Most Sustainable Funds Sidestepped the Meta Plunge

Shares of Meta Platforms FB took a historic beating Thursday, losing 26% and erasing more than $230 billion in market capitalization. The firm formerly known as Facebook is a top-10 holding in every traditional index fund. Prior to Thursday’s plunge, those covering U.S. large-cap stocks had positions in Meta ranging from 1.7% to 2%, depending on the index they follow; passive funds focused on large-growth stocks had exposure of about 3.5%, and those covering the overall U.S. stock market about 1.6%.

Most of the largest actively managed funds in the large-blend and large-growth Morningstar Categories were overweight in Meta, led by Fidelity Contrafund FCNTX at 9.7% and T. Rowe Price Blue Chip Growth TRBCX at 6.7%. Several large actively managed American Funds, including Growth Fund of America AGTHX and Investment Company of America AIVSX, also had overweight positions.

While many traditional investors shared in the Meta meltdown, sustainable investors could easily have sidestepped it. That’s because most sustainable funds do not hold Meta stock. Of the 20 largest sustainable funds that invest in U.S. large caps (10 actively managed, 10 passively managed), 15 have no position in Meta.

Why Not?

In a nutshell, Facebook has major issues in the way it handles customer data privacy and security and in how it oversees its platforms for misuse and misinformation. Just last fall, a Wall Street Journal investigation concluded that the Facebook platform is "riddled with flaws that cause harm" and detailed how it allowed antivaccination misinformation to be spread. Before the pandemic, I wrote about how the platform was fueling political disinformation and its unwillingness to take steps to address the issue. Sustainalytics (a division of Morningstar) assesses Meta's overall environmental, social, and governance risks as High, and the firm ranks near the bottom of the Internet Software peer group in terms of its overall ESG Risk evaluation: 229th out of 235.

Sustainable fund managers who are serious about and thorough in their application of company-level ESG assessments seem to have come to the same conclusion. They want nothing to do with Meta.

There are, however, a few who do. In particular, four funds from iShares, Vanguard, and Dimensional. Although they are only four of the 20 largest sustainable U.S. large-cap funds, they collectively hold more than $50 billion in assets.

Let’s take a look at each of these funds to see whether they provide any clues as to why they count Meta Platforms among their holdings.

The $25 billion iShares ESG Aware MSCI USA ETF ESGU, the largest sustainable exchange-traded fund in the United States, had a roughly market-weight 1.7% position in Meta prior to Thursday’s sell-off. Note the phrase “ESG Aware” in the name, intended to indicate that the portfolio is structured with an awareness of the ESG ratings of its holdings--a modest ambition when it comes to sustainability. The passively managed fund is based on an index that uses some fairly standard exclusionary criteria, then employs an optimizer to create a portfolio that tilts toward companies with better ESG evaluations while minimizing tracking error against the MSCI USA Index. Because it holds a market-weight position in Meta, presumably the underlying evaluation of the company by MSCI was average. (IShares does offer three other ESG ETFs based on more thorough approaches, but they haven’t attracted as many assets.)

The $16 billion Vanguard FTSE Social Index VFTNX had a 2.2% position in Meta prior to Thursday. A careful reading of the fund’s prospectus reveals that it is mostly exclusion-based and limits fossil-fuels exposure, but it does not assess ESG risks and opportunities beyond that in any systematic way.

The same is true of its sibling, the $6 billion Vanguard ESG U.S. Stock ETF ESGV, which held a 2% position in Meta. While it claims to be replicating a different FTSE index, its prospectus' wording on how the index applies its ESG mandate is exactly the same as that of Vanguard FTSE Social Index.

Finally, there is the $5.5 billion DFA U.S. Sustainability Core 1 DFSIX, which also holds a 2% position in Meta. This fund follows Dimensional’s signature approach of creating large, rules-based portfolios that tilt toward smaller-cap, value, and profitable companies. Here, the managers “adjust the composition of the portfolio based on sustainability impact considerations,” according to the most-recent prospectus. But, like the other funds that have positions in Meta, this one does not apply any systematic ESG evaluation of companies. Its focus is on carbon emissions and other environmental issues, as well as involvement in controversial products such as tobacco and weapons.

Of the 10 actively managed products among the 20 largest sustainable funds, only American Century Sustainable Equity AFDAX had a position in Meta, which dates back to 2013 before the fund was repurposed as sustainability-focused. The fund’s 1.3% position is its 18th-largest holding. This fund emphasizes firms that have improving businesses and attractive ESG characteristics. Morningstar analyst David Kathman notes that not all stocks are above-average in both of these areas. The fund’s most-recent prospectus states that companies in the top three fourths of its proprietary ESG model are considered “sustainable.” While Meta wouldn’t be considered sustainable using Sustainalytics’ rating, American Century uses multiple sources and internal assessments in its model.

Fair enough, I suppose, but active ESG managers ought to consider publishing their sustainability thesis for each holding, so investors can better understand their thought processes. For Meta, this would have forced the managers to articulate why the holding should be acceptable to sustainable investors or explain why it falls short on sustainability but deserves a spot because of business improvement (at least prior to Thursday).

These popular funds are exceptions rather than the rule when it comes to sustainable fund exposure to Meta. The “popular” part is what is worrisome. Vanguard and iShares are the largest fund and ETF providers in the U.S. Dimensional is also large and has a stellar reputation. For investors and advisors looking for sustainable funds for the first time, it’s only natural that they would check out the offerings from these respected firms, especially if they assume that all sustainable funds are created equal.

But there is considerable variation in the approaches funds are taking to sustainability. We’ve outlined them in our Sustainable-Investing Framework and noted that any given fund may employ multiple approaches, resulting in a universe of sustainable funds that is quite varied. While there does seem to be broad agreement about Meta Platforms, especially among active sustainable-fund managers, this example is a reminder of how important it is for fund companies to be more transparent about their approach and for advisors and individual investors to look under the hood to make sure a particular fund’s approach aligns with their sustainability concerns.