Magnificent seven stocks have been a popular choice for investors over the past decade as technological innovation and favourable market conditions have seen them dominate market performance. The group – composed of Nvidia, Apple, Microsoft, Amazon, Google, Meta, and Tesla – collectively returned 271.13% over the five-year period through to 2023, compared to the broader S&P 500 index which returned 90.27%, according to Bloomberg data.
But at what cost has that been? The companies have been at the forefront of technology growth trends such as Artificial Intelligence (AI), electric vehicles, cloud computing and digital services, but they have also been increasingly linked to a rise in mental health problems and teenage suicide rates.
Even before the peak returns started to wane, sustainable investors have been questioning whether these stocks have positions in responsibly invested portfolios. Here, PA Future shares the views of sustainable investment professionals about when it is deemed acceptable to hold these stocks in responsible portfolios, why good governance is “essential” and how to engage with these companies.
Evidence of poor mental health
Concerns around magnificent seven’s impact on mental health have been heightened recently in light of allegations against Meta, which owns popular platforms such as Facebook and Instagram.
Various US state lawsuits accuse the platform of fuelling mental health problems among teenagers by making its Facebook and Instagram platforms “addictive”. This includes a failure to flag harmful content, and algorithms that lead to anxiety, depression and body-image issues among adolescents.
One lawsuit alleges the social media company knew – but never disclosed – it had received millions of complaints about underage users on Instagram but only disabled a fraction of those accounts. Another instance included a 12-year-old girl’s four accounts that were not deleted following complaints from her mother requesting to take the account down.
Chief executive of Meta, Mark Zuckerberg, said in an interview for The Verge there is “no causal connection” between social media and teen mental health, but campaigners have argued the evidence suggests otherwise.
Further, a study published by the National Library of Medicine (NLM) – The role of online social networking on deliberate self-harm and suicidality in adolescents: A systematized review of literature – found the increase in social media use by minors is directly correlated with an increase in suicide rates. It also said online social networking leads to “increased exposure to and engagement in self-harm behaviour”, because more time spent on social networking websites leads to “higher psychological distress, an unmet need for mental health support, poor self-rated mental health and increased suicidal ideation.” The conclusion stated: “The greater time spent on online social networking promotes self-harm behaviour and suicidal ideation in vulnerable adolescents.”
The topic was raised at the Edelman Smithfield Investment Summit last month when speakers on the panel – ESG Outlook: Have we passed ‘peak sustainable’? – were asked their views on their firms’ social responsibility on lack of social responsibility related to these stocks, and how investors can manage those responsibilities.
“Mental health is an issue that cuts across all companies, and when we engage on mental health it is something we do as part of what we call human capital management,” said head of responsibility and EOS at Federated Hermes, Leon Kamhi. He added engagement around mental health is key when investing in companies involved in social media – and there has been a somewhat positive response.
“It is not only about how a company responds when there is an issue, but what policies and structures they put in place to manage mental health. There can be huge productivity improvements as a result of this engagement, which is helpful for returns’ sake.”
For example, in the wake of the US lawsuits against Meta, the platform has strengthened its child safety laws. It moved all teenagers onto a private account, introduced a ‘sleep mode’ to limit notifications and introduced parental controls for parents to monitor their children’s usage of these social media platforms.
However, Lazard Asset Management chief executive, Jeremy Taylor, said it isn’t simply down to fund management and society “must push back on the tools these large companies put in front of young users”, while also recognising the importance of regulation in guiding companies to solve this problem – it requires a group effort between governments, shareholders and investors to push magnificent seven companies to improve.
High ESG scores vs poor worker rights
Poor worker rights is another common concern raised around the magnificent seven and there are transparency issues attached to this with little insight into some of the supply chains’ operations. Chief executive of EdenTree, Andy Clark, said the firm has small holdings in Alphabet, Apple and Microsoft, but added: “Worker and labour rights is a huge part of the selection process in a sustainable fund company, which gets lost when you talk about the tick boxing and ESG scores.”
ESG scores can be inaccurate when it comes to tracking tangible issues, such as human rights, something which has been previously noted in an earlier interview for PA Future with Martin Buttle, better work lead at CCLA who stressed how hard it is to track human rights and worker conditions. He mentioned the Uighur cotton controversy, where the cotton industry in Xinjiang had been accused of using large-scale forced labour to produce cotton: “The traceability of the cotton down to that stage in the supply chain is difficult. It comes down to factories and countries having poor human rights records and poor environmental standards.”
The issue for the magnificent seven is some are linked to poor worker and labour rights, but they have a high ESG score. According to the ISS ESG Performance Score, magnificent seven companies score 56.4 compared to the average score of 48.4. It revealed that five out of the seven companies score above 50, which is the threshold indicating ISS ESG’s prime status of ‘Best-in-Class’ sustainability performance by industry.
