How Sustainable Is Facebook? An ESG Analysis of the Social Media Giant

Published in

The Startup

11 min readAug 16, 2020

Photo: Anthony Quintano / Creative Commons

It is a bit spooky to write about tech firms, previously Amazon and Alibaba, and now Facebook. One man, one idea and a huge leap of faith are some of the characteristics of people shaping our world today — and our future. Again and again, all the systems, all the tech, all of it — it is all about people. Is Facebook a different story? Join me and discover world of tech Gods.

Social media mogul Mark Zuckerberg ranks among the most powerful men in the world. As the head of Facebook, Zuckerberg became a billionaire at a very young age. And yet, we know relatively little about Zuckerberg. Who he is, where he’s come from and, most importantly, where he’s headed.

Mark Elliott Zuckerberg was born on 14 May 1984 in White Plains, New York. He excelled in high school and transferred to the famous boarding school Phillips Exeter Academy in New Hampshire (whose endowment stands at over one billion dollars) where he excelled at maths, astronomy and physics. Here, he also became the captain of the fencing team.

Zuckerberg’s father, Edward, a dentist, taught him Atari BASIC Programming in the 1990s, later hiring a software developer to tutor him. Mark went on to create a software program called ZuckNet — a system of communication between the computers in his home and his father’s dental office.

He was also part of a group that built a music playing software called Synapse Media Player during his high school years. In the accompanying section on Synapse team members, teenage Zuckerberg described himself as a “[p]rogrammer god.”

However, Zuckerberg did not conform to the nerdy programmer stereotype in his youth.

Zuckerberg went on to Harvard University, where he read psychology and computer science. At university, Zuckerberg garnered a reputation as a programming prodigy. Fledgling endeavours included CourseMatch, a program which allowed users to select classes according to the choices of other students, and form study groups accordingly.

In January 2004, Zuckerberg began writing code for a new site which came to fruition on 4 February 2004 when he launched thefacebook.com from his Harvard dorm room. The Facebook — the “the” was later dropped — began as an exclusive social network for Harvard students before expanding to other elite colleges in the US, including Columbia, Yale, NYU and Stanford.

Zuckerberg dropped out of Harvard in his sophomore year to develop Facebook full-time. He moved out to Palo Alto, California with a bevy of peers including roommate Dustin Moskovitz in order to take Facebook to the next level. Here, he met with the titanic Peter Thiel, who invested in the company. Some sixteen years later, Facebook boasts an astronomical 2.7 billion users.

In May 2017, Zuckerberg was awarded an honorary degree from Harvard University.

*Number of monthly active Facebook users worldwide as of 2nd quarter 2020 (in millions). Source: Statista.*

A business model where YOU are the product

One of the most compelling characteristics of the tech giants’ business models is the so-called “network effect”, whereby the value of their service increases with a higher number of users. Social media platforms are the prime example here. With each new user, the pool of potential connections and scope for content sharing increases. Once critical mass has been achieved, it is hard for rivals to lure users away from the market leaders. By now, it’s widely understood that Facebook’s voracious appetite for user data is driven by their business model which charges advertisers for access to precisely targeted segments of their massive consumer database. No one knows more about you than Facebook.

It looks as if Facebook has built the best business model in the world. Achieving high scale and high growth and high profit margins unmatched by any high-tech company, including Google, Amazon, Apple, and Netflix.

Facebook’s astonishing financial success is captured by the mnemonic 50/50/50/500: in round numbers, a $50 billion annual revenue run rate, growing at 50% per year with a 50% operating income margin, generating a market cap of nearly $500 billion.

Most of the products provided by Google and Facebook are ostensibly free, resulting in huge consumer surplus. One study cited in the Economist estimated that users value “search” at around $16,600 per year, “maps” at $2,800 and “video” at $900. Clearly, we as users are creating value for the firms as they harvest our data, which they can then monetise through sales to advertisers. In surveys, consumers claim that we value our data highly and are not willing to trade it for services, but our behaviour strongly suggests otherwise. Unthinkingly, we all tick consent boxes and allow cookies rather than interrupt our browsing/purchasing experience, and data breaches appear to have little to no impact on our behaviour. Facebook currently generates revenue of just $20 a year from each user — almost all from advertising — versus a value of $750 that users derive from the platform according to a recent MIT study. Facebook has been particularly cautious of increasing its ad load, wary that any improvement in near-term monetisation might come at the cost of reduced user engagement.

