ESG managers shun outperforming Faangs

Facebook, Amazon and Apple have been shunned by fund managers using an environmental, social and governance approach to investing, although Google parent Alphabet still gets a pass.


Sonia Rach

Facebook, Amazon and Apple have been shunned by fund managers using an environmental, social and governance approach to investing, although Google parent Alphabet still gets a pass.

Faangs used to be viewed as responsible investments because they had a lower environmental impact and were seen as positive social forces, according to Adrian Lowcock, head of personal investing at Willis Owen.

“But that has changed as fake news and terrorist propaganda, as well as how companies use our data, has changed people’s expectations and views on acceptable behaviour,” Lowcock says.

“This is critical challenge of ethical investing. Ethics will continue to evolve and more quickly in new industry’s such as technology and it is hard to know how this will work.

“Often successful ESG managers work with companies to improve their processes and learn from their mistakes so it is not just about the current position of businesses but how they respond to crisis.”

The top performing funds in H1 2018 have had a high concentration in Faang stocks, such as Baillie Gifford American, which returned 29.77% over the period.

Facebook controversy

Edentree Investment Management and Liontrust Asset Management have both dropped Facebook from their sustainable funds.

Edentree Higher Income manager Tom Fitzgerald said while Facebook has taken steps to improve, the direction of travel is not yet significant enough.

“Our ESG team and investment team appreciate that Facebook has done a lot for society, it’s improved connectivity, it’s brought free communication to areas of the world that would not have it, but we think there are huge issues around its impact on society, such as bullying.

“It’s been shown to have a negative impact on younger user demographics. The whole data privacy issue, we have concerns about and we think the company still doesn’t have full grasp of who’s using its data and how they’re using it.”

Mike Appleby, investment manager on the Liontrust Sustainable Investment team, says despite rating Facebook eligible for investment in early 2017, they have since reassessed that view.

Following a meeting with Facebook in H2 2017, Liontrust’s sustainability team concluded while Facebook was taking steps to address many identified issues, its response was inadequate in light of the risk to its profitability.

An external advisory committee flagged the stock as controversial.

Concerns were focused around illegal and fake content and whether it could be moderated in a timely manner. Data privacy was also raised as a concern.

“We updated how we rate social networks to be more stringent and subsequently downgraded and removed Facebook from our portfolios in Q1 2018 as a result,” Appleby says.

Labour issues

Meanwhile, poor labour practices at Amazon and Apple mean they are also not suitable for the Edentree Higher Income fund from an ESG perspective.

“We think there’s huge issues around trade unions, labour rights, poor treatment of workers in distribution centres and so on. For that reason, it’s not acceptable for the funds,” says Fitzgerald.

Apple turns a blind eye to its business that is outsourced to companies such as Foxconn, he added.

“We feel like it’s not just a legacy issue there, it’s ongoing because Apple uses so many vendors that we feel it doesn’t have a greater level of oversight over practices and don’t think you can disregard what happens in those companies, just because it’s not under your roof.”

He added there is not transparency on where minerals used to make their products are sourced.

The Rathbones Ethical Bond fund also doesn’t invest in Faang issues.

Only Alphabet

Alphabet is the only Faang to get ESG approval from Edentree and Liontrust for their sustainability funds.

Appleby says: “We like Alphabet because its management of its environmental impact, particularly in relation to the environmental impact of its data centres, is very good.

“We also feel Alphabet is very good in terms of looking after its employees, including some policies and initiatives which we feel are market leading.

 “We feel these positives do outweigh the concerns we have around using personal information to generate advertising revenue, weak governance structures and concerns around their approach to tax.”

Fitzgerald also holds Alphabet, a decision based on its valuation as well as ESG factors.

Alphabet is also a high-conviction holding in Ben Goldsmith’s Menhaden Capital, due to its commitment to renewable energy.

ESG funds shunning Faangs

Fund/Sector 3 month 6month 1 year 3 year 5 year
Edentree Higher Income fund 1.1% 1.4% 5.5% 24.6% 39.1%
IA Mixed Investment 40-85% Shares 3.9% 0.8% 5.1% 24.2% 39.1%
Rathbones Ethical fund -0.1% -1.8% 1.6% 17.2% 36.0%
IA Sterling Corporate Bond 0.7% -0.9% 0.2% 13.0% 24.9%
Sustainable Future Global Growth Fund 10.3% 7.1% 14.9% 52.8% 80.2%
IA Global 8.7% 4.2% 9.8% 44.9% 67.1%
Source: FE

– This article first appeared on ESG Clarity‘s sister site Portfolio Adviser.


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