WHEB Commentary

Seb Beloe

Is this Facebook’s ‘Volkswagen’ moment?


Facebook’s recent travails have resurfaced long-standing questions about the role and influence that Facebook, Google and other ‘tech giants’ have in shaping public discourse. The loss of 16% of its value in the week leading up to Easter has so far forced Facebook CEO Mark Zuckerberg to apologise for a ‘breach of trust’[i]. Whether there will be further long-term implications for the business is still unclear. However, this most recent scandal, along with stricter regulation governing the use of personal data such as the EU’s General Data Protection Regulation (GDPR) point to much greater scrutiny in future.

In advance of these latest controversies, Facebook and other tech stocks have been popular holdings among a wide range of leading ‘ESG’ and sustainability funds. Facebook’s standing has clearly been weakened by recent events with some investors now questioning the company’s continued position in their portfolios[ii]. But can Facebook and the other tech giants ever really be considered to be offering solutions to sustainability challenges?

Are the tech giants sustainability solution providers?

Clearly, while all the ‘FAANG’ (Facebook, Apple, Amazon, Netflix and Google) businesses ostensibly fit into a ‘big tech’ sector, they are very different. Alphabet, Facebook and Netflix are primarily advertising and media businesses. Alphabet alone accounts for nearly 40% of the global online advertising market and together with Facebook operate a near duopoly in digital advertising[iii]. In spite of its rapidly growing activities in web and subscription services, Amazon is still primarily an online retailer with 61% of 2017 sales coming from on-line retailing, and Apple still derives the vast majority of its revenue from sales of electronic products; 60% from the iPhone alone.

Greening the internet

One thing that does connect all of these businesses, literally as well as figuratively, is their dependence on the internet and, by extension, on data centres and server farms. As we know, this infrastructure consumes vast amounts of energy and, to their credit, the large tech companies have been proactive in seeking to address the carbon emissions associated with this energy use. Apple, for example, sourced 96% of their energy from renewable resources in 2017[iv] and Google announced that they would be 100% renewable in 2017[v]. Facebook is a relative laggard with a target of having 50% of its energy from renewable sources by 2018[vi] – though still way ahead of the wider global economy.

Learning from Volkswagen

Clearly these achievements are exceptional as well as being financially and politically astute, but they emphatically do not make these companies solution providers for sustainability. The key question for Volkswagen was not how environmentally-friendly their factories were, but the emissions coming from their vehicles. In the same way, the key question for the tech giants is not how much renewable energy they use, but whether their products and services are genuinely helping the world to become more sustainable.

This is not a straightforward question to answer. Google’s mission statement ‘to organize the world’s information and make it universally accessible and useful’ is laudable, but sits awkwardly with its sustainability reporting which says next to nothing about how the company is making information more accessible and useful.

Facebook’s mission ‘to give people the power to build community and bring the world closer together’ sounds equally promising, but is arguably pretty much exactly the opposite of what they are doing in selling user data to third parties for advertising and other objectives. In fact, as many have argued following the revelations surrounding Cambridge Analytica, the potential for these media giants to cause tremendous damage to democracy and the trust that underpins society is enormous.

Focusing on the core business

Ultimately the key question sustainability-oriented investors should be asking is how do these companies actually make money and how is this aligned with sustainable development. In short, by doing more of what they do, will the world be a more sustainable place?

For both Facebook and Google, the core to the business model is in the sale of on-line advertising. For Amazon, Apple, Microsoft and Netflix the business is fundamentally about the sale of consumer products and services. Do these products and services actively enable and benefit from the shift to low carbon, sustainable forms of development?

We remain unconvinced and none of the ‘FAANGs’ qualify for WHEB’s investable universe. We do though maintain an open mind. Volkswagen used the diesel cheating scandal to massively accelerate their transition from manufacturing internal combustion engine vehicles to electric vehicles. Perhaps Facebook will follow Sir Winston Churchill’s advice to “never let a good crisis go to waste” and use their current predicament to effect a similar strategic shift.

 

[i] FactSet data 16-29 March 2018.

[ii] https://www.reuters.com/article/us-nordea-sustainability-facebook/nordea-says-its-sustainable-funds-wont-buy-more-facebook-stock-idUSKBN1GX140

[iii] Data from FactSet

[iv] https://www.bloomberg.com/news/articles/2017-04-13/apple-says-three-suppliers-to-use-solely-renewable-power

[v] https://environment.google/projects/announcement-100/

[vi] https://sustainability.fb.com/clean-and-renewable-energy/

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