Why This ESG Index Booted Facebook

The S&P 500 ESG Index (SPXESUP) is newly minted equity benchmark that brings environmental, social and governance (ESG) criteria to the widely followed S&P 500.

S&P Dow Jones launched the index earlier this year and its approach to ESG investing is traditional in that it excludes tobacco companies, civilian firearms manufacturers and companies with low scores based on the United Nations Global Compact for responsible business.

What Happened

While the S&P 500 ESG Index doesn't serve as the benchmark for a U.S.-listed ESG ETF, it very well could at some point given the proliferation of such funds in the world's largest ETF market. Additionally, the S&P 500 ESG Index does serve as the benchmark for several ETFs in Europe. Investors in those funds will not find exposure to social media giant Facebook Inc. FB.

“A day before its exclusion, Facebook held a weight of 2.5 percent in the S&P 500 ESG Index,” said S&P Dow Jones Indices in a recent note. “At that time, Facebook was the fourth-largest company in the S&P 500, the parent index for the S&P 500 ESG Index, with a weight of 1.9 percent.”

Why It's Important

While Facebook seems to have the “E” in ESG down pat, the company, at least in the eyes of the curators of the S&P 500 ESG Index, leaves something to be desired when it comes to the social and governance elements, leading to an overall weak ESG score.

“In the case of Facebook, its overall S&P DJI ESG Score was 21, out of a range of 0 to 100, with 100 being best,” according to S&P Dow Jones. “This low score resulted in Facebook not being selected as part of the approximately 75 percent of the Media & Entertainment industry group’s market capitalization included in the S&P 500 ESG Index.”

As data from S&P Dow Jones indicate, Facebook's ESG score has been tumbling. It was 71 in 2015 and has fallen in each of the past four years.

What's Next

“Drilling down further, though its (Facebook's) environmental score was strong at 82, this sub-score only carried a 21 percent weight in determining its aggregate ESG score, as environmental issues tend to be less material for tech companies,” said S&P Dow Jones. “More impactful were its social and governance sub-scores, which registered at 22 and 6, respectively. These scores carried weights of 27 percent and 52 percent, respectively.”

In other words, the Cambridge Analytica scandal and the hacking of 50 million user accounts, among other privacy issues, are coming home to roost when it comes to Facebook's ESG score.

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