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by
Seneca ESG
- May 26, 2022
Electric carmaker Tesla Inc [TSLA:US] was dumped by S&P 500 from its ESG Index in an annual rebalancing of the index. Tesla CEO Elon Musk was angered by the decision of the index, saying that S&P Global Ratings has “lost their integrity.” Tesla’s stock fell 6.8% amid a broad selloff in tech shares. The company’s stock is down over 30% since 2022. While Tesla was cut from the ESG index, two other companies were added: one is Twitter Inc [TWTR:US], which is soon to be controlled by Musk, and the other is oil refiner Phillips 66 [PSX:US]. As of now, ExxonMobil [XOM:US] is rated as the top 10 best in the world for ESG by S&P 500.
From a market standpoint, Tesla’s removal from the S&P ESG index probably will have minimal impact on the company’s financial prospect, according to Bloomberg, because there were only about USD11.7bn of assets that tracked the S&P ESG index as of the end of 2020. In comparison, trillions of dollars track the main S&P 500 index. Meanwhile, many ESG-labeled funds are still holding Tesla’s stock. The world’s largest ESG-focused exchange-traded fund (ETF) has around 1.8% investment allocation in Tesla. However, the back-and-forth over the index changes reflects a wider debate about the metrics used to judge corporate performance on ESG issues. To judge a company across ESG criteria, different raters may have different angles.
Why was Tesla kicked out of the S&P 500’s ESG index?
To compile the S&P 500 ESG Index, S&P uses ESG criteria to judge companies’ performance. The criteria include hundreds of data points per company. All of these data points formed a picture of how the company’s business affects the planet and treat stakeholders beyond shareholders, including but not limited to customers, employees, suppliers, and the community. Meanwhile, the rater tracks all of the controversies around the company under assessment. A company with strong management capability towards risks could gain a higher score. By contrast, if a company has many controversies including lawsuits, regulatory warmings, or even fines, this demonstrates weak management, which will directly lower the score.
Over the past year, Tesla’s ESG score has remained fairly stable, but it has slipped down the ranks because of the improvement of global peers, according to the S&P Dow Jones Indices, which decided on Tesla’s removal. A spokesperson for the S&P 500 ESG index explained a few factors contributing to Tesla’s removal, including a lack of low-carbon strategy and codes of business conduct, racial discrimination, poor working conditions, as well as product responsibility. Recently, Tesla was involved in an investigation after multiple deaths and injuries were linked to the malfunction of its autopilot systems. The investigation of autopilot systems is only one of the 35 investigations that Tesla is currently involved in.
What do other raters think of Tesla?
Aside from S&P’s ESG raters, how do other rating agencies rate Tesla? Among the big ESG rating agencies, MSCI Inc [MSCI:US] gives Tesla an “A” ESG rating, which is average among 41 companies in the automobile industry. In its indexes, it gives high weighting to Tesla, which is listed as the 5th constituent in the top 10 constituents of the MSCI America ESG Universal Index, following Microsoft Corp [MSFT:US], APPLE [AAPL:US], Amazon.com [AMZN:US], and Nvidia [NVDA:US]. In the Russell 1000 ESG Screened Target Exposure, Tesla is also listed in the top 10 constituents list. Sustainalytics gives Tesla a “medium risk” rating, which is also average among 82 peers.
Though the index list is not a ranking of the best companies by ESG score, investors can understand from these ESG ratings that Tesla, though regarded as the most valuable auto industry company, doesn’t outperform industry peers in certain ESG issues. “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”, said Margaret Dorn, S&P Dow Jones Indices’ head of ESG indices for North America.
What should an investor do to reconcile different raters’ rating methodologies?
Besides claiming that S&P Global Rating has lost its integrity, Tesla pointedly wrote in its Impact Report that current ESG reporting focuses on measuring the company’s dollar value of risk and return, rather than its positive impact on the world. This argument has its merit, as ESG assessment methodologies can vary greatly among major raters and focus mainly on ESG’s impact on financial performance. While ESG ratings from agencies such as S&P help bring light to financially material ESG issues, these ratings alone may not be sufficient for all investors. As a result, fund managers will benefit from creating their own assessment frameworks based on what is the most valuable for them.
Seneca ESG’s prime product, the ZENO platform, allows investment managers to tailor their strategies to their specific needs. You can use ZENO to manage hundreds of ESG scorecards for all companies under your portfolios. ZENO not only draws ESG scores from major raters but also allows direct ESG assessment based on any chosen framework, enabling ESG scoring for private entities and assets too.
Contact us to explore new possibilities in ESG investing with ZENO!
Sources:
https://www.cnbc.com/2022/05/18/why-tesla-was-kicked-out-of-the-sp-500s-esg-index.html
https://www.barrons.com/articles/tesla-sp-esg-index-sustainability-ratings-51653011864
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