Tesla is a well-known company led by Elon Musk. Tesla ESG fell off the S&P 500 index of firms that excel at environmental, social, and governance (ESG) issues. Even though 34 other companies were removed from the index as part of its annual reshuffle, the company stands out for its emphasis on environmentally friendly transportation.

Tesla Overview

Margaret Dorn, head of ESG indices for North America, S&P Dow Jones Indices’ explained that, while Tesla’s ESG score has stayed relatively “stable” year on year, it has been outpaced by worldwide sector peers. The index provider listed numerous contributing factors to this shift, including alleged racial discrimination at one of the company’s plants. This led to a lawsuit against Tesla by the California Department of Fair Employment and Housing. In a February 2022 statement, the corporation strongly rejected discrimination and harassment. It termed the case “unfair and unhelpful, especially given that the allegations concern incidents that occurred years ago.”

Tesla CEO Elon Musk expressed dissatisfaction with the index change, alleging that “S&P Global Ratings has lost their integrity.” The world’s richest man objected that Exxon Mobil, embroiled in a controversy over climate denialism allegations, was placed in the top ten for ESG. At the same time, his electric car company was left off the list entirely.

What is the S&P 500 ESG Index, and which companies are included?

The S&P 500 ESG Index, launched in 2019, gauges the stock value of some of the big firms by market capitalization listed in the United States that meet specified sustainability standards. Its scope is similar to that of the original S&P 500 Index, but it intends to assist investors in selecting firms based on their commitment to strong ESG principles.

The index’s components are screened for their participation in businesses regarded resentful to ESG aims, such as tobacco and contentious weapons manufacture, as well as their scores within the United Nations Global Compact, a global corporate social responsibility framework. Lastly, the index excludes companies with poor ratings relative to their peers.

The ESG Index is meant to provide a more realistic depiction of a company’s corporate responsibility obligations than it says on its website. “You cannot simply take a company’s mission statement at face value; you must examine their practices across all of those key dimensions,” Dorn said.

More than 300 firms from the original S&P 500 Index are featured in the ESG rating, like Apple, Nvidia, JP Morgan Chase, and Exxon Mobil. Social media giant Meta, pharmaceutical corporation Johnson & Johnson, and vehicle manufacturer Chevron were all removed from the list, along with Tesla. Meanwhile, Musk’s acquisition target Twitter and oil refiner Phillips 66 have been added.

Why was Tesla removed?

Dorn stated that Tesla dropped out of the ranks after falling the index compared to its global industry counterparts. She cited the carmaker’s lack of a low-carbon strategy and codes of business conduct as reasons for the drop, allegations of racial discrimination and terrible working conditions in one of its plants, and the company’s handling of accidents and fatalities linked to its driver-assistance technologies.

According to a Tesla representative, the company aims to get “as close to zero accidents as feasible to establish itself as the safest factory in the auto industry worldwide.” According to the New York Times, Tesla and Musk have stated that the vehicles’ autopilot system makes them safer.” While Tesla ESG may be playing a role in removing gasoline-powered cars from the road when examined through a broader ESG lens, it has fallen behind its peers,” Dorn added.

What was Elon Musk’s reaction?

Tesla’s CEO resorted to Twitter to express his displeasure with the announcement that the business has ceased the S&P 500 ESG index. “ESG is a scam. Fake social justice warriors have weaponized it,” Musk wrote.

In subsequent posts, the internet mogul shared memes mocking the index’s inclusion of six oil corporations and arguing that a good “ESG score” equates to a company’s cooperation with “the leftist agenda.” Specific industries have questioned the notion of ESG, mainly because it allows firms and investors to dodge scrutiny for socially harmful activities or investments. The world’s largest ESG-focused exchange-traded fund has about 3.1% of its assets invested in the oil and gas sector—the business that hastened the climate crisis.

According to Tesla’s 2021 Impact Report, “current Tesla ESG evaluation methodologies” are “fundamentally flawed” since they do not focus on the company’s “real-world impact” on society and the environment. Hiro Mizuno, a Tesla board member, stated, “Current ratings frequently overestimate the reduction of negative impacts while ignoring positive impacts.”

How does this affect Tesla?

Although not all investors would agree on Tesla’s exclusion from the index, the company’s stock value may suffer. According to Fen Munster, a former technology analyst now managing partner at Loup Ventures, it may force some investors to liquidate their holdings because “Funds evaluated to the ESG index are unable to own the stock at this time.” Adding to investor fears, Musk has recently dismissed suggestions that his proposed $44 billion acquisition of Twitter diverts his attention from the electric vehicle producer. Musk’s funding plans for the transaction have upset some Tesla shareholders, as he has taken out a $6.25 billion loan backed by Tesla stock. He has already disposed of more than $8.5 billion in Tesla stock to contribute to the transaction.

