By Rachel Koning Beals
Investing usually uses a combination of head, heart and gut even if it’s not supposed to. And perhaps no market theme stirs “all the feels” quite like ESG.
This week, a major move to cut Tesla from a closely followed environmental, social and governance (ESG) index brought anger and relief in nearly equal measure.
Defiance was on display from Standard & Poor’s, which rejected Tesla from its ESG index; annoyance emerged from Tesla /zigman2/quotes/203558040/composite TSLA +1.24% investors, including well-known asset manager and Tesla bull Cathie Wood . There was also a seething snapback from Elon Musk.
Mostly, a fresh wave of confusion emerged about what constitutes “ESG” if what many see as the anti-gasoline renegade no longer gets its due.
The S&P 500 ESG Index dropped Musk’s Tesla from the lineup as part of its annual rebalancing . But, in large part because it’s also supposed to track the broader S&P 500 /zigman2/quotes/210599714/realtime SPX +1.06% , although while adding an ESG layer, the index kept oil giant ExxonMobil /zigman2/quotes/204455864/composite XOM +2.23% in its top ESG mix. Also included: JPMorgan Chase & Co. /zigman2/quotes/205971034/composite JPM +1.28% , which has been dinged by environmental groups as chief lender to the oil patch.
“ESG is a scam. It has been weaponized by phony social justice warriors,” tweeted Musk, lamenting that ExxonMobil topped Tesla .
“Ridiculous,” was Wood’s terse response to Tesla’s removal.
“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,” argued Margaret Dorn, senior director and head of ESG indices, North America, at S&P Dow Jones Indices, in a blog post .
Specifically, it was the ”S” and ”G” that soured Tesla’s ”E”, S&P’s report shows. Tesla was marked down for claims of racial discrimination and poor working conditions at its Fremont, Calif., factory. The carmaker was also called out for its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles.
ESG-minded 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 due to how it pays and treats its workers, the investment company said. Broadly speaking, Tesla performs well on environmental issues, customer treatment and creating U.S jobs, but not so well on certain “S” and “G” criteria, including “paying a fair and living wage” nor “protecting worker health and safety” nor with diversity, equity and inclusion (DEI)-related discrimination controversies.
Paul Watchman, an industry consultant who wrote a seminal report in the mid-2000s that helped ESG investing take off, said Tesla should be part of ESG indexes. “Not all breaches of ESG are equal, and this assessment shows just how warped the S&P assessment is,” he told Bloomberg .
It’s just this difference of opinion that may confuse investors most.
“The majority of investment managers that are applying ESG are simply paying money to data providers to tell them what is good ESG,” said Tony Tursich of the Calamos Global Sustainable Equities Fund, in a MarketWatch interview .
ESG ratings aren’t like scores given by credit rating agencies, where there’s agreement on criteria for creditworthiness. With ESG, there are so far no standard definitions.
Dimensional Fund Advisors says it is challenged by ESG ratings as well. The correlation between the ESG scores of different providers has been estimated at 0.54, they said. In comparison, the correlation in the credit ratings assigned by Moody’s and S&P is 0.99.