“As Facebook’s peers raise the bar in their ESG performance, Facebook will need to do even more to rejoin the ranks of the S&P 500 ESG Index,” Reid Steadman, global head of ESG at S&P Dow Jones, wrote in a blog.

Facebook Missing From New ESG Launches

By being excluded from ESG indexes, Facebook finds itself ousted, excluded or its weighting reduced from ETF portfolios.

Two new ESG launched this year to some fanfare by quickly gathering more than $1 billion in assets under management (AUM) for each, taking in more than half of the $4.7 billion of inflows into all ESG funds this year. And Facebook is not to be found in either.

The iShares ESG MSCI USA Leaders ETF (SUSL), which launched in May and now has $1.4 billion in AUM, and the $1.1 billion Xtrackers MSCI U.S.A. ESG Leaders Equity ETF (USSG), which launched in March, were well aware of the Facebook’s ESG struggles while developing the products.

Tech titans Microsoft and Alphabet (Google) are in the top five holdings of both, and Netflix is in the top-20, but there’s not a trace of Facebook.

 

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Another example of Facebook falling behind its peers in the ESG space can be seen when looking at the holdings of one of the largest and oldest ESG ETFs, the iShares MSCI U.S.A. ESG Select ETF (SUSA). Microsoft, Apple and Alphabet (Google) are in the top five holdings of the $1.1 billion fund, which launched in 2005.

 


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Even though technology companies make up 29% of SUSA, Facebook has a 1% weighting in the fund, landing it far down on holdings list.

Fortunately for Facebook, exclusion from ESG indexes isn’t a one-way trip. The company could redeem itself and tackle ESG-related issues to qualify for reentry. ESG investing is picking up, and companies such as a social media giant probably don’t want to be excluded from the party.

While other U.S.-focused ESG ETFs have higher weightings than 1%—such as the Shares MSCI KLD 400 Social ETF (DSI), with a 2% weighting—how Facebook reacts to the record FTC fine and corporate guidelines being imposed will certainly impact its future standing in ESG investment indexes. Surely the older and more established ESG funds will be seriously reexamining Facebook’s place in ESG-land.

But at this point, the ESG trend is not Mark Zuckerberg’s friend.

Drew Voros can be reached at dvoros@etf.com

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