Despite this, ISS found that although the magnificent seven have a strong overall sustainability score, all seven companies lag behind in their progress toward the UN Sustainable Development Goals. Their lack of alignment is often driven by controversies in areas such as labour management and practices, product safety and quality, and human capital development.
‘Challenging’ engagement
As a result, governance and engagement are key for fund managers of sustainable portfolios when investing in these companies.
Senior responsible investment analyst at EdenTree, Hayley Grafton, said in fact governance is “essential” when it comes to investing in the magnificent seven. “Even if a company has made significant progress over time, this can reverse at any point. Strong governance is a key indicator of a company’s commitment and ability to carry out the changes necessary to strengthen their approach as a sustainable business.”
She added: “We view engagement as an important tool for investors to assess how companies are considering and managing key risks, with progress informing our investment case over time. In our experience, companies that have strong governance structures aligned with shareholder interests are more receptive to engagement efforts.”
Similarly, Federated Hermes has holdings in the magnificent seven and the companies are within its engagement programme. Kamhi explained how the firm engages with Meta on data privacy and the impact the companies have on teenagers’ mental health through social media networks.
However, he echoed the sentiment that fund manager engagement can only go so far. “Whether this engagement has been successful so far is debatable. We only have so much influence over major companies such as Apple and Microsoft that have significant power within the founders.”
Grafton agreed and gave an example of how engagement with these companies can be “challenging” pointing to Alphabet, where, given the vast range of products and services the company provides, it faces a number of sustainability challenges ranging from supply chain issues related to its hardware products, use of customers data and privacy, and freedom of expression and content moderation.
EdenTree invests in Alphabet “because it is a good company making real advancements in sustainable solutions”. However, Grafton noted the company has a multi-class share structure that has been increasingly preventative to shareholders, demonstrated by the company’s failure to implement widely supported proposals following their AGMs. As a result, “while this doesn’t weaken the significant positive contributions they make across sustainability themes, many investors are questioning potential oversights and missed opportunities due to the insulated governance structure”.
Clark highlighted the dilemma faced by all sustainable investors – investing in the magnificent seven “turns into a balancing act between making a lot of money and wanting to be a good citizen”. He suggested the aim of a “good” sustainable investor is to “balance the two” and this could be by identifying areas for engagement at the time of investment.
Given that a number of companies within the magnificent seven present acute ethical dilemmas, Grafton said: “EdenTree only invest if the firm is confident in the strength of a company’s approach as a sustainable business, and in their management of the key sustainability risks they face.
“As such, just four of the magnificent seven companies are deemed suitable for inclusion in our funds with the screening qualifier ‘with caution’ – signifying that due to the nature of the business, there is an elevated level of risk that the fund manager should be alerted to. This also signals priority areas for engagement once invested.”
An example here is EdenTree initially chose not to invest in Apple due to the environmental and social impacts of their products, alongside their poor management of supply chain risks. She explained: “However, the firm saw significant improvement from the company to manage these risks, especially around renewable energy, environmental impact reduction initiatives, a shift towards circular supply chains and its close work with suppliers to reduce their impact across a number of key areas.”
Hence, as Grafton explained: “Following Apple’s efforts to strengthen their relationship with suppliers, they have demonstrated a willingness and improvement in their approach and management of key sustainability risks. For that reason, they are now deemed suitable for inclusion, with caution.”
Yet, some companies under the magnificent seven still fail to qualify for fund inclusion: “Companies such as Amazon and Tesla, who have shown slower progress or increased involvement in controversies, indicate weaker management of key risk areas, and as such remain not suitable for inclusion from our perspective.”
Encouraging good practice
Grafton emphasised that there is only so much investors can do but they also have a responsibility to push for higher standards across markets via engagement opportunities – both directly and collaboratively – and conversations with all stakeholders.
Director for engagement, EOS at Federated Hermes, Diana Glassman, echoed this point: “It is in a company’s best interest to engage with investors to understand their concerns and interests. Long-term investors can offer boards valuable insights into risks and trends that may impact the company’s health and sustainability – insights that management teams might overlook in the heat of the moment.
“Investors bring essential perspectives to complex issues such as data privacy, age restrictions and mental health impacts, all of which can significantly affect financial performance,” Glassman concluded.
While the appeal of the magnificent seven may have faded for the performance chasers, there remains some opportunities for sustainable investors to drive positive change – from a social and returns perspective – within the biggest tech companies in the world. However, a sharp eye on governance and legal repercussions are clearly imperative for those willing to invest.
