Facebook may be on the verge of being switched out of some of the largest ESG ETFs on the market today after a myriad of news highlighting just how aware Mark Zuckerberg and other company officials are of the company’s ill effects on society.
The Wall Street Journal kicked off a torrent of investigations into the social media behemoth in September based on documents provided by Frances Haugen, a former product manager for the company turned whistleblower.
Since coming forward, Haugen has testified before Congress and the parliaments of the UK and European Union, arguing that the executives of Meta knew for years that its platforms were negatively impacting society, from allowing hate speech and disinformation to spread to inflaming body image issues in teenage girls based on internal research.
The company we all knew as Facebook changed its name to Meta, and soon it will adopt the ticker MVRS. However, its social media platform will keep the Facebook name.
A wave of negative press from a trove of documents Haugen has given to primarily the Wall Street Journal and later other major news outlets has only intensified the glare, although its name shift and its pivot toward developing the metaverse has deflected some of the constant criticism.
Haugen’s attorneys have also filed complaints with the SEC, arguing that Meta’s alleged misrepresentations to Congress and the public also count as misrepresentations to investors.
Separately, Ohio Attorney General David Yost filed a securities fraud suit against Facebook, claiming the alleged misrepresentations put the state’s public pension at risk of losing billions in value.
When controversy becomes an ESG liability
Measuring the climate impact of a company is relatively simple to do. A range of sensors and tools exist to measure greenhouse gas (GHG) emissions and other pollutants, and analysts can apply those emissions measurements to estimate a company’s environmental footprint across the three scopes.
But quantifying a company’s impact on society is less a science than an exercise in interpretation.
For example, Sustainalytics’ primary research product measures ESG risk that a company is exposed to, and how much of that risk analysts deem is “unmanaged” by the company’s management responses.
Simon MacMahon, head of research products at Sustainalytics, said the firm’s analysts aim to put an emerging controversy into the broader context of whether an event is extraordinary in terms of the company and industry’s history.
MacMahon said Facebook faces more financial risk from governments passing stricter controls on the flow of data across the platform and third parties, rather than the broader discourse about whether the company is harming society.
But the swath of evidence put forward in the press about how Facebook impacts society is a novel challenge to analyse.
“A lot of the information that you see in the news points to a lot of great concerns about the impact on stakeholders, the impact on society,” MacMahon continued. “It is really not clear yet how those externalities are going to be internalised and create a business risk for Facebook.”
Could Facebook be dropped from ESG indices?
Approximately $102.3bn of the company’s $956bn market capitalization is held by ETFs, according to data from FactSet. Out of that figure, 22 ETFs with the phrase “ESG” in their name hold the company.
But how a controversy is defined among the big three index providers, and when it becomes a big enough issue to warrant exclusion, is up to myriad standards among data providers and the analysts behind them once an index is due for a rebalance or reconstitution.
MSCI defines a business controversy as a single or ongoing situation deemed by an analyst to show a structural problem in the company’s risk management that poses a risk to its operating future, and a matrix is used to determine just how much that controversy plays into the company’s overall score.
In several ETFs under BlackRock’s ESG line-up, MSCI can exclude companies involved in “severe” or “very severe” business controversies, although those decisions are at the discretion of MSCI’s analysts.
The iShares ESG Advanced MSCI USA ETF (USXF) does not hold Facebook, despite it accounting for 1.9% of the Invesco PureBeta MSCI U.S.A. ETF (PBUS), which tracks the MSCI USA index.
FTSE Russell’s indices have differing sets of rules based on each series of indices. For example, the Vanguard ESG U.S. Stock ETF (ESGV), which tracks the FTSE US All Cap Choice index, has a 1.96% weighting in Meta. That index screens out companies deemed to be actively flouting the UN Global Compact.
But Refinitiv, a data provider owned by FTSE Russell’s parent company the London Stock Exchange, includes a weighting system that reduces the controversy penalties for large-cap companies versus small-cap companies to control for a tendency for larger firms to get more media attention than smaller ones.
MSCI and FTSE Russell could not provide representatives for comment due to commitments at the United Nations climate change conference in Glasgow over the past several weeks.
Todd Rosenbluth, director of mutual fund and ETF research at CFRA Research, said ESG indices are already starting to penalise Facebook by underweighting it relative to a parent index or removing it entirely based on some ETFs already not carrying the stock.
There is already precedent for removal from 2019, when S&P Dow Jones Indices removed the company from the S&P 500 ESG index, which is tracked by three ETFs in Europe from UBS Asset Management, Amundi and Invesco, due to ongoing privacy concerns.
The Invesco Nasdaq-100 ESG UCITS ETF (NESG) also downgraded its exposure to Facebook, holding a 2.16% weight compared with the 3.47% weight in the older Invesco Nasdaq 100 UCITS ETF (EQQQ). The fund was one of the first the firm rolled out as part of its plans to roll out ESG versions of its core ETF strategies.
Should FAAMGs be included in ESG ETFs?
Removing the seventh-largest company in the world by market capitalisation poses a threat of performance diverging from the parent index, but broad indices can counter that by overweighting other companies within the communication services sector.
Take the SPDR S&P 500 ESG Screened UCITS ETF (SPYY), which follows 314 companies and does not hold Facebook. SPYY has gained 29.9% year-to-date, compared with the 26.7% gain in the SPDR S&P 500 ETF Trust (SPY) and its 2.05% weighting in Meta.
Rosenbluth said the overweight on contemporaries like Microsoft and Alphabet, which are up 54.73% and 70.92%, respectively, over the past 12 months, has more than covered Meta’s contribution of a 24.23% gain.
This story was originally published on ETF.com