ESG Lessons from S&P's Facebook Smackdown.

• Position: EDITOR'S NOTE

The S&P 500 ESG (environmental, social and governance) Index lost a few familiar names during its annual rebalancing, including Wells Fargo, Oracle and IBM. But the one that made the most news, and the biggest component of the index, was Facebook.

While Facebook did well when it came to the environmental piece of ESG, it was the social and governance that sunk the social networking firm. (Environmental issues tend to be less material for tech companies so S&P gives more weight to the social and governance scores for those firms.)

Out of 100, with 100 being the best, Facebook scored 22 on social and a dismal 5 on governance; giving the company an overall weighted score of 21.

"The specific issues resulting in these scores had to do with various privacy concerns, including a lack of transparency as to why Facebook collects and shares certain user information," wrote Reid Steadman, managing director and global head of ESG for S&P Dow Jones Indices, in a recent blog post.

"A day before its exclusion," he continued, "Facebook held a weight of 2.5% in the S&P 500 ESG Index. At that time, Facebook was the fourth-largest company in the S&P 500, the parent index for the S&P 500 ESG Index, with a weight of 1.9%."

At the heart of the issue was uncertainty in how effective the company's risk management processes are as they relate to ESG, an issue that should be of great importance in all boardrooms today.

ESG isn't seen as a nice-to-have, it's becoming more and more about risk management.

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