Interactive Investor

Why Tesla was kicked out of S&P ESG index

31st May 2022 09:47

Sam Benstead from interactive investor

Taking dirty vehicles off the road is not enough to earn the unconditional support of index builders.  

Electric vehicle pioneer Tesla has been removed from a leading environmental, social and governance (ESG) index by an index builder which cites questionable business conduct and its failure to have a sufficient low-carbon strategy.

It is now longer in the S&P 500 ESG index, which is tracked by 16 exchange-traded funds (ETFs), including the Invesco S&P 500 ESG ETF and the UBS ETF S&P 500 ESG on the London Stock Exchange.

The index is put together by S&P Dow Jones Indices and aims to strip out companies with poor ESG scores relative to their peers from the classic S&P 500 index.

Tesla was ineligible for index inclusion because its ESG score was in the bottom 25% of its car industry peers. It joins giants Berkshire Hathaway, Johnson & Johnson and Meta (formerly Facebook) in not being included.

Margaret Dorn, head of ESG indices for North America, said: “We identified two separate events centred around claims of racial discrimination and poor working conditions at Tesla’s Fremont factory, as well as its handling of the NHTSA [National Highway Traffic Safety Administration] investigation after multiple deaths and injuries were linked to its autopilot vehicles.”

Both these events had a negative impact on the company’s S&P Dow Jones Indices ESG Score at the criteria level, and subsequently its overall score. 

Tesla’s EGS score was similar to a year ago, but its ranking fell among its peers.

S&P Dow Jones’ decision has proved controversial given that Tesla is responsible for millions of electric, instead of petrol, vehicles on roads around the world.

Elon Musk, its chief executive, tweeted: “Exxon is rated top 10 best in world for environment, social & governance by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponized by phony social justice warriors.”

However, Dorn states that: “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.

“So, while Tesla and others may not have been included in the index this year, the beauty of the annual rebalance is that they will once again have an opportunity to be reviewed for inclusion in years to come. For now, the rebalancing act of the S&P 500 ESG Index has once again been achieved.”

Hector McNeil, co-CEO and founder of HANetf, adds that on the surface, Tesla’s deletion from the S&P 500 ESG index appears shocking. But goes on to say that it is important to be clear on what ESG screening really is.

“It is not simply about companies that are providing climate solutions; it is about the risks and profiles of the companies in question. Innovating and pioneering climate-change solutions is great and admirable, but it doesn’t give you automatic inclusion in an ESG index.

“If you read the reasoning from S&P Dow Jones it's quite clear why Tesla was excluded. It doesn’t have a low-carbon strategy and has questionable labour practices. These give it a lower ESG score and are fairly standard measures in the world of ESG screening,” he said.

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