Facebook, Corporate Governance, and Influence of ESG Investing
Linda Zhang, CEO of Purview Investments
Facebook has encountered serious problems lately, with more users closing the accounts, abandoning the once popular social media platform. The trouble now seems to be migrating to its investors. The stock has plunged by over 20% as of March 28, since its recent high on February 1.
Last Friday on March 23, 2018, Australia’s BetaShares, made news with its decision to take out Facebook from ETHI, the largest global ethical ETF listed in the country. Facebook counts nearly 4% of the fund. The company cited Facebook’s serious data breach and other controversial practices on personal data usage.
BetaShares essentially ditched Factbook due to its questionable business ethics and poor corporate governance. BetaShares action is just the latest example of how Environmental Social and Governance (ESG) investing is affecting the new wave of investment: Combine investment goals with value system.
Monitoring a company’s governance is a good practice not just for ESG investing, but for all investment practice. Governance practice and records can serve as a good indication of risk factors the company is facing. In the case of Facebook, the risk includes losing its user base, hence the value of digital marketing that ties directly to its advertising revenue. Furthermore, it may also point to regulatory risk, possibly multiple ones from the countries in which it operates.
Which ESG ETFs are most exposed to Facebook risk? DSI, iShare’s MSCI 400 KLD, the largest ESG ETF and with the longest history, has 3.4% concentration, compared with 1.7% for S&P500 broad market based ETF, and 3.4% for QQQ, the popular NASDAQ ETF. Many ESG ETFs, such as DSI, are managed against MSCI ESG Research indices. MSCI has not disclosed their intended decisions toward Facebook. This is worth a close watch.
Facebook Concentration in Top 10 largest (by AUM) US listed ESG ETFs
Produced: Purview Investments; Data Source: Bloomberg, as of 3/27/2018
In the overall ETF product space, ESG inclined or not, here is the list of top 20 ETFs that have the highest concentration of Facebook stock as a percentage of the fund. (see Exibit 2). Many technology sector ETFs are on the list, as expected. Several internet thematic ETFs are also on the top of the list. The highest concentration is above 8%.
Facebook’s story clearly serves a reminder that it is a good practice to include corporate governance and possibly other ESG principles into the investment process for products, ESG minded or not.
Exibit 2. ETFs with the Highest Facebook Concentration