ESG Lessons from S&P’s Facebook Smackdown
By Eve Tahmincioglu

The S&P 500 ESG (environmental, social and governance) Index lost a few familiar names during its annual rebalancing, including Wells Fargo, Oracle and IBM. But the one that made the most news, and the biggest component of the index, was Facebook.

While Facebook did well when it came to the environmental piece of ESG, it was the social and governance that sunk the social networking firm. (Environmental issues tend to be less material for tech companies so S&P gives more weight to the social and governance scores for those firms.)

Out of 100, with 100 being the best, Facebook scored 22 on social and a dismal 5 on governance; giving the company an overall weighted score of 21.

“The specific issues resulting in these scores had to do with various privacy concerns, including a lack of transparency as to why Facebook collects and shares certain user information,” wrote Reid Steadman, managing director and global head of ESG for S&P Dow Jones Indices, in a recent blog post.

“A day before its exclusion,” he continued, “Facebook held a weight of 2.5% in the S&P 500 ESG Index. 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%.”

At the heart of the issue was uncertainty in how effective the company’s risk management processes are as they relate to ESG, an issue that should be of great importance in all boardrooms today.

ESG isn’t seen as a nice-to-have, it’s becoming more and more about risk management.

We’ve been debating whether a company should balance social purpose and profits as part of our ongoing “The Character of the Corporation” series this year, but boards cannot just ponder ESG concerns. That’s why for this issue we’re focusing on what’s happening on the ESG mandate front, and on practical steps that can be taken to bolster long-term thinking.

In this issue, we hear from U.S. Securities & Exchange Commission Chairman Jay Clayton who addresses short-term versus long-term thinking and ESG requirements; and we have an update on proposed ESG-related mandates nationally by Maureen Milford. Also, we get a long-term thinking reality check from Martin Lipton, a founding partner of Wachtell, Lipton, Rosen & Katz and member of the Directors & Boards editorial advisory board; and Willis Towers Watson’s Don Delves and Ryan Resch offer their insights on the role of compensation committees and ESG, and Michael Useem with the Leadership Center at the Wharton School weighs in on investor capitalism’s rise and what we do about it now.

For boards to ensure they’re not left out in the ESG and long-term-thinking cold, they need to set their corporate risk focus on these critical issues, as S&P’s Steadman maintains in his blog post:

“As Facebook’s peers raise the bar in their ESG performance, Facebook will need to do even more to rejoin the ranks of the S&P 500 ESG Index.”

 


Issue: 
2019 Annual Report

Other related articles