Your ESG fund might be invested in Facebook—and it highlights a major issue with sustainable investing

Facebook has been aware of real-world harms propagated by its platforms and ignored warnings from employees about those dangers, according to the Facebook Papers, a series of articles published by 17 U.S. news outlets beginning Friday.

Earlier this month, the Wall Street Journal reported that the platform is used for sex trafficking, helps spread vaccine misinformation and damages the mental health of users, particularly young users, among other allegations.

With such negative allegations — which the company says are not true — it might surprise some investors to learn that Facebook is often held by mutual funds that say they take environmental, social and governance, or ESG, factors into account when selecting investments.

It is included in the Vanguard ESG U.S. Stock fund, for example, as well as the FlexShares STOXX US ESG Select Index Fund, among others.

The recent allegations, which are backed by thousands of pages of internal Facebook documents, are far from what investors think of as socially responsible, says Andrew Behar, CEO of As You Sow, a nonprofit foundation that promotes corporate social responsibility. A company that reportedly targets products to minors despite its own research showing that some teenage girls have committed suicide as a result is not what many socially conscious investors want their money to support, he says.

"I think Facebook violates all kinds of definitions of ESG … having to do with hate speech, having to do with election fraud, having to do with criminal activity," Behar says. "It really should be dropped from an ESG fund."

A Facebook representative pointed CNBC Make It to its ESG section in its proxy statement in response to a request for comment for this article.

What does sustainable mean?

Sustainable investing, another way to refer to ESG, is increasingly popular, reaching record high inflows in 2020. Investors, particularly younger ones, want their money to go to companies that they believe have good track records on not contributing to climate change and treating their employees well.

But there's no agreed upon standard for measuring ESG factors. Fund companies create their own metrics for measuring how sustainable a company is in different areas. Different funds with similar objectives often hold different companies, depending on how the fund manager scores companies.

"ESG funds are often not ESG," says Behar. "They can define ESG however they want in their prospectus."

Facebook might be included in an ESG fund because it performs relatively well in environmental considerations, according to S&P Global. MSCI, one of the world's largest index providers and ESG researcher, ranks Facebook as a leader in carbon emissions and average in factors like corporate governance and privacy & data security. Fund managers could look at that and decide it's okay to include.

Funds also need to perform well, otherwise no one would invest in them. That's why so many so-called sustainable funds are stocked with FAANG companies — including Facebook, Apple, Amazon, Netflix and Google (or Alphabet) — which are often among the top-performing stocks in major indices.

ESG proponents say that companies can do good and perform well. In fact, the Biden administration recently argued that having a good ESG rating can lead to better performance over time.

But Facebook's inclusion in ESG funds shows the conversation is complicated, Behar says. In 2019, the company was actually dumped from an index tracking companies that abide by socially responsible practices amid user privacy concerns. But others still include it.

Behar says he expects more sustainable funds to drop the company after the recent revelations. "I know the true ESG funds are dumping Facebook, I don't know about the fake ones," he says. "It will be a test."

The social media platform isn't the only questionable company in ESG funds. Other big tech companies, for example, have their own spotty records on human rights, environmental and other issues, and yet are often included, Behar says.

And ESG funds are often more expensive to invest in than a standard index fund because of the time and research fund managers put into selecting the companies in it, meaning individuals could be paying more to invest in a lie, Behar says.

Ultimately, it's up to individuals to research the funds they're interested in, and to make the call for themselves on what they feel comfortable with. But even that is complicated for the average investor, says Behar. Typically, investors research funds by searching for their prospectus. But those only includes a fund's top 10 holdings. They can also check on a site like Morningstar.

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