Musk’s Criticism of ESG Rankings Highlights $35 Trillion Industry Confusion

Elon Musk’s critique of environmental, social and corporate governance (ESG) rankings he called a “scam” highlights how the most popular investment trend on Wall Street these days means different things to different people.

Tesla’s chief executive on Wednesday lashed out at S&P Global after the company pulled the electric car maker from its main ESG stock index and added some companies whose activities are considered harmful to the environment, such as oil companies.

Musk took to Twitter to express his frustration with the move “despite Tesla doing more for the environment than any company has ever done!” He added that the ESG “was used as a weapon by false social justice warriors.”

S&P Dow Jones Indices senior director Margaret Dorn told Reuters that Tesla was excluded from the index because its score had dropped slightly, just as the scores of other automakers had improved.

Tesla was not excluded because S&P executives decided to drop the company from the index over a specific issue, he added.

While Tesla’s cars do contribute to reducing carbon emissions, the automaker’s ESG score has lagged behind in other respects, such as poor working conditions at a US factory, allegations of racial discrimination and manipulation of a US government investigation. United States about multiple deaths and injuries related to autopilot technology.

Sustainable investing – factoring in ESG factors in portfolio selection – has exploded in recent years, reaching $35.3 trillion by early 2020, according to the Global Sustainable Investment Alliance.

Half a dozen investment managers interviewed by Reuters said that Musk’s feud with S&P illustrates how confusion still reigns over how investors and executives view the sector.

Some, like Musk, believe ratings should reward companies that do the most for the planet and society. Others, including companies like S&P that produce the rankings, say the aim is to show how much risk a company’s stock faces due to ESG factors.

This explains why some companies that are major contributors to climate change, such as Exxon, may remain on an ESG index if they can show they are taking steps to reduce that risk.

“Ultimately, ESG is a way of identifying and trying to quantify risk. So it’s basically risk mitigation,” said Chi Chan, portfolio manager at Federated Hermes. “Effectively, Musk is confusing ESG with sustainability.”

Mark Tinker, chief investment officer at Toscafund Hong Kong, said Musk “correctly pointed out” that corporate and social governance considerations are being used “for politically motivated cancellations” and that a company’s contribution to the environment can also ” mean what you want it to be”.

Tesla did not respond to a request for comment on behalf of the company or Musk.

S&P published the change to its ESG index on April 22. But it wasn’t until May 18, the day after Horn posted explanations of why Tesla was excluded from the index, that Twitter users began to publicize it, catching Musk’s attention.

Only a tiny fraction of the ESG industry’s assets under management – ​​$11.7 billion at the end of 2020 – is tied to the S&P indices. S&P’s influential ESG index rival MSCI Inc has so far kept Tesla in its bluechip ESG index.

S&P declined to provide a breakdown of the ESG score it assigned to Tesla, which is compiled based on rankings of various company operations and practices.

MSCI also declined to provide a breakdown, but a May 3 copy of its Tesla rating sent to investors and reviewed by Reuters shows how perceived poor performance on social issues took some of the shine off the company’s strong green credentials.

Tesla scored 9.1 out of 10 on environmental issues, against an industry average of 6.5. This represented 30% of their total ESG score. On social issues, however, it came in at 1.4 compared to an average of 3.5, while on governance it scored 5.1 against an average of 3.2.