Elon Musk Called ESG a Scam – Did Tesla CEO Do Investors a Favor?

When it comes to investing, a combination of head, heart and gut is usually used, although it shouldn’t be. And perhaps no market theme arouses “everyone’s feelings” like ESG.

This week, a major move to remove Tesla from a closely followed ESG (environmental, social and governance) index brought almost equal amounts of anger and relief.

Defiance was issued by Standard & Poor’s, which excluded Tesla from its ESG index; Trouble arose from Tesla TSLA,
Investors including well-known wealth manager and Tesla bull Cathie Wood. There was also a sizzling snapback from Elon Musk.

Sustainable investing: Today’s widespread ESG ratings and net-zero promises are largely worthless, say two pioneers of sustainable investing

More often than not, a new wave of confusion about what constitutes “ESG” emerges when what many see as anti-gasoline renegades fall into disrepute.

The S&P 500 ESG Index dropped Musk’s Tesla from the lineup as part of its annual rebalance. But in large part because it’s also meant to track the broader S&P 500 SPX,
Although the index retained oil giant ExxonMobil XOM when adding an ESG layer,
in its best ESG mix. Also included: JPMorgan Chase & Co. JPM,
hired by environmental groups to be the main lender for the oil field.

“ESG is cheating. It was armed by false social justice warriors,” Musk tweeted, lamenting that ExxonMobil has outperformed Tesla.

“Ridiculous,” was Wood’s terse response to Tesla’s dismissal.

“While Tesla may be doing its part to take fuel-powered cars off the road, it has fallen behind its peers when viewed through a broader ESG lens,” argued Margaret Dorn, Senior Director and Head of ESG Indices, North America , at S&P Dow Jones indices, in a blog post.

Read: Electric vehicles can store electricity for our homes and the power grid: why vehicle-to-everything technology is a must-have for investments

Specifically, it was the “S” and “G” that soured Tesla’s “E,” S&P’s report shows. Tesla was stripped of allegations of racial discrimination and poor working conditions at its Fremont, California factory. The automaker was also called out for its handling of the NHTSA investigation after multiple deaths and injuries were linked to its Autopilot vehicles.

The ESG-oriented investment house Just Capital has a similar criticism as S&P. Tesla has historically scored in the bottom 10% of Just Capital’s annual sustainability rankings largely because of the way it pays and treats its employees, the investment firm said. Overall, Tesla scores well on environmental issues, customer treatment, and job creation in the US, but not so well on certain “S” and “G” criteria, including “Paying a Fair and Living Wage” or “Protection the health and safety of workers”. with discrimination controversies related to Diversity, Equity and Inclusion (DEI).

Paul Watchman, an industry consultant who wrote a landmark report breakthrough ESG investing in the mid-2000s, said Tesla should be part of ESG indices. “Not all ESG violations are created equal, and this assessment shows how skewed S&P’s assessment is,” he told Bloomberg.

This disagreement is likely to confuse investors the most.

“The majority of investment managers using ESG simply pay data providers money to tell them what good ESG is,” said Tony Tursich of the Calamos Global Sustainable Equities Fund in a MarketWatch interview.

ESG ratings are not like ratings given by credit rating agencies, where there is consensus on creditworthiness criteria. So far, there are no uniform definitions of ESG.

Dimensional Fund Advisors says it’s also being challenged by ESG ratings. The correlation between the ESG scores of different providers was estimated at 0.54, it said. In comparison, the correlation between Moody’s and S&P credit ratings is 0.99.

MSCI Inc., the leader in ESG ratings, still includes Tesla AND Exxon in its broader tracked ESG-focused indices, adding another level of confusion over what ESG actually means. The methods used by MSCI and S&P for their ESG indices are very similar.

On the part of S&P, the addition of Exxon maintains its representation in the energy sector in line with broader goals.

But that leaves many investors wondering why ESG is associated with any other priority? And still others bemoan all the exceptions that can come with an ESG promise and a stock listing in an ESG index, ETF, or mutual fund.

Strict environmental groups also typically object to the inclusion of traditional oil companies under an ESG label. “We see funds with ESG in their names getting Fs on our screening tools because they hold dozens of fossil fuel extraction companies and coal utilities,” said Andrew Behar, CEO of As You Sow.

However, other energy industry observers say their inclusion may have a different meaning. The transition to cleaner options will be most effective at the incumbent traditional energy companies given their size, multinational reach and investment in processes such as carbon capture. Viewing them as ESG-lite keeps the pressure on to evolve, they argue.

No matter which ESG element is more important to an investor, trust is paramount.

In fact, some ESG observers say that Tesla isn’t as clean on the environmental side as its hyper-focus suggests, which essentially means you can’t take a company’s ESG promise on merit alone. Tesla was recently tagged in by As You Sow a report that evaluated 55 companies on their “green” progress after pledges were made. Tesla received bad marks for not publicly sharing emissions data.

“Part of [Tesla’s] Problem is a lack of disclosure. For someone who champions freedom of speech, Musk could bring more transparency to Tesla,” said Martin Whittaker, founding CEO of Just Capital.

Read: What does “freedom of expression” actually mean? Twitter does not censor speech, despite the opinion of Elon Musk and many users

Aside from data on environmental and greenhouse gas emissions in particular, the growth of broader corporate sustainability information can pose challenges, say Will Collins-Dean, senior portfolio manager, and Eric Geffroy, senior investment strategist at Dimensional Fund Advisors, in a comment.

For example, corporate sustainability reports can span hundreds of pages, vary significantly from company to company, and may not contain all the information that investors are interested in.

The Securities and Exchange Commission is moving towards unified rules for reporting on climate change risks and has addressed broader ESG promises. The Department of Labor is also considering adding ESG to 401(k)s, including how transparent that addition must be. For the time being, the company’s actions are voluntary.

When individual companies miss the mark on ESG. The funds these names raise can be just as confusing.

A report by InfluenceMap, a London-based nonprofit, evaluated 593 equity funds with total net assets in excess of $256 billion and found that “421 of them have a negative Portfolio Paris Alignment Score,” a screener used by Influence Map . This means that the bulk of the listings are not on track to reach the maximum 2 degrees Celsius (and ideally 1.5 degrees) global warming set by the voluntary Paris Climate Agreement. While the companies promise a greener future, they deliver far less.

For many, the key to more solid ESG investing is to limit expectations.

“Rather than using generic ESG ratings, investors should first identify which specific ESG considerations are most important to them and then choose an investment strategy accordingly,” say Collins-Dean and Geffroy.

“An example could be reducing exposure to companies with high emissions intensity,” they said. “The broader the set of goals, the more difficult it can be to control the interactions between them. A “kitchen sink” approach that integrates dozens of variables can make it difficult for investors to understand a portfolio’s allocations and can lead to unintended outcomes.” Elon Musk Called ESG a Scam – Did Tesla CEO Do Investors a Favor?

Brian Lowry

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