Imagine that you’ve just had the luck to receive a large amount of money – a lottery win, perhaps. You wish to spend part of that pot, but you also want it to grow, so that you can continue to live comfortably on the sum for the rest of your life. Investing a percentage in a hedge fund is one way to do this. However, you don’t want your money invested in just any business: after all, there are plenty of ways to turn a buck, and a lot of them involve supporting companies that pollute the environment or mistreat their staff.
Fortunately, an entire industry has grown up around the impulse to combine the profit motive with doing a little good in the world. ESG hedge funds grade and invest in companies that prioritise good governance, sustainable practices and positive social impact in their operations. The idea is that businesses that abide by these principles are better run and more likely to make a profit than those that don’t. According to financial services firm Morningstar, that theory is borne out in the numbers, with the majority of sustainable funds now outperforming their traditional counterparts – a contributing factor, it seems to ESG assets now being valued at some $2.74trn worldwide.
According to Morningstar’s global head of sustainability research, it’s part of a titanic shift in the ethics of investment. “The massive growth in ESG investing has sent a signal to public companies across the global economy that investors care about good business practices that create value for all stakeholders,” says Jon Hale. “It used to be that investors were the bulwark against that kind of thing.”
The tech giants have benefited from this new wave. While some of their governance practices are questionable – many employ, for example, a dual-class stock structure that can see founders retain almost dictatorial control over the company – these firms tend to boast impressive environmental credentials. As such, says Hale, “it’s not uncommon to see the likes of Apple, Microsoft, and Netflix, in an ESG portfolio.” Until recently, their inclusion has been immensely profitable for sustainable funds, with the valuation of the ‘big five’ tech giants reaching $9.3trn – more than the combined value, the New York Times noted, of the next 27 largest US companies.
For Tariq Fancy, however, it’s a sign that something is askew in the relationship between ESG investors and big tech. Formerly chief investment officer for sustainable investing at Blackrock, Fancy penned a controversial essay series on Medium last year attacking the fundamental precepts behind ESG investment. In it, he argued that asset management firms are motivated to invest in profitable firms given good but unreliable ESG scores by third-party analysis firms, as it improves their fund performance and allows them to charge higher fees.
“Think of it like if you’re selling laundry detergent in the supermarket,” says Fancy. “The fact that you can paint yours green and say you’re socially responsible gives you a bunch of pricing power, because there’s people who care about that. And, you know, they may pay 25 cents more.”
As a result, Fancy argues, ESG investment may not in fact encourage businesses to do good. “The biggest concern I have is that it doesn’t seem to be changing anyone’s behaviour at all,” he says. “In fact, it seems to be a placebo that is delaying us from what actually would change their behaviour, which is obviously government regulation.”
In the case of the tech giants, he adds, an ESG investment culture that prioritises engagement with emissions has diverted attention from their internal governance and social impact.
Big Tech and ESG: beyond emissions
One of the most glaring failures of the ESG investment community, says Andrew Behar, is its failure to hold up a mirror to the tech giants’ own investment strategies. “It has been utterly ignored,” says the chief executive of As You Sow, a non-profit advocating sustainable practices among corporations.
Recent research by the group found that the pension funds of several tech giants were heavily invested in firms making an outsize contribution to climate change. “Amazon, by the way, does a great job,” says Behar. “They have 100,000 electric vehicles, or they’re purchasing them. They power their data centres with renewables. But, if you work at Amazon, you own companies that are burning down the Amazon.”
According to data collected by As You Sow, the delivery giant has invested some $48m of employees’ 401(k) plan into companies directly linked to deforestation, while $621m is invested in companies linked to fossil fuels extraction. It is a similar story at Apple, whose fund has invested $738m in the latter, compared to Google’s $1.43bn and Microsoft’s $1.45bn.
While these sums represent percentages of the funds that rarely rise above single digits, Behar believes that divestment from these companies by the tech giants and pension funds would send a powerful message: “If these people who own [these funds] actually expressed their displeasure with the companies and that are continuing the climate crisis, I think it would have a big impact.”
Critics of ESG investment also point out that asset managers only consider the direct emissions of the tech giants when calculating their overall scores, emissions that remain low relative to the size of the companies. This effectively ignores so-called Scope Three emissions produced by consumers using the tech giant’s products and their suppliers.