Other companies can only dream of running a company like this: Facebook has no cost of goods sold (individual users and companies provide content for free) and it does not have marketing costs (user word-of-mouth and viral network effects spur continuous growth). On the top of it, Facebook does not have selling costs (most advertisements are purchased through a self-service, automated ad placement platform).

If you were in charge of such a money-making machine, would you be eager to change this business model? Consider that Facebook’s average revenue per user (ARPU) in North America was $84.41 in 2017. To replace this revenue in an ad-free service, Facebook would have to charge each user at least an amount equivalent to its current ARPU. How many members of the Facebook “community” (as Zuckerberg is fondly wont to call it) would be willing to pay this amount for the privilege of not seeing ads they never asked for and not being spied on across the Internet? Not many.

It is therefore inaccurate for Zuckerberg to justify his company’s business practices by comparing Facebook with “a lot of media, having an advertising-supported model as the only rational model that can support building this service to reach people.” In reality, Facebook has hollowed out the readership and drained the advertising revenues from media companies, causing many to shift to subscription-based revenue sources for survival.

Either as investors or as human beings, it’s fair to say we can no longer think of Facebook merely as a profit-making company. Its global footprint makes it the world’s first interconnected public square — and that introduces opportunities to do both good and bad, at scale.

Facebook — a good environmental citizen?

Facebook helped usher in the era of green data centres already ten years ago. In January 2010, the company publicly committed to opening a reimagined data centre, built from the ground up to be energy efficient in ways no one had previously considered. The Prineville, Oregon, facility opened in April 2011 and is still serving users today.

Facebook has the luxury of rethinking dominant approaches when it comes to sustainability. The company is also obviously operating at massive scale. Its facilities in Luleå, Sweden, and in Altoona, Iowa, are powered by 100% renewable energy — hydro in Luleå and wind in Altoona.

Another way that Facebook is able to cool its data centres is through an outside-air cooling system, instead of a massive air conditioner, to cool its facilities. By drawing the outside air into the penthouse section of the data centre, the air travels through filters and is regulated for humidity and temperature as necessary. Once that air moves across the electronics and is heated back up, it’s recycled or pushed out of the building using giant exhaust fans.

It’s not just in data centre energy usage that the company looks to be a good environmental citizen — the approach extends to their other facilities. Their Menlo Park campus demonstrates this.

Facebook is also a founding part of the Open Compute Platform, an industry organisation that aims to improve all parts of data centre design, from the servers themselves, to the buildings they are housed within. Facebook deserves at least some credit for inspiring Microsoft and others to think bigger. Why? In this case, Facebook freely published the designs that made Prineville a state-of-the-art facility ten years ago. Today, there are roughly 200 organisations participating in and contributing to the project. Facebook has communicated that it has been running on 75% renewable power in 2018 and is on track to get to 100% in 2020.

And they actually walk the talk. In this chart you can see that Facebook is well on track to meet the targets set in the Paris Agreement.

Facebook is well on track to meet the targets set in the Paris Agreement. Source: J. Safra Sarasin.

For the greater good or God?

Trading in people’s data is an inherently conflicted business that can force leaders to choose between profit and protecting users. Measuring “social value”, and how much of it is created or destroyed by big tech, is far from straightforward.

Most will remember the feeding frenzy over shares and the extraordinary market value of the company at its debut — $100 billion — or the 50% haircut in value investors endured over the ensuing 90 days.

I remember Zuckerberg’s letter and the powerful, hopeful vision he penned about a more connected, more just, more peaceful world:

“These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits. Facebook exists to make the world more open and connected, and not just to build a company. We expect everyone at Facebook to focus every day on how to build real value for the world in everything they do.”

Ethical practices were to be central to the Facebook ethos as Zuckerberg foresaw it in 2012. Eight years later, he’s leading one of the world’s most scandal-plagued enterprises. Unfortunately, if you look at history, scandal is business as usual for Facebook.

The Cambridge Analytica scandal is arguably the most far-reaching and demonstrative of Facebook’s influence and privacy practices. The now-defunct U.K.-based political consulting firm obtained private data on about 87 million Facebook accounts worldwide with the help of an app developed by a Russian-American academic who has since sued Facebook for defamation. The data became part of an orchestrated campaign to influence the outcome of the 2016 U.S. elections. It seems Facebook is reluctant to take responsibility for privacy breaches impacting its users.

