Elon Musk is no fan of the environmental, social and governance scores used to evaluate companies for inclusion in investment funds. Seeing his company booted from a major ESG index hasn’t exactly tempered his criticism.
This month, Mr. Musk’s Tesla Inc., credited with elevating electric cars to emission-fighting status symbols, was dropped from the S&P 500 ESG Index, the basis for its inclusion in several passive investing funds. The exclusion has only worsened the fall of Tesla stock, which has tumbled 43 per cent in the past month and a half.
Tesla was cut after its ESG ratings fell because of a number of factors, including its lack of a low-carbon strategy and codes of business conduct. Even more galling to the world’s richest person, Exxon Mobil Corp., the oil major, was added to the roster.
Boy, was Mr. Musk mad. “Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list!” he tweeted. “ESG is a scam. It has been weaponized by phony social justice warriors.”
That was just one of several missives and memes he’s fired off about the perceived snub in recent days. He has put himself in the middle of a lot of controversies lately and a common theme is his ire for the political left, and what he says is its hypocrisy. His very public displays of anger add fuel to a growing backlash against ESG in general, and serve to further muddy the waters in a much misunderstood field.
Last month, The Globe and Mail published an investigation into the issue of third-party ESG ratings, which measure scads of metrics, such as greenhouse gas emissions, boardroom gender diversity and workplace safety.
Our reporting found a common misconception with many rating systems is that they provide an assessment of a company’s positive environmental and social impact – a measure of its values. Instead, the main task often is to assess material non-financial risks that institutional investors can use to bolster returns – a measure of its value.
This is the pickle for Tesla and its ESG record.
In a blog post, Margaret Dorn, S&P Dow Jones’s head of ESG Indices, explained that Tesla’s score also worsened after claims of racial discrimination and poor working conditions at its Fremont, Calif., factory and its handling of a U.S. regulatory investigation into deaths and injuries linked to autopilot vehicles. “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,” Ms. Dorn wrote.
To that idea, Mr. Musk responds with a meme that describes an ESG score as a determinant of “how compliant your business is with the leftist agenda.”
The backlash against ESG is only gathering steam in finance and political realms. This, even as the world’s largest asset managers, the pinnacle of capitalism, demand better performance in all these areas from the companies they invest in. The sustainable investing world, which in past decades had been a small part of overall finance, now finds itself increasingly important and having to mount a defence.
“Elon Musk is a visionary and a brilliant innovator, but he doesn’t know everything and when it comes to ESG, he has no idea what he’s talking about,” said Dustyn Lanz, senior adviser at ESG Global Advisors and the former chief executive of Canada’s Responsible Investment Association. “Considering ESG factors in a business decision is not left wing, as he has been arguing. That’s disinformation, in my view.”
However, some of the skepticism directed at sustainable investing has been driven by the complexity and seeming contradictions within ESG itself. Mr. Lanz cites several factors, including a confusing lexicon of categories and taxonomies and acronyms which has evolved over several years. Meanwhile, Mr. Musk’s distaste for ESG ratings as a supposed gauge of corporate righteousness is shared by many inside and outside the finance world.
Dropping Tesla from the index and including Exxon is a prime example. “ I understand that those companies are in different sectors, and that affects their ratings and weightings in the index, but that ranking just doesn’t pass the smell test for people. Criticism is warranted in that case,” he said.
The risk of having someone such as Mr. Musk, with his immense megaphone and massive following, referring to ESG as a leftist conspiracy against business is that it emboldens like-minded politicians, and could result in delaying or blocking legislation and regulations for such important issues as climate change and corporate disclosure.
All of this puts the onus on industry and its associations to improve their messaging and educational efforts to explain what ESG is and what it isn’t, said Mr. Lanz. Another imperative is to take a harder stance rooting out greenwashing – false or exaggerated environmental claims.
“It’s incumbent upon industry and regulators to make sure that’s not happening to preserve the credibility of the space. Basically it’s incumbent upon industry to really step up.”
Jeffrey Jones writes about sustainable finance and the ESG sector for The Globe and Mail. E-mail him at firstname.lastname@example.org.
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