Why Facebook is not an ethical investment

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 it and Instagram in the wake of Facebook's failure to take more action over hate speech.

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 Guardian 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-owned WhatsApp has also come under fire for being a popular forum for the spread of fake news and conspiracy theories regarding COVID-19.

The boycott has weighed on Facebook's stock price. Over the month to July 10, 2020, Facebook shares have underperformed all other FAANG stocks. Facebook has significantly underperformed all the tech giants this year.

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.

Investors in Facebook should take note - investing in companies which have poor environmental, social or governance (ESG) ratings can hurt your returns over the long term. Facebook is one such company with a relatively poor 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.

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.

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