A benchmark ESG stock index has removed Tesla Inc., sparking a debate over which companies are succeeding — and failing — in catering to socially responsible investors.
Tesla has become a $735 billion company thanks to its breakthrough electric vehicle engineering. Its own carbon footprint is only a small fraction of that of its peers, and its market success has driven the entire industry away from gasoline-powered vehicles.
But the other components of ESG – social and governance risks – give investors pause. CEO Elon Musk is an unconventional manager, prone to impulsive tweets, and the company discloses very little information about its workforce or working conditions.
This split became significant on Wednesday after it emerged that Tesla had been kicked out of the ESG version of the S&P 500 index. Musk responded by saying ESG is “a scam.” That added to an already bad day for the company, whose shares fell 6.8% amid a broad sell-off in tech stocks.
“It all speaks to the big inconvenient fact of ESG: you can’t keep the baby and throw out the bathwater,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. “You have to accept or reject both.”
In a report, Bloomberg Intelligence analysts wrote that Tesla’s ESG status remains one of the most debated for any company, with many ESG-labeled funds still holding the stock. In fact, the world’s largest ESG-focused exchange-traded fund has about 1.8% of its assets invested in Tesla, according to data compiled by Bloomberg.
The fund, BlackRock Inc.’s $21.9 billion iShares ESG Aware MSCI USA ETF (ticker ESGU), tracks the MSCI USA Extended ESG Focus Index, which still includes Tesla as a member.
BI’s Balchunas and Shaheen Contractor wrote on Wednesday that eight of the top 15 U.S. funds that include ESG in their portfolio screens hold significant positions in Tesla.
“While Tesla may fit an environmental goal or an impact theme, the company’s social and governance issues make its inclusion in ESG funds questionable and Tesla’s removal from the S&P 500 ESG Index possibly be late,” the analysts said in their article “Is Tesla ESG?”
The S&P Dow Jones Indices, which removed Tesla from its S&P 500 ESG index, said the company’s score on environmental, social and governance standards has remained “fairly stable” over the past year, but that it tumbled against the improvement of its global peers.
The index provider cited concerns over working conditions and Tesla’s handling of an investigation into deaths and injuries related to its driver assistance systems. A lack of a low-carbon strategy and codes of business conduct also worked against Musk’s company, he said.
“While Tesla may be playing its part in taking gas-powered cars off the road, it has lagged its peers when examined through a broader ESG lens,” said Margaret Dorn, Managing Director and responsible for ESG indices for S&P Dow Jones in North America. , said in a blog post on Tuesday.
For months, Tesla has been criticizing ESG. The company said in its annual report that ESG ratings are “fundamentally flawed” and in an April tweet, Musk said “corporate ESG is the devil incarnate.”
From a market perspective, Tesla’s removal from the S&P index will likely be minimal as there was only around $11.7 billion tracking the S&P ESG gauges as recently as late 2020. In contrast, trillion tracks the main S&P 500 gauge.
Investors are divided on S&P’s decision. Kristin Hull, founder of Nia Impact Capital, a sustainability fund in Oakland, Calif., which has lobbied Tesla to address workers’ issues, said she was relieved there was “finally accountability”. .
Zach Stein, chief investment officer of Carbon Collective, an online climate change-focused investment adviser based in Berkeley, Calif., said otherwise. ESG’s biggest issue is climate change, so excluding the leading maker of electric vehicles makes no sense, especially since companies like Exxon Mobil Corp. remain in the S&P index, he said.
Tim Quinson reports for Bloomberg News.