Elon Musk-led electric car manufacturer Tesla lost its place this month on the S&P 500 index dedicated to companies excelling at environmental, social, and governance (ESG) issues. Though there were 34 other companies also removed from the index following its annual reshuffle, the company stands out for its focus on environmentally conscious transportation.
In a blog post published May 17, S&P Dow Jones Indices’ head of ESG indices for North America Margaret Dorn explained that, although Tesla’s ESG score has remained relatively “stable” year-on-year, it had been outflanked by global industry peers. The index provider cited several contributing factors to this change, including alleged incidents of racial discrimination at one of the company’s factories that resulted in the California Department of Fair Employment and Housing bringing a lawsuit against Tesla. The company said in a February 2022 statement that it strongly opposes all forms of discrimination and harassment and called the lawsuit “unfair and counterproductive, especially because the allegations focus on events from years ago.”
Musk, who is the CEO of Tesla, tweeted his displeasure with the index reshuffle, claiming that “@SPGlobalRatings has lost their integrity [sic]”. The world’s richest man complained that oil giant Exxon Mobil—which has been mired in controversy over claims of climate denialism—was listed in the top 10 for ESG, while his electric car company was booted off the list entirely.
Here, why Tesla lost its place on the S&P 500 ESG Index, and what it means for the company:
What is the S&P 500 ESG Index and what kinds of companies are in it?
Launched in 2019, the S&P 500 ESG Index measures the stock value of some of the largest companies by market capitalization listed in the U.S. which meet certain sustainability criteria. It is similar in scope to the original S&P 500 Index, but aims to help investors choose between companies based on their commitment to strong ESG goals.
The constituents of the index are filtered for participating in certain industries deemed antithetical to ESG goals—such as tobacco and controversial weapons manufacturing—and for their scores under the United Nations Global Compact, a global framework of corporate social responsibility. Finally, companies with the lowest scores relative to their peers are excluded from the index.
The ESG Index is intended to provide a more accurate representation of businesses’ corporate responsibility commitments than what a company claims on its website. “You can’t just take a company’s mission statement at face value, you have to look at their practices across all those key dimensions,” Dorn told Reuters.
More than 300 of the companies included in the original S&P 500 Index feature on the ESG ranking, including Apple, Nvidia, JP Morgan Chase, and Exxon Mobil. During the annual rebalance on May 2, social media giant Meta, pharmaceutical company Johnson & Johnson, and car maker Chevron were all removed from the list, alongside Tesla. Meanwhile, Musk’s acquisition Twitter target, and oil refiner Phillips 66 were added.
Why was Tesla removed?
In her May 17 blog post, Dorn said that Tesla fell off the rankings after moving down the index relative to its global industry peers. The reasons she cited for this drop included the car maker’s lack of low-carbon strategy and codes of business conduct, allegations relating to racial discrimination and poor working conditions at one of its factories, and the company’s handling of deaths and injuries linked to its driver-assistance systems.
Tesla did not respond to a request for comment in time for publication of this story. A spokesperson for the company previously told the Guardian that Tesla aims to have “as close to zero injuries as possible and to become the safest factory in the auto industry worldwide.” Tesla and Musk have said that the vehicles’ autopilot system makes its cars safer, according to the New York Times.
“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens,” Dorn said.
How did Elon Musk react?
Tesla’s CEO took to Twitter to air his frustration over the news that the company had slipped off the S&P 500 ESG index. “ESG is a scam. It has been weaponized by phony social justice warriors,” Musk wrote.
In a series of further posts the tech titan shared memes mocking the inclusion of six oil companies on the index, and claiming that a good “ESG score” amounts to a business’s compliance with “the leftist agenda.”
The concept of ESG has faced skepticism in certain sectors, largely for allowing companies and investors to avoid scrutiny for socially irresponsible activities or investments. According to Bloomberg, the world’s largest ESG-focused exchange-traded fund has almost invested 3.1% of its assets in the oil and gas sector—the very industry that is accelerating the climate crisis.
In its 2021 Impact Report, Tesla said that “current ESG evaluation methodologies” are “fundamentally flawed” because it lacks focus on the company’s “real-world impact” on society and the environment.
Tesla board member Hiro Mizuno tweeted that “current ratings often overweight reduction of negative impacts while neglecting positive impacts.”
What does this mean for Tesla?
Although not all investors will agree on Tesla’s expulsion from the index, it could have an impact on the company’s stock value. Fen Munster, former technology analyst who’s now a managing partner at venture-capital firm Loup Ventures, told Bloomberg that it could force some investors to sell their holdings, because “funds benchmarked to the ESG index cannot hold the stock now.”
Adding to investor concerns, Musk has batted off claims in recent weeks that his proposed $44 billion acquisition of Twitter is distracting him from the electric vehicle maker. His financing plans for the deal have alarmed some Tesla investors, as Musk has taken out a $6.25 billion dollar loan backed by Tesla stock. He has already sold more than $8.5 billion of Tesla stock to contribute to the sale.
Other investors remain committed to Tesla. John Streur, president of Morgan Stanley unit Calvert Research and Management, told Reuters that Tesla is still on his company’s ESG indexes, even after the S&P index decision, saying he believed that Tesla had embraced the necessary tenets of ESG.
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