ESG early warnings unheeded: Facebook timely data shows material importance of “social” factors

Blog August 2, 2018

When Facebook’s downward earnings guidance rocked the stock market, plenty of analysts weighed in, bulls and bears alike, weaving the news into their narrative for the tech giant.

The best analyst guidance relies on solid data, though—so was there data that anticipated Facebook’s downfall?  The answer is yes.  For most of the past year, lights were flashing red for Facebook in a key area:  financially material ESG signals.

Chief among these was the factor of Data Security and Customer Privacy, determined by the Sustainability Accounting Standards Board (SASB) to be financially material for Facebook’s industry of Internet & Media Services.

In the Fall of 2017, ESG data that Truvalue Labs gathers showed Facebook’s timely Pulse Score fell over 20% due to a host of data, security, and privacy issues. In the Spring of 2018, its Pulse Score fell yet again (~10%+) over similar issues as news spread of Cambridge Analytica misuse of user data.

Despite congressional hearings, analysts collectively shrugged off the importance of the issue, and future earnings estimates (for Fiscal Year 2019) actually rose.

 


Source: Thomson Reuters, Truvalue Labs’ platform

 

Now it’s clear that was misguided—but it’s worth looking at the evidence that was mounting all along.

Before reviewing the body of evidence warning of problems at Facebook, here’s the hit to Fiscal Year 2019 earnings expectations the company took (this time measured by wall street consensus EBITDA estimates).

 

Source: Thomson Reuters, Truvalue Labs’ platform

 

Given Facebook’s history of revenue and user growth and its prominence in markets as the first letter in the FAANG group, this kind of an earnings surprise is a huge deal.

Now here’s why it shouldn’t have been a surprise:  as mentioned earlier, Data Security and Customer Privacy is a financially material factor for Internet Media and Services companies, according to SASB.

Here’s a look at the events captured on Truvalue Labs’ Insight360 platform in the past year during which Facebook’s SASB Materiality score dropped, specifically in months with dramatic drops.

JULY 2017

  • Germany’s Federal Cartel Office Claims Facebook ‘Extorts’ Personal Data From Users. /  tech.slashdot.org
  • Facebook can track your browsing even after you’ve logged out, judge says. / The Guardian
  • Facebook Data Collection: Germany Investigates Social Network ‘Extorting’ User Info. / International Business Times

SEPTEMBER 2017 (timely data shown in circle in chart below)

  • Facebook fined in Spain for allegedly misusing personal data. / Engadget
  • Facebook Fined Over Privacy Practices: Spanish Regulators Issue $1.4 Million Fine. / International Business Times
  • Facebook fined $1.4 million by Spanish Data Protection Agency. / Siliconbeat
  • Facebook hit with €1.2m fine in Spain for breaking privacy laws.  / The Telegraph Technology

 

Source: Truvalue Labs’ platform

 

DECEMBER 2017

  • France’s CNIL: WhatsApp’s Data Sharing With Facebook Is Illegal. / Tom’s Hardware
  • Facebook Battles Users Over Tracking At Health Sites. / MediaPost
  • Facebook Wants Your Face and You’ll Probably Let Them Have It / Gizmodo

FEBRUARY 2018

  • Facebook ordered to stop tracking web users in Belgium. / The Inquirer
  • Why Was Facebook So Easy to Hijack?. / WSJ – Business
  • Facebook’s tracking of non-users ruled illegal again. / TechCrunch

MARCH 2018

  • Facebook must ‘step up’ after data scandal: Zuckerberg. / Channel NewsAsia
  • After Days of Silence, Mark Zuckerberg Publicly Addresses Facebook’s User-Data Uproar. /  The Wall Street Journal
  • Mark Zuckerberg breaks his silence on Cambridge Analytica scandal. / CNN Money
  • Facebook CEO Mark Zuckerberg breaks silence on data breach scandal. / GeekWire

 

So, how did Facebook’s stock perform as these events took place? See the chart below.

 

 

The two-year chart shows Facebook’s struggle on privacy issues, with the underlying stories just discussed behind the dips.

The dotted line is the timely ESG Pulse score—it’s more expressive of near-term swings.  Through that lens, the green lines show stock price performance wasn’t totally out of line with ESG sentiment from late 2016 to late 2017.

In August to September 2017, though, as negative privacy events piled up, a disconnect arose.

The long-term Insight Score, in pale purple, continues to trend downward, as the darker purple–Facebook’s stock price, breaks free to the upside.

While investment professionals are realizing the importance of intangible factors and ESG, the empirical case for ESG integration is more mature than many realize.  Click on this link for a study looking at proof of outperformance.