14.3.2019 Miika Koskela

We analysed Facebook’s sustainability shortcomings and decided to keep investing

HCP Focus Annual Review
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WE HAVE invested in Facebook through HCP Focus portfolio since May 2016. In March last year, the ESG rating of Facebook was downgraded from BBB to BB in MSCI ESG database.

ESG ratings evaluate the sustainability of companies based on environmental, social and governance factors. At HCP, the Head of Risk Management screens the ESG scores of the companies included in the HCP Focus portfolio annually and informs the portfolio manager on companies with low ratings. The portfolio manager then analyses the red flagged companies case by case.

After a thorough analysis, the HCP Focus portfolio manager Ernst Grönblom has decided to keep investing in Facebook.

“Social media is still an industry in its infancy and it is still too early to say where it is headed. I decided to keep Facebook in the portfolio because I believe that despite all its serious problems, the net effect of social media is still positive”, Grönblom says.

Grönblom also points out that social media is such a new phenomenon, that investors can still influence the development of the sector through active engagement.

ACCORDING to Grönblom’s analysis, the most severe of the current controversies regarding Facebook is the Cambridge Analytica (CA) data breach. You can read the Facebook ESG analysis here.

In March 2018, New York Times and the Observer revealed Cambridge Analytica had obtained private information of more than 50 million Facebook users without their consent. Allegedly, CA had used this information for ads-targeting, and eventually political campaign micro-targeting during the 2016 U.S. elections.

Although the CA data breach brought attention to serious shortcomings in user privacy, transparency, and self-regulation of Facebook, according to Grönblom, the company has addressed many of the systemic weaknesses swiftly and decisively.

“They have removed several million fake accounts, suspended more than 400 policy violating applications, increased the head-count of employees specializing in safety to over 30 000 people, so the probability of similar scandals happening in the future has significantly reduced.”

For now, it seems like Facebook is taking real action to do better in terms of social sustainability and governance. Professional investors, however, need to watch where the digital network giant is headed.

“It is very important that investors speak openly and take a public stance against the misuse of social media – for example, for propaganda purposes,” HCP’s CEO Tommi Kemppainen emphasizes.

WE PUBLISH our ESG analysis on Facebook not only to show that we are taking controversies regarding Facebook seriously but also to contribute to the debate on ESG standards.

“Professional investors should speak openly about their concerns and publish their conclusions. ESG standards are still developing so the more organizations contribute to the debate, the stronger new standards come out of the process, Kemppainen notes.

We continue screening the ESG ratings of our investments and analysing each low rated companies individually. We also take part in the debate on sustainable investment and revise our stance if needed. You can follow on our findings by reading our blog. You can read Ernst Grönblom’s Facebook ESG analysis here.

HCP Focus Annual Review
BarclayHedge: HCP Focus ranked best equity hedge fund in the world
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