The risks are mounting for investors in social network giant Facebook as some of the world’s biggest and most influential companies boycott advertising on the platform and its Instagram unit as part of the Stop Hate for Profit campaign.
The boycott has weighed on Facebook’s stock price. Over the month to 10 July 2020, Facebook shares have underperformed all other FAANG stocks. Over the year, Facebook has significantly underperformed all the tech giants.
More than 500 companies, including Coca-Cola, Boeing, Sony, Pfizer, Ford, Colgate-Palmolive, Adidas, Reebok and Lego, have said they will pause advertising on the social network, as part of the Stop Hate for Profit campaign. The social giant’s reputation is under concerted attack, as reflected in this recent headline: “Facebook is out of control. If it were a country it would be North Korea”.
This alarming headline reflects the damage to Facebook’s name as a result of numerous scandals involving the platform’s role in hosting hate speech and misusing and not protecting users’ data. Along with Instagram, Facebook’s WhatsApp unit too has come under fire for being another popular forum for the spread of fake news and conspiracy theories regarding COVID-19.
As the bulk of Facebook’s ad revenue comes from small and medium-sized businesses, any potential impact on advertising revenue could be minor, say some analysts. However, if the Stop Hate for Profit campaign continues over the longer-term, Facebook’s earnings, profitability and share price could take a much bigger hit.
Facebook’s ESG rating
MSCI, one of the world’s largest index providers and leading ESG researcher, has developed the world’s biggest range of ESG and quality indices. The index provider has a team of over 190 analysts worldwide assessing companies in its global universe on a “AAA” to “CCC” scale according to their exposure to industry-specific ESG risks and their ability to manage those risks relative to peers.
The social network giant with a rating of BBB stands behind the other technology giants, compared to Microsoft’s AAA rating, Alphabet’s AA rating and Apple’s A rating.
Yet despite its average ESG rating, some so-called “sustainable” and “ethical” funds including ETFs, hold Facebook as an investment. The social network giant should not be included in any portfolio of “sustainable” or “ethical” companies given the data privacy and hate speech controversies it faces.
Link between ESG and improved performance
Not implementing ESG can “cost” companies and investors better returns and even mean losses over time, as anyone who had invested in Volkswagen before its diesel deception would have realised; VW shares have never recovered after it admitted to cheating emissions tests in the US in 2015.
MSCI recently released a research paper, Five Lessons for Investors from the COVID-19 Crisis, which presents strong evidence to support ESG investing. This research, and many other studies, dispel the myth that sustainable investing can cost returns.
MSCI found that sustainable investing helped mitigate declines in the March COVID-19 correction. MSCI examined the performance of six of its indices: four with explicit ESG objectives including socially responsible investing and ESG leaders; and two with explicit climate objectives, including low-carbon target and climate change. As you can see below, during the first five months of 2020, all six indices outperformed the broader share market as measured by the MSCI World Index, with some of that outperformance attributed to ESG factors. The results are a compelling argument to include ESG investments in your portfolio.
Chart 1: Relative performance of selected MSCI Indices with ESG and climate objectives
Source: MSCI, as at 31 May 2020
MSCI stresses the importance of ESG, diversification and factor investing. And MSCI should know. The world’s leading index provider is also a leading global ESG researcher.
Aside from this research, academics, asset managers and index providers have found a link between good ESG governance and improved financial performance, largely through risk reduction.
Investors can easily compare companies’ ESG ratings – useful tools for diligent investors keen to avoid corporate citizens who aren’t giving back to society or, as in the case of Facebook, not doing enough to dissuade hate speech or protect users’ privacy.
The holdings of all VanEck’s ETFs are available on our website, including our ESG-focused, VanEck Vectors MSCI International Sustainable Equity ETF (ASX: ESGI), which does not hold Facebook, and the VanEck Vectors MSCI Australian Sustainable Equity ETF (ASX: GRNV). In addition, we also make available a quarterly report to investors which outlines the carbon intensity and ESG exposure of these two portfolios here – ESGI and GRNV
In addition, both ESGI and GRNV track MSCI indices that screen for fossil fuels and social responsible investments combined with targeting ESG leaders. The carbon footprints of both ETFs are considerably lower than Australian and global share markets, another important point when climate change is one of the biggest long-term risks the world faces.
Arian Neiron, managing director and head of Asia Pacific, VanEck
This information is issued by VanEck Investments Limited ABN 22 146 596 116 AFSL 416755 (“VanEck”) as responsible entity and issuer of the VanEck Vectors MSCI International Sustainable Equity ETF and the VanEck Vectors MSCI International Sustainable Equity ETF (“the funds”). This is general information only and not financial advice. It does not take into account any person’s individual objectives, financial situation or needs. Before making an investment decision in relation to the funds, you should read the relevant PDS and with the assistance of a financial adviser consider if it is appropriate for your circumstances. The PDS is available at www.vaneck.com.au or by calling 1300 68 38 37. The funds are subject to investment risk, including possible loss of capital invested. The PDS details the key risks. Past performance is not a reliable indicator of future performance. No member of the VanEck group of companies gives any guarantee or assurance as to the repayment of capital, the payment of income, the performance, or any particular rate of return from a fund. The funds are indexed to an MSCI index. The funds are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to the funds or the MSCI index. The PDS contains a more detailed description of the limited relationship MSCI has with VanEck and the funds.