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Sustainable Investing

Many Sustainable Funds Have Sidestepped the Facebook Meltdown

Analyzing ESG risks in a timely manner can pay off for investors.

As Facebook, its users, and regulators all grapple with the firm's data-privacy and content-oversight issues, the bulk of fund investors have gotten caught in the sell-off.

Sustainalytics issued

in early June assessing how seven tech companies--the so-called FAANG+ stocks--are positioned to handle data-privacy concerns. (These stocks are Facebook,

, have called for Facebook chairman and CEO Mark Zuckerberg to step down as board chairman to focus on the chief executive role. Investors have also called for the company to dissolve its dual-class stock structure, which gives a significant majority of voting rights to Zuckerberg.

Sustainable funds available to U.S. investors appear to have considerably less exposure to Facebook than funds overall. Morningstar categorizes Facebook as a large-cap growth stock. Large-growth indexes had been weighting Facebook at between 3% and 4% of assets, depending on the index, as of midyear. Nearly three fourths (73%) of funds in the large-growth Morningstar Category had positions in the stock as of their most-recent publicly available portfolios. But among sustainable large-growth funds available to U.S. investors, more than half (10 of 18) did not own the stock. Of the eight that did, four were underweight.

Facebook is also a top holding in broad market indexes of U.S. stocks. Its midyear weight in the S&P 500 was 2% of assets. Nearly 60% of funds in the large-blend Morningstar Category had positions in Facebook in their most recently released portfolios. Among sustainable large-blend funds, more than half (21 of 38) did not own Facebook. Of the 17 that did, 13 were underweight and the other four were close to market weight. Only two of the 10 largest large-cap sustainable funds hold Facebook.

This illustrates a key advantage of sustainable investing: its ability to identify and analyze ESG risks in a timely fashion so that investors can make more-informed decisions. Two U.S.-based sustainable investment asset managers, Calvert Research and Management and Domini Impact Investments, divested from Facebook last spring. As more stakeholders demand better corporate behavior on issues and controversies that in the past might have not garnered this much attention, the potential for ESG-related issues to have a material impact on companies is greater than ever. That's why more asset managers are now incorporating ESG analysis into their investment processes.

Jon Hale has been researching the fund industry since 1995. He is Morningstar’s director of ESG research for the Americas and a member of Morningstar's investment research department. While Morningstar typically agrees with the views Jon expresses on ESG matters, they represent his own views.

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