In the booming space of ESG investing (Environmental, Social, and Governance), there are quite a few things that could make you go hmmm. Facebook (NASDAQ:FB), no stranger to controversy in the past few years, has been on my radar for a while, particularly from a perspective of governance issues. It also was on the radar of the S&P 500 ESG Index committee as they underwent their annual re-balance earlier this year.
After market close on April 30, 2019, Facebook, along with a few other well-known companies like Wells Fargo (NYSE:WFC), Oracle (NYSE:ORCL) and IBM (NYSE:IBM) were removed from the S&P 500 ESG Index. At the time, Facebook had a weight of 2.5%, the fourth-largest holding in the index. Why was Facebook, along with other companies, dropped from the index? The simple answer is, their ESG score of 21 out of a possible 100.
The inquiring mind might ask: What took them so long? Better yet, why was Facebook included in this index to begin with? You may have guessed – it’s complicated.
Some ESG Index providers use negative screens to come up with a list of companies that are deemed to be favorable from an ESG perspective. As long as companies from a large pool, for instance the S&P 500, aren’t in breach of say an environmental law, or aren’t specifically excluded from a sector, they’re in. Companies that manufacture weapons of mass destruction, sell tobacco or gambling stocks might be excluded by default.
The S&P 500 ESG Index, in association with RobecoSAM, uses a set of financially-material ESG factors to derive their ESG scores. This seems to be a more proactive methodology that allows them to “monitor companies’ sustainability performance on an ongoing basis.”
While we may still question how some companies like Facebook get into an ESG index in the first place, a more pressing question may be, what’s taking other index providers (and the funds that are based on these indexes) this long to exclude Facebook from their index?
Below is a list of ETFs that are categorized as ESG funds.
Facebook is just one many companies that are included in these ESG funds that may be questionable choices from an average person’s perception of what ESG stands for. Now factor in that some of these funds are very similar to the S&P 500 (e.g. “SUSA” has an above 90% correlation with the S&P) why then must investors pay much higher fees when they are effectively holding an S&P 500 index fund, albeit with a few exclusions?
Going back to our original question: What’s taking all the other ESG index providers so long to exclude Facebook from their ESG Index? Perhaps they should take S&P as an example and reassess their methodologies. Despite their mathematically correct algorithms, a final check based on purely human common sense every now and then might make for a more convincing ESG fund.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.