Facebook, Apple, Amazon, Netflix and Google – the FAANGs – make up a dominant part of the global market, but they should not have a place in sustainable or environmental, social and governance (ESG) portfolios, according to Nick Edgerton of Stewart Investors.
The FAANGs stocks are examples of the US technology companies that have dominated market returns and portfolio weightings for the past several years.
They make regular appearances in portfolio top ten holdings, including sustainable and ESG-focused funds as the companies are moving towards tackling climate change with carbon-reducing business practices. But the handling of environmental and social elements mean that they will not feature in any of Edgerton’s sustainable funds. 
He said “we’ve avoided the FAANGs for the past decade,” in the four FE funinfo Crown rated Stewart Investors Worldwide Sustainability fund, which he runs along with FE fundinfo Alpha Manager David Gait, as well as his other sustainable portfolios.
For Edgerton (pictured) there have always been concerns about the mega-cap tech stocks from a sustainability perspective, even though they score highly on some ESG measures.
Social media company Facebook, for example, can score “pretty well” on ESG metrics but the negative social implications around social network sites and the public’s lack of ability to influence them makes this problematic.
Other concerns were the lack of control social network companies had on the actual content being put uploaded.
It’s not just the social media or internet companies that were problematic from a sustainability perspective. E-commerce giant Amazon was one Edgerton said he was “always concerned” about, for its labour rights and labour conditions in some of its facilities.
Amazon has faced criticism over the working conditions in its fulfilment warehouses, especially during the lockdown when consumers turned more to online delivery.
Tesla is another popular name often paired with the FAANG stocks due to its high returns and large market cap. The electric carmaker offers a clear sustainability angle from an environmental perspective thanks to its focus on renewable energy.
But company founder Elon Musk creates concerns about Tesla’s role in sustainable portfolios for Edgerton, particularly over his actions regarding Tesla’s 2016 acquisition of SolarCity.
At the time Musk claimed that the purchase of the solar panel maker was an endeavour to create houses with roofs made entirely from solar panels, furthering Tesla’s environmentally friendly industry.
Since then it has been alleged that Musk pushed Tesla’s board to buy SolarCity, which he owned a 22% stake in, just as it was running out of money. At the time Musk also had a 22% stake in Tesla.
Musk was in court two weeks ago to defend against a lawsuit by shareholders seeking to recoup the $2.6bn (£1.9bn) the company paid for SolarCity. Musk has denied it was a bailout as the shareholders allege.
This kind of governance issue should be a warning to investors against chasing a franchise, Edgerton said.
Investors need to have a “great leap of faith” when a company is in trouble and trust that they will look after shareholders in the future.
“It's only by looking at the long-term in history and seeing management teams that you can get a feel for whether they'll treat you right as a minority shareholder when times are tough,” Edgerton said. The worst thing to do as an investor is to fail to understand the motivations and incentives of the company being invested in.
“Because ultimately, one of the best ways to lose money is for them to syphon it away from you as a shareholder,” Edgerton said.
Not everyone agreed that FAANGs should not have a place in sustainable portfolios however.
Susana Coutinho, research director at MainStreet Partners, an independent investment advisory on ESG, sustainability and impact investing, said that these companies had a role to play in reducing global carbon footprints, so investing in them allowed investors to drive the change towards that.
Coutinho said as well as having a significant presence in benchmarks these mega-cap stocks “play an important role towards a low carbon economy.
“We believe that to drive change in the current system, you need to be part of that system. Therefore, having an active position in these companies gives the investor the ability to drive that change.”
Coutinho added that although the companies do lag on social and have corporate governance “failures” they are “definitely not talking about the worst companies in terms of sustainability here.
“There is room to improve and investors can be part of that process.”