“Big Tech stocks in the US are the singular industry group that’s likely to be most impacted by [the inclusion of] Scope 3,” said David Hogarty, head of strategy development at asset management firm KBI, in an interview with Responsible Investor. “We think it is a big contingent liability that a lot of ESG investors may not be aware of yet.”
Social impact and governance are other ESG metrics that critics argue have been overlooked in the tech giants. In the wake of a series of revelations last year about Facebook’s internal practices and negative impacts on society by former company executive Frances Haugen, some analysts speculated that the 22 ESG exchange-traded funds holding its stock might reduce their holdings.
Others were sceptical: after all, while Haugen’s revelations were shocking, they didn’t seem to be materially increasing the risk exposure of Facebook’s investors. “A lot of the information that you see in the news points to a lot of great concerns about the impact on stakeholders, the impact on society,” Sustainalytics head of research products Simon MacMahon told ETF.com. “It’s not really clear yet how those externalities are going to be internalized and create a business risk for Facebook.”
The case of the newly rebranded Meta is also emblematic of another concern ESG analysts have had about basic governance among the tech giants. The company is one of several such firms that employ a dual-class stock structure, a framework that allows a single individual – usually the founder – to exercise close control over its future and avoid meaningful oversight from shareholders. In the case of Mark Zuckerberg, his voting share at Meta is estimated to be 58%. “He designed it so that he has absolute authority,” says Behar.
Investors versus Big Tech
If the tech giants fall so short on so many ESG credentials, could sustainable investors steer them in the right direction? Fancy thinks not, and nor will the threat of divestment.
“Think about Sharia-compliant investors in the Middle East,” he says. “They don’t want to own alcohol companies, because [they say], ‘Oh, well, that’s not aligned with our values.’ That’s fine, but that’s not impacted, right? Because they know very well if they don’t own Diageo or some alcohol company, that doesn’t mean that people in France are going to stop drinking wine! Someone else will own it.”
The same goes for the tech giants, says Fancy, which can afford shareholders offloading their holdings. Companies like Apple, Amazon and Meta have such a long track record of profitability that someone, somewhere is likely to pick up those shares, regardless of whether or not those companies have fallen short on emissions or corporate governance standards. “It’s cancel culture meets financial markets,” says Fancy. “You sell it, someone else buys it.”
Others, like Hale, are more optimistic. The Morningstar analyst hopes that recent scandals involving tech platforms have spurred ESG analysts to weigh social impact calculations more heavily in their overall scores for tech giants. It is, after all, simply impossible for such companies to avoid the issue for very long compared to the days before the internet, when “it was fairly easy for companies that had reputational challenges that come up to spin that out of the headlines,” says Hale.
Those who dismiss the value of ESG principles in making capitalism more sustainable, argues Behar, are ignoring the positive impact made by targeted shareholder advocacy (and also the value created by hundreds of sustainably minded mutual funds and ETFs). As You Sow is in the process of organising a shareholder resolution at Amazon that would force it to issue a report describing the extent to which the investment of its pension fund in companies linked to fossil fuel extraction aligns with the firm’s climate goals, while also fighting a case in the US courts system that would see Amazon classified as a conventional retailer. If successful, this would tighten the company's legal responsibility to police rogue sellers on its platform, like those who sell face whitening cream containing 38,000 times the legal limit of mercury.
As You Sow isn’t alone in this regard. Proxy shareholder resolutions have markedly increased among tech giants in the past two years, with many intended to force internal changes that would improve the ESG credentials of these companies. Not all change needs to be forced by a vote, says Behar. “Last year, we got 188 engagements” with companies, he says. “102 of these companies said, ‘Great idea, thank you for the data. Let’s go get to work.’ 86 we had to file a shareholder resolution because they didn’t want to do anything, and then half of those agreed to our terms.”
New rules about material information disclosure brought in by the SEC also point toward an improvement in corporate transparency across the board, explains Behar. “We trust financial data because it is verified and in the audit and in a standardised format,” he says. “We need to trust all material disclosures in the same way.”
Reaching that state of affairs – one that might finally hold companies up to uniform standards on racial inclusion, governance and Scope 3 emissions – would make it harder to publish misleading information and make it easier for sustainable investors to hold Big Tech firms to account on their operations.
Currently, however, data on these metrics is something that activist investors have to fight to publicise. “Trust… has got to underpin all of this” effort, says Behar. “Right now, we don’t have that.”