In theory, there should be no debate about Tesla’s (NASDAQ:TSLA) status as a credible environmental, social and governance (ESG) stock.
After all, Elon Musk’s company is the dominant manufacturer of electric vehicles, which also puts it at the forefront of energy storage technologies. Additionally, the company is a major purveyor of rooftop solar panel systems.
At the very least, Tesla is like so many growth companies in that aces the “E” and its “S” and “G” credentials are up for debate owing largely to fluidity in terms of how index providers and ESG scoring companies evaluate social and governance issuers.
Still, at least one major index provider doesn’t view Tesla through an ESG lens. Earlier this month, the S&P 500 ESG Index was rebalanced and Elon Musk’s company was left out of the fray. Not surprisingly, this news was greeted with a fair amount of internet “commentary” over the past couple of days as Tesla’s exclusion from that benchmark became widely known.
Musk Complains. He’s Right to Do So.
Musk, as he’s known to do, took to Twitter to voice his displeasure, but his pointed commentary wasn’t so much about Tesla’s exclusion from the S&P 500 ESG Index. After all, the two exchange traded funds following that gauge combine for just $1.2 billion in assets. While both are healthy ETFs, neither is going to be confused for a $20 billion behemoth. At least not today.
“Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponized by phony social justice warriors,” wrote Musk in one tweet.
That was followed by “@SPGlobalRatings has lost their integrity” – an overt shot at S&P.
Like him or not, Musk brings up an interesting point. How the heck is Exxon Mobil (NYSE:XOM) in an ESG index while Tesla is excluded? In fact, Exxon is the eighth-largest holding in the benchmark. Moreover, the S&P 500 ESG is designed, supposedly, to provide sector exposures that are similar to the standard S&P 500. Yet, by excluding Tesla, the benchmark is excluding the second-largest consumer discretionary company behind Amazon.
This is the type of stuff that advisors and clients hate about ESG. Put simply, the combination of lack of uniformity and increasing politicization of ESG scoring makes this style of investing harder for advisors to convey to clients. Speaking of ESG politicization, Musk isn’t the first to levy such allegations against S&P.
“In addition to rating governments on meaningful financial criteria, in March the biggest of the top three credit-rating firms began to apply an environmental, social and governance, or ESG, rating system. But Utah isn’t about to submit to these subjective standards. State officials, including myself, recently wrote a letter to S&P objecting to the ESG indicators and ratings it has assigned to Utah and calling for the company to withdraw them,” writes Utah Treasurer Marlo Oaks in an op-ed for the Wall Street Journal.
In his Journal piece, Oaks goes on to note ESG ratings are rigid in that they hold a single point of view and often lag in adapting to market changes.
What S&P Says
To be fair, this isn’t about piling on S&P. Musk, Oaks and others have that market cornered. In a recent note, the index providers says that while Tesla’s ESG score is stable over the past year, other auto makers are catching up on that front.
However, the reason for Tesla not being in the S&P 500 ESG Index according to the provider is a “disqualifying ESG score.” Conversely, Meta Platforms – a company some would argue flunks the “S” and “G” components – was eligible for inclusion and simply not selected.
Bottom line: Index providers need to eradicate elements of politics from index construction and it’s disappointing this is a conversation with ESG because ESG itself is known to stoke political passions. Said another way, the optics of Tesla not being in a broad market, large-cap ESG index aren’t good.
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