The exclusion of Tesla Inc (NASDAQ:TSLA) from a leading ESG index highlights the paradox of the company for sustainable investors, and will have an ironic impact on how sustainable funds will invest in the stock.
Despite the blustering reaction of boss Elon Musk and backer Cathie Wood at ARK, the truth of the matter is that there is a lot more to ESG than just 'E' – the Environmental – with those prominent Twitter users not the only ones to forget the social and the governance elements of the acronym.
Musk branded ESG a "scam", arguing that Tesla was doing more than its bit for the environment (or "more for the environment than any company ever!" as he tweeted).
But, as S&P pointed out in its blog post that explained why Tesla had not made it into the ESG version of its S&P 500 index, the company does not have a squeaky clean record, with poor working conditions and other issues reported at its factories, not to mention Musk's carefree attitude to governance.
I asked one ESG expert and one City broker to give their perspective on whether the S&P news would have a wider-reachign impact.
Patrick Wood Uribe, founder of Util, an investment screening platform allows investors to research the social and environmental impact of 50,000 listed companies, said Tesla and Musk have excelled at their mission to “accelerate the world’s transition to sustainable energy” but that there were big holes in Musk's argument.
“Tesla's foray into EV, renewable, and battery development has added tremendous fuel to climate capitalism. Their impact isn’t absolutely positive – see the costs associated with metal mining – but, overall, it’s a better company for the environment and society than its peers. And Tesla’s influence over consumers and so also over other automakers makes it a significant impact multiplier.
“The problem with Musk’s claims is that ESG is not about impact," said Wood Uribe.
“ESG is operations. It’s a lens through which to better understand how world events might risk a company’s enterprise value, not how a company might pose risks to the world. If there were an S&P 500 Impact Index, then Tesla would probably still be in it, and Exxon, out. But that doesn’t mean Tesla can claim ESG.
“So Musk is both right and wrong. Yes, Tesla has done a lot for climate. No, ESG is not a scam. ESG simply doesn’t measure, necessarily, the things Musk and others think it measures."
The main message that Wood Uribe for investors to take away from this, is that industry insiders must be “absolutely clear" about what it is they’re selling and that both impact and ESG are important, but are measures of different things.
“If the distinction is miscommunicated – or worse, miss-sold deliberately to make products more marketable – Musk and others will continue to misunderstand. And that could undermine the promise of sustainable investing, period.
Neil Campling, head of tech, media and telecoms research at broker Mirabaud felt Tesla has been “economical with the truth” for a long time, with many “false promises” and while Tesla may tick the box for the E in ESG “they definitely don't tick the box for G”.
With ESG funds the biggest segment of active investors, Campling said Tesla being removed from what is a flagship ESG benchmark is a “big deal”.
This will be particularly important as some funds track the index as their benchmark.
For those funds from now, “any holding of Tesla would be seen as an active bet rather than a positive relative to the benchmark weighting. You have to say - this is ironic,” Campling said.