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

Investing usually uses a combination of head, heart and guts, even if it is not intended to be. And maybe no market theme arouses ‘all the feelings’ like ESG.

This week, a big move to remove Tesla from a closely monitored Environmental, Social and Governance (ESG) index sparked anger and relief in almost equal measure.

Defiance was featured at Standard & Poor’s, which rejected Tesla from its ESG index; annoyance stemmed from Tesla TSLA,
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investors, including noted wealth manager and Tesla bull Cathie Wood. There was also a seething snapback from Elon Musk.

Sustainable investing: Today’s widely accepted ESG ratings and net zero commitments are mostly worthless, say two sustainable investing pioneers

Usually a new wave of confusion arose about what “ESG” is and what many see when the anti-gasoline renegade no longer gets its due.

The S&P 500 ESG index removed Musk’s Tesla from its lineup as part of its annual rebalancing. But largely because it also has to track the broader S&P 500 SPX,
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although the index, while adding an ESG layer, held oil giant ExxonMobil XOM,
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in its top ESG mix. Also included: JPMorgan Chase & Co. JPM,
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which has been identified by environmental groups as the oilfield’s main lender.

“ESG is a scam. It’s armed by fake social justice fighters,” Musk tweeted, lamenting that ExxonMobil was the top of Tesla.

“Ridiculous,” was Wood’s brief response to Tesla’s removal.

“While Tesla may have a role in taking fuel-powered cars off the road, it has fallen behind its competitors when viewed through a broader ESG lens,” said Margaret Dorn, senior director and head of ESG indexes. North America, at S&P Dow Jones Indices, in a blog post.

Read: EVs can store power for our homes and the grid: why ‘vehicle-to-everything’ technology is a must-follow investment theme

In particular, it was the “S” and “G” that soured Tesla’s “E,” the S&P report found. Tesla was written off over claims of racial discrimination and poor working conditions at its Fremont, California plant. The automaker was also called to handle the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles.

ESG-focused investment house Just Capital has a similar critique to that of S&P. Tesla has historically scored in the bottom 10% of Just Capital’s annual sustainability rankings, primarily because of the way it pays and treats its employees, the investment company said. Overall, Tesla does 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.” ‘, nor ‘protecting workers’ health and safety’, nor with diversity, equality and inclusion (DEI)-related discrimination controversies.

Paul Watchman, an industry consultant who wrote a groundbreaking report in the mid-2000s that helped ESG investment get off the ground, said Tesla should be part of ESG indices. “Not all ESG violations are created equal, and this assessment shows how warped the S&P assessment is,” he told Bloomberg.

It is precisely this difference of opinion that can confuse investors the most.

“Most investment managers who use ESG simply pay data providers money to tell them what good ESG is,” Tony Tursich of the Calamos Global Sustainable Equities Fund said in an interview with MarketWatch.

ESG ratings are not like ratings given by rating agencies, where creditworthiness criteria are agreed upon. Until now, there are no standard definitions for ESG.

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

MSCI Inc., the leading provider of ESG assessments, still includes Tesla AND Exxon in its more widely tracked ESG-focused indices, yet another layer of confusion about what ESG actually means. The methodologies used by MSCI and S&P for their ESG indices are very similar.

On the S&P side, the Exxon containment keeps its representation in the energy sector in line with its broad objectives.

But that leaves many investors wondering why mix ESG with any other priority? And still others complain about all the exceptions that can come with an ESG promise and the placement of a stock in an ESG index, ETF or mutual fund.

Firm environmental groups also generally object to the inclusion of traditional oil companies under an ESG label. “We see funds with ESG in their name getting F’s on our screening tools because they have dozens of fossil fuel extraction and coal-fired utility companies,” said As You Sow CEO Andrew Behar.

But other energy industry observers say their inclusion may have a different meaning. The transition to cleaner options among incumbent traditional energy companies will be most effective given their size, multinational reach and their investment in practices such as carbon capture. They see them as ESG-lite and keep the pressure to evolve, they say.

No matter which part of ESG is more important to an investor, trust matters most.

In fact, some ESG watchers say Tesla isn’t as clean on the environment as its hyperfocus suggests, which essentially means you can’t accept a company’s ESG promise on merit alone. Tesla was recently tagged by As You Sow in a report that ranked 55 companies on their “green” progress after pledges were made. Tesla earned bad marks for not sharing emissions data publicly.

“Part of [Tesla’s] problem is lack of disclosure. For someone who is committed to free speech, Musk could provide greater transparency at Tesla,” said Martin Whittaker, founder of Just Capital.

Read: What does ‘free speech’ actually mean? Twitter doesn’t censor speech, despite what Elon Musk and many users think

In addition to environmental and especially greenhouse gas emissions data, the proliferation of broader corporate sustainability intelligence could pose challenges, Will Collins-Dean, senior portfolio manager and Eric Geffroy, senior investment strategist at Dimensional Fund Advisors, said in a comment.

For example, corporate sustainability reports can be 100 pages long, vary significantly from company to company, and may not contain all the information that interests investors.

The Securities and Exchange Commission is moving closer to unified reporting rules for climate change risks and has been scrutinizing broader ESG commitments. The Department of Labor is also considering the inclusion of ESG in 401(k)s, including how transparent that addition should be. For now, the company’s action is voluntary.

When individual companies miss the mark with ESG. The funds those names boast can be just as confusing.

A report by InfluenceMap, a London-based nonprofit, evaluated 593 equity funds with total net assets of more than $256 billion and found that “421 of them have a negative Portfolio Paris Alignment score,” a screening used by Influence. folder. That means most of the lists are not on track to hit the maximum global warming of 2 degrees Celsius (and ideally 1.5 degrees) enshrined in the voluntary Paris climate agreement. The companies may promise a greener future, but far fewer do.

The key to healthier ESG investing is often narrowing expectations.

“Instead of using generic ESG ratings, investors should first determine which specific ESG considerations are most important to them, and choose an investment strategy accordingly,” said Collins-Dean and Geffroy.

“An example could be reducing exposure to high-emission-intensity companies,” they said. “The wider the set of objectives, the more difficult it can be to manage 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 lead to unintended results.”

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