Should we be surprised that Tesla was dropped from the S&P 500 ESG index?
The short answer is no. Neither surprised nor upset.
Tesla’s mission to “accelerate the world’s transition to sustainable energy” is an admirable statement. And their 2021 Impact statement describes a worthy goal of “selling tens of millions of vehicles by 2030 that could save millions of tons of CO2 emissions each year” (their words, my emphasis).
However, over the last 20 years, I have read hundreds of sustainability reports from companies promising lofty carbon emissions savings. In fact, I’m sure that if you add up all the carbon ‘saved’ in those reports over that time, the atmosphere would not be at 412.5 ppm right now.
The world is at a very precarious point right now. Aspirational promises in sustainability reports won’t pull us back from the brink. What is needed is clear goals with measurable interim targets based on science with yearly tracking and reporting on progress. We can no longer simply take the word of corporate executives about some rosy future, even ones as brilliant and creative as Elon Musk.
Tesla was dropped because their ESG numbers don’t qualify them.
Tesla was only added to the S&P 500 ESG a year ago and, at that time, S&P clearly stated that 1) Tesla’s score was 5th from the bottom of the entire list of 307 companies and 2) if their score didn’t improve, Tesla would be dropped from the index.
And what happened? Tesla got dropped.
Should we be surprised and upset? No. Although Elon Musk was upset enough to tweet firebombs like “ESG is devil incarnate’ and ‘ESG is a scam, weaponized by phony social justice warriors,” which frankly sounds a lot like claims of ‘fake news’! Sorry Elon, ESG ratings are not a popularity contest.
ESG ratings are far from perfect, as anyone knows who has read Joel Makower’s very cogent, recent 3-part review of ESG ratings. For those who haven’t, here’s the nutshell about ESG ratings:
1. ESG ratings ARE NOT specifically about whether a company is making a positive impact on the world, although some of the topics the ratings are based on are improvements.
2. ESG ratings ARE about whether sustainability is having an impact on the company, specifically whether a company’s ESG policies and practices (or lack thereof) are a risk to the company’s financial bottom line.
3. Some investors use ESG ratings to help evaluate potential sustainability- and climate-related risk. Others may incorrectly use ESG ratings thinking they are a ‘good-for-the-planet’ ranking rather than a ‘not so bad’ or ‘better than others’ ranking (see item 1).
4. Companies benefit from being included in ESG indexes – they get recognized as ESG leaders, which can build their brand and attract talent and they also improve their overall performance, which can improve their bottom line and can reduce their impact on the planet.
5. However, unlike financial data which companies are required to report in a regulated and consistent fashion, there IS NO regulated standard for companies’ ESG reporting (yet). As a result:
6. There IS NO standard methodology for creating ESG ratings, which are black box proprietary methodologies, based on hundreds if not thousands of data points.
7. ESG ratings are generally done in industry groupings and the “best-in-class” from each grouping are included in the indexes. This leads to the inclusion of companies in sectors like oil&gas, that are not usually top of mind if you think ESG ratings are about who is making the world more sustainable (see item 1).
A ‘perfect’ ESG rating would rank companies based on which were making the most positive (dare I say net positive?) impact on the world. Unfortunately, the data and methodology doesn’t exist yet for doing that.
But this doesn’t make ESG a satanic scam perpetrated by social justice warriors. ESG ratings, although not perfect or entirely transparent, are based on publicly stated principles. Principles about sustainability-related disclosure, metrics, risk assessment, reporting and target setting.
As I pointed out in my Sustainability vs ESG post last week, over the 20+ years that ESG ratings have been around, companies have paid more and more attention to how they are rated and have improved their practices in order to maintain good ESG ratings. How ESG reporting is done is also becoming more standardized, including more topics that are about making the world more sustainability. And as GHG Scopes 1, 2, and 3 reporting and science-based targets become the norm, the ESG ratings will also improve.
One standardized practice becoming the norm is the public disclosure of carbon emissions through the CDP using the GHG protocol. According to the CDP website, “In 2021, a record-breaking 13,000+ companies representing over 64% of global market capitalization disclosed through CDP.”
Read that again:
13,000+ companies representing over 64% of global market capitalization disclosed their carbon emissions through CDP!
Which brings me back to Tesla. Tens of thousands of companies around the world, including the majority of the S&P 500 companies, openly report their carbon emissions through CDP.
Since going public in 2010, Tesla has never reported carbon emissions to CDP.
Their 2021 Impact Report only says that they have a ‘goal’ to report on Scopes 1, 2, and 3 emissions. And the report only has a one metric related to carbon emissions – the average carbon emissions that could be saved over the life of the tens of millions of Model 3 Teslas they expect to sell by 2030 (again, their words, my emphasis).
We should be neither surprised nor upset that Tesla was dropped from the S&P 500 ESG. And probably not surprised that Elon is upset.
I was surprised at some of the people who chimed in that S&P is engaging in ‘woke’ ESG. Politicizing ESG only helps to raise the incendiary nature of the current social/political discourse in the US.
Sustainability professionals need to step up and work to improve ESG, not tear it done.
As Winston Churchill never said, ESG is the worst form of corporate sustainability rating systems, except for all the rest. As with democracy, it’s up to all of us to get involved and improve these systems.
What gets measured, gets managed.