FAANGs: dominant tech companies but are they ethical investments?

Sam Slator 04/10/2018 in Sustainable investing

When we talk about technology companies, the five most quoted are the FAANG stocks: Facebook, Apple, Amazon, Netflix and Google.

Two of them – Apple and Amazon – have recently become the world’s first $1 trillion companies, having risen to dominance in a world of increasing digitalisation. All five have a huge presence in our everyday lives.

However, while their rise has been exciting and profitable for investors, how do they rank in terms of ethical choices?

EdenTree Investment Management, pioneers of ethical investing and whose EdenTree Amity UK fund is Elite Rated, share their views.

Facebook Inc.

Positives: Facebook provides a simple to use, free networking service that connects families and friends across distances and has in many ways ‘democratised communication.

Negatives: Following claims of data misuse and privacy intrusion its business model (mining user data to enable targeted advertising) has become strained and is being placed under increasing scrutiny. Environmental and social disclosure is viewed as weak, although the company has made progress mitigating climate impacts. Its impact on user addiction and mental health is also a consideration. Governance is also viewed as weak, with ordinary shareholders discriminated against via a dual share structure that gives the majority of voting power to executives.

Verdict: Facebook is not suitable for inclusion in the Amity range of funds given its multiple challenges over data privacy, poor corporate governance and weak business ethics.

Apple Inc.

Positives: Apple’s unique selling point has been its relentless design innovation connecting the world through ‘must have’ devices. It has built a loyal following and improved environmental performance considerably, developing strong protocols around conflict minerals (natural resources extracted in a conflict zone and sold to perpetuate the fighting) and end-of-life recycling. Governance conforms with US norms, with a single share class structure and a strong independent board.

Negatives: Contracted out manufacturing of iPhones to China has led to serious allegations of poor working conditions including excessive hours, child labour, abuse of student interns, health risks and unpaid wages. Some progress has been made in reporting on supply chain standards but there is continuing risk in terms of human rights. The business model of obsolescence based on desire for the latest product presents acute sustainability issues in a world of finite resources.

Verdict: Apple is not suitable for inclusion in the Amity fund range give its multiple challenges over social and supply chain standards. The business model makes it a poor sustainability play.

Amazon.com Inc.

Positives: Amazon’s all-encompassing model of retailing has provided a one-stop shop for millions of consumers. It represents the apex of digital disruption, with few areas left unexploited.  Governance conforms reasonably with US norms. It does not have a dual-class voting system despite the Chief Executive being the beneficial owner of 16% of the issued equity. The Board also has a good level of governance. It has recently increased the minimum wage for workers in the US and UK.

Negatives: The company has faced multiple allegations of poor labour relations and inadequate working conditions, aggressive tax avoidance and potential weakness in product governance (fake and counterfeit products). Amazon is viewed as a laggard as far as environmental and social reporting is concerned, although Amazon Web Services renewable energy program is considered ‘best-in-class’.

Verdict: Amazon has not been scoped for investment inclusion. The current House view is that Amazon, owing to multiple labour, tax and supply chain controversies would most probably not pass our positive screens and would therefore not be suitable for inclusion in the Amity range of funds.

Netflix Inc.

Positives: Netflix is a pure entertainment play and is therefore more ‘benign’ in responsible investment terms than others in the FAANG group.

Negatives: The scale of growth has not been accompanied by mature reporting around environmental, social and governance issues. Its model relies heavily on third party platforms and delivery systems which are not under its control. The company’s reporting on responsible advertising is weak and there is little in the public domain regarding marketing to children. Governance conforms to US norms and it does not have a dual-class voting system, although it has not instituted a majority vote standard in uncontested director elections. Netflix is one of just a handful of companies no longer holding a physical AGM, opting instead for a virtual meeting.

Verdict: Netflix has not been scoped for investment inclusion. The current House view is that Netflix would probably be suitable within the Amity fund range, but we would seek to engage prior to investing owing to poor disclosure and weak governance.

Alphabet Inc (Google).

Positives: Google has been a facilitator of news, knowledge and information democratising the internet for users. Its broad family of accompanying services such as Android and Google Maps have been positive enablers. It has been a leader in technology environmental management and has been carbon-neutral since 2007. It has also been a powerful advocate for the community and charitable sector with a commitment to award $1 billion in grants and to make advertising to charities free. It is also well-known for its positive work-life balance ethic with and engaged workforce.

Negatives: Its size and global reach present similar challenges as Amazon, with concerns around market abuse, tax avoidance, anti-competitive practices, patent infringement and data privacy. Alphabet has three share classes with which 50% of the equity carry no votes. The founders continue to exercise control via a controlling share. The Board has overall poor independence levels. Disclosure on social and human rights issues, as with the other FAANG stocks, is generally weak and could be improved.

Verdict: Google (Alphabet) presents challenges for the responsible investor, not least around regulation and market dominance. We have engaged with the company and continue to monitor developments, not least suggestions Google may seek to enter China where internet search services are censored. Google (Alphabet) has been deemed suitable for inclusion in the Amity fund range.

The views expressed are those of EdenTree and do not constitute advice to buy or sell any of the stocks mentioned.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions.Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice.Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.