Elon Musk called ESG a scam — did the Tesla chief do investors a favor?

Elon Musk called ESG a scam — did the Tesla chief do investors a favor?

Investing typically uses a combination of head, heart, and gut, even though it’s not supposed to. And perhaps no market theme evokes “all the emotions” like ESG.

This week, a major decision to remove Tesla from a closely tracked environmental, social and governance (ESG) index drew anger and relief in almost equal measure.

Defiance was displayed by Standard & Poor’s, which rejected Tesla from its ESG index; boredom emerged from Tesla TSLA,
-6.42%
investors, including well-known asset manager and Tesla bull Cathie Wood. There was also a seething snapback from Elon Musk.

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Above all, a new wave of confusion has emerged over what constitutes “ESG” if what many see as the anti-petrol renegade no longer gets its due.

The S&P 500 ESG Index has removed Musk’s Tesla from the lineup as part of its annual rebalancing. But, largely because it’s also meant to track the broader S&P 500 SPX,
+0.01%,
although while adding an ESG layer, the index retained oil giant ExxonMobil XOM,
+0.79%
in its ESG top mix. Also included: JPMorgan Chase & Co. JPM,
-0.82%,
which has been named by environmental groups as the main lender to the oil sector.

“ESG is a scam. It has been weaponized by fake social justice warriors,” Musk tweeted, lamenting that ExxonMobil overtook Tesla.

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

“While Tesla may be playing its part in taking gas-powered cars off the road, it has lagged behind its peers when examined through a broader ESG lens,” said Margaret Dorn, senior director and head of ESG indices, North America, at S&P. Dow Jones indices, in a blog post.

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

ESG-minded investment firm Just Capital has a similar review to S&P. Tesla has historically ranked in the bottom 10% of Just Capital’s annual sustainability rankings, primarily because of how it pays and treats its workers, the investment firm said. Generally speaking, Tesla does well on environmental issues, customer treatment, and job creation in the United States, but not so well on certain “S” and “G” criteria, including “paying a fair and living wage”, nor “protect the health and safety of workers” nor with the controversies of discrimination related to diversity, equity and inclusion (DEI).

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 indices. “Not all ESG lapses are created equal, and this assessment shows just how skewed the S&P assessment is,” he told Bloomberg.

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

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

ESG ratings are not like the ratings assigned by rating agencies, where there is an agreement on creditworthiness criteria. With the ESG, there is so far no standard definition.

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

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

For S&P’s part, the inclusion of Exxon maintains its representation of the energy sector in line with overall objectives.

But this leads many investors to ask why confuse ESG with another priority? And still others deplore all the exceptions that can accompany an ESG commitment and the placement of a stock in an ESG index, an ETF or a mutual fund.

Committed environmental groups also generally dispute 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 own dozens of fossil fuel mining and coal-fired utility companies,” said Andrew Behar, CEO of As You Sow.

But other energy industry watchers say their inclusion may have a different meaning. The transition to cleaner options in well-established traditional energy companies will be more effective given their size, multinational reach and investment in practices such as carbon capture. Viewing them as ESG-lite keeps the pressure on to evolve, they argue.

Whichever ESG component matters most to an investor, trust matters above all.

In fact, some ESG watchers say Tesla isn’t as environmentally clean as its hyper-focus might indicate, which essentially means you can’t take 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 promises were made. Tesla got poor marks for not sharing emissions data publicly.

“Part of [Tesla’s] problem is a lack of disclosure. For someone who is committed to free speech, Musk could do a better job of transparency at Tesla,” said Martin Whittaker, founding CEO of Just Capital.

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Beyond environmental data, and in particular greenhouse gas emissions, increasing broader corporate sustainability information can present challenges, say Will Collins-Dean, Senior Portfolio Manager and Eric Geffroy, senior investment strategist at Dimensional Fund Advisors, in a commentary.

For example, corporate sustainability reports can be up to 100 pages long, differ significantly from company to company, and may not contain all of the information of interest to investors.

The Securities and Exchange Commission is moving closer to unified climate change risk reporting rules and has reviewed broader ESG commitments. The Department of Labor is also considering the inclusion of ESG in 401(k), including the transparency of this addition. For now, the company’s action is voluntary.

If individual companies miss the mark with ESG. Funds picking up these names can be just as confusing.

A report by InfluenceMap, a London-based nonprofit, rated 593 equity funds with more than $256 billion in total net assets and found that “421 of them have a score of negative portfolio alignment in Paris”, a filter used by Influence Map. This means that the bulk of the announcements are not on track to meet the maximum global warming of 2 degrees Celsius (and ideally 1.5 degrees) set in the voluntary Paris climate agreement. Companies may be promising a greener future, but far fewer are delivering on their promises.

The key to stronger ESG investing is to lower expectations.

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

“An example may be reducing exposure to emissions-intensive companies,” they said. “The larger the set of goals, the more difficult it can be to manage the interactions between them. A “kitchen sink” approach that incorporates dozens of variables can make it difficult for investors to understand portfolio allocations and can lead to unexpected results. »

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