Other investors are still interested in Tesla. Even after the S&P index decision, John Streur, president of Morgan Stanley unit Calvert Research and Management, said that Tesla is still on his company’s ESG indexes and that he believes Tesla has accepted the required ESG precepts.

ESG versus Sustainability versus Impact

Musk is effectively conflating ESG with sustainability and impact. The issue with Musk’s statements is that ESG is about operations, not impact. It’s a prism through which to grasp better how global events could jeopardize a firm’s enterprise value rather than how a company might affect the world. If there were a hypothetical S&P 500 Impact Index, Tesla would almost certainly be included, while Exxon Mobil would not. However, this does not imply that Tesla can claim ESG.

So, Musk is both correct and incorrect. Yes, Tesla has done a lot for the environment. ESG is not a scam. ESG does not measure all; Musk and others believe it does. Rather than relying on generic ESG ratings, investors should first identify the individual Tesla ESG issues that are most relevant to them – and then adopt an investment plan accordingly.

Why does the ESG rating system not take this into account? And if Tesla isn’t an ESG leader, who is?

The issue stems in part from the subjective nature of the ratings themselves. “Simple evaluations fail to enable investors to take an additional subtle and complex approach to arrive at their own informed decisions around the inherent tradeoffs in many ESG issues,” Aniket Shah, the global head of ESG and sustainability strategy at Jefferies Group, told Barron’s. As a result, the baby may be tossed out alongside the bathwater, mainly if an investor is more focused on one component of ESG.

“Good ESG investing,” he stated, “should recognize the risks associated with governance issues but also weigh them against the environmental positives and opportunities in the equity, with the investor making the final decision.” According to him, the ESG community should view S&P’s decision to remove Tesla from the index as “a true indictment” of ESG ratings. A few counts of perplexity and confusion might be added to the indictment. ESG evaluations, for example, compare corporations to their peers rather than to all other companies. As a result, highly rated corporations in some polluting or extractive industries may legitimately be deemed the best of the worst. This is also true in sectors such as mining, where human rights and environmental violations are common.

Faithful, Tesla and other electric vehicle makers face problems, according to Andrew Poreda, senior ESG research analyst at Austin-based Sage Advisory Services. He mentioned human capital challenges in the lithium, cobalt, and nickel supply chains. Cobalt, for example, is mainly derived from the Democratic Republic of the Congo, a country plagued by child labor and human rights violations.

Bottom Line

To return to a more positive note, Tesla’s legacy is its influence in the electric vehicle (EV) sector and how the business created enough momentum for EVs. Tesla battled established manufacturers from the start and was able to accelerate the global development of EVs. Despite not having the finest Tesla ESG ratings in the industry, it is creating high-energy efficient automobiles and investing extensively to reduce environmental risks. It accomplishes this by increasing supply chain management and transparency and developing better battery recycling techniques and technologies.

While Tesla is helping to get gas-powered cars off the road, it has yet to catch up with its counterparts when seen through a broader ESG lens. ESG determines if an organization reacts efficiently and successfully to various stakeholder needs, demands, and requirements within various internal/external contexts (e.g., environment, social, governance). You may reach a different conclusion if you judge a company solely on one statistic. That is something other than what ESG does. It’s a comprehensive framework for determining what makes a firm exceptional. Musk needs to accomplish more than one or two excellent things to be a leader of the twenty-first century.

FAQs

Q1. What are Tesla’s ESG practices?

ESG is a comprehensive framework that evaluates a company’s performance across several dimensions, encompassing environmental impact, social responsibility, and corporate governance. Tesla ESG has received accolades for how it affects the environment, as its electric vehicles emit no emissions.

Q2. How can Tesla enhance its ESG performance?

Conduct a living wage audit for the whole Tesla staff. Conduct a pay gap evaluation by ethnicity, race, and gender. Provide thorough diversity in the workforce data by race and gender (for example, the EEO-1 Report). Pledge to and report on a confirmed 1.5-degree Science-Based Climate Target.

Q3. How environmentally friendly is Tesla?

Furthermore, according to its research, Tesla has a lower water use for manufacturing each car, which helps to boost sustainability slightly. Finally, all Tesla vehicles are manufactured in the United States and in line with Environmental Protection Agency (EPA) standards, which helps to reduce emissions.

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