The company is reactive rather than proactive, and sometimes in the worst ways. Since the days of its missteps with Beacon, Facebook has been apologising for its privacy issues — and then returning to business as usual. And it’s not just Zuckerberg at fault here. In a November 2018 expose, The New York Times revealed a series of disturbing decisions management made during the height of the Cambridge Analytica crisis. Two decisions by Chief Operating Officer Sheryl Sandberg, in particular, beg the question of whether Facebook can ever meet Zuckerberg’s original intent of building a customer-first business for the social good.

In January 2018, Sandberg asked Facebook’s communications team to investigate financier George Soros’ “financial interests”, according to The Times, following a speech he gave at the World Economic Forum in which Soros suggested that Facebook and Google posed a “menace” to society.

Four months earlier, in September 2017 in a board meeting, Sandberg berated Facebook security chief Alex Stamos for informing directors that efforts to contain Russian infiltration of the social network weren’t complete — news that should have come directly from Zuckerberg or Sandberg but apparently hadn’t. “You threw us under the bus!” The Times reports Sandberg saying in the meeting, directing visible anger at Stamos for being outed.

Facebook has spent more than $31 million on lobbying in the last three years alone, and there’s little evidence Facebook has learned its lesson. Last year, the company unveiled plans to formally enter the dating business, which could go wrong in numerous ways given Facebook’s history with handling private data. Imagine, for example, that in signing up, you unknowingly give permission to a third party to post on your News Feed. Trusting Facebook with romantic data when it’s proven untrustworthy in too many other areas seems like a stretch.

Even though Facebook — a company which is also well known for its tax avoidance practice— checks many ESG boxes there are many maybes. The most critical questions relate to management choices, and the company’s ongoing collisions with regulators and failures on public policy issues makes the company rather “complex” from a traditional ESG point-of-view.

Facebook’s corporate office conveniently located in Dublin, Ireland. Similar to other Big Tech companies, Facebook has a history of tax avoidance and aggressive tax planning. Photo: Faithie / Shutterstock.

Three key questions on Facebook (and the answers)

– Is Facebook creating new products that address emerging societal needs or open currently unserved customer segments?

Well, mostly yes. It is unique, innovative and disruptive.

– Is Facebook enhancing productivity in the value chain, whether by finding new efficiencies or increasing the productivity of employees and suppliers?

Yes and no, it is disruptive and powerful, hard to control on one side and extremely focused on increasing productivity on the other side. Facebook has hollowed out the readership and drained the advertising revenues from media companies and as such it is — like it or not — a news source for millions of people around the world. A source where “news” is manipulated.

– Is Facebook investing to improve the business environment or industry cluster in the regions where the company operates?

Honestly, I can’t see how it does that aside of providing 45,000 jobs. Trading in people’s data is an inherently conflicted business that can force leaders to choose between profit and protecting users.

The conclusion

So what is the conclusion? As always, it depends a great deal on the ESG style and outcome you are looking for.

A hard-core mission-driven ESG investor would certainly avoid the stock. Too many scandals of which the Cambridge Analytica case is the most far-reaching and demonstrative of Facebook’s failures on privacy practices.

Facebook’s ESG standing will improve materially if Zuckerberg and Facebook’s other leaders make good on promises to bring to market a fully private Facebook experience that’s built on a subscription model, providing users with clear choices as to how they can use and experience the world’s most feature-rich social media platform.

Unfortunately, that day may never come, and I can’t see Facebook as “ESG proof” unless it does.

ESG libertarians (who like ESG “as long it does not hurt”) will recognise the risks and harbour in stock as “all of the others do” given size of the stock in indices. They will deploy “engagement”, proxy voting and collaborative initiatives. They will recognise the risk, but see the money.

A true LTA investor (long-term active) will assess a real economic-ESG value creation, which seeks out companies that achieve excellent economic performance by innovating to meet important societal needs. The incapacity of the political system to ponder the problem of Facebook power guarantees many challenges and those will come in many shapes in the next 3–5 years.

Either way, the version of Facebook you’re investing in today could look very different even five years from now.

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