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With European and US lawmakers calling for investigations into reports that Facebook user data was accessed by UK based consultancy Cambridge Analytica to help President Donald Trump win the 2016 election, investors are asking even more questions about the social media company's operations.
An increasingly vocal base of investors who put their money where their values are had already started to sour on Facebook, one of the market's tech darlings.
Facebook's shares closed down nearly 7.0 per cent on Monday, wiping nearly $40 billion off its market value as investors worried that potential legislation could damage the company's advertising business.
Cambridge Analytica said it strongly denies the media claims and said it deleted all Facebook data it obtained from a third-party application in 2014 after learning the information did not adhere to data protection rules.
"The lid is being opened on the black box of Facebook's data practices, and the picture is not pretty," said Frank Pasquale, a University of Maryland law professor who has written about Silicon Valley's use of data.
The scrutiny presents a fresh threat to Facebook's reputation, which is already under attack over Russia's alleged use of Facebook tools to sway US voters with divisive and false news posts before and after the 2016 election.
"We do have some concerns," said Ron Bates, portfolio manager on the $131 million 1919 Socially Responsive Balanced Fund, a Facebook shareholder.
"The big issue of the day around customer incidents and data is something that has been discussed among ESG (environmental, social and corporate governance) investors for some time and has been a concern."
Bates said he is encouraged by the fact that the company has acknowledged the privacy issues and is responding, and thinks it remains an appropriate investment for now.
Facebook said on Monday it had hired digital forensics firm Stroz Friedberg to carry out a comprehensive audit of Cambridge Analytica and the company had agreed to comply and give the forensics firm complete access to their servers and systems.
"What would be a deal-breaker for us would be if we saw this recurring and we saw significant risk to the consumer around privacy," said Bates.
More than $20 trillion globally is allocated toward "responsible" investment strategies in 2016, a figure that grew by a quarter from just two years prior, according to Global Sustainable Investment Alliance, an advocacy group.
New York City Comptroller Scott Stringer, who oversees $193 billion in city pension fund assets, said in a statement to Reuters on Monday that, "as investors in Facebook, we're closely following what are very alarming reports."
Sustainalytics BV, a widely used research service that rates companies on their ESG performance for investors, told Reuters on Monday it is reviewing its Facebook rating, which is currently "average."
"We're definitely taking a look at it to see if there should be some change," said Matthew Barg, research manager at Sustainalytics.
"Their business model is so closely tied to having access to consumer data and building off that access. You want to see that they understand that and care about that."
ESG investors had already expressed concerns about Facebook before media reports that Cambridge Analytica harvested the private data on Facebook users to develop techniques to support Trump's presidential campaign.
Wall Street investors, including ESG funds, have ridden the tech sector to record highs in recent months, betting on further outsized returns from stocks including Facebook, Apple Inc and Google parent Alphabet Inc.
Jennifer Sireklove, director of responsible investing at Seattle-based Parametric, a money manager with $200 billion in assets, said an increasing number of ethics-focused investors were avoiding Facebook and other social media companies, even before the most recent reports about privacy breaches.
"More investors are starting to question whether these companies are contributing to a fair and well-informed public marketplace, or are we becoming all the more fragmented because of the ways in which these companies are operating," she said.
All about Cambridge Analytica
British data analytics firm Cambridge Analytica is accused of illegally obtaining data on 50 million Facebook users. Here’s what known about the company:
How did it start?
Cambridge Analytica is an offshoot of SCL Group, a government and military contractor that says it works on everything from food security research to counter-narcotics to political campaigns. Cambridge Analytica was created around 2013 initially with a focus on US elections, with $15 million in backing from billionaire Republican donor Robert Mercer.
What it does?
Cambridge Analytica markets itself as providing consumer research, targeted advertising and other data-related services to both political and corporate clients. It does not list its corporate clients but on its website describes them as including a daily newspaper that wanted to know more about its subscribers, a women’s clothing brand that sought research on its customers and a US auto insurer interested in marketing itself.
When did it first get attention?
After Trump won the White House in 2016, in part with the firm’s help, Cambridge Analytica CEO Alexander Nix went to more clients to pitch his services, the New York Times reported last year. The company boasted it could develop psychological profiles of consumers and voters which was a “secret sauce” it used to sway them more effectively than traditional advertising could
Cambridge Analytica markets itself as providing consumer research, targeted advertising and other data-related services to both political and corporate clients.