Elon Musk Says ESG Index Is a Scam After Tesla Gets Pulled—Is He Right?
S&P Dow Jones pulled Tesla from its environmental, social, and governance index in May. Does the change make sense?
Elon Musk
has managed to take on a Trump-like presence on newsfeeds in the last few months. The latest controversy surrounding the richest person in the world has to do with his car company’s position in a particular sustainability investment index.Musk ranted in defiance of Standard & Poor's (S&P), the financial analytics firm that manages the index, when the company pulled
Tesla
from the group of investments based on environmental, social, and governance criteria (ESG).How does S&P’s ESG index work?
Starting in 2019, S&P created a new grouping of 500 investments based on the
sustainability
of each business. Sustainability indices had been built before, but were too narrow for some investors to feel like they were safe bets. S&P’s option was designed to fix that.But as the index has changed over the years, it’s generated plenty of criticism. For many, the broadness of the index makes it too vague and undermines it as a resource for people looking to invest in value-driven businesses.
Others, like Musk, point to the seeming inconsistency in the index’s scoring system across industries. They don’t see how the environmental impact of
gas companies
like Exxon shouldn’t outweigh the issues the investment firm highlighted for its reasons to remove Tesla.What’s behind S&P’s removal of Tesla from its ESG 500 Index?
Margaret Dorn, S&P Dow Jones Indices' head of ESG indices for North America, told
Reuters
that lack of published details related to its low carbon strategy or business conduct codes were some of the reasons the firm removed Tesla from the index. Claims of racial discrimination and
crashes
linked to its Autopilot system were also thought to have influence the decision, not to mention Musk’s vocal criticisms of ESGs altogether. Musk isn’t alone, though. Climate research groups are giving S&P and its rivals bad grades as well, pointing out the weight of fossil fuel companies in these indices which are meant to encourage investment in environmentally sustainable businesses.
A quick look at S&P Dow Jones’ description of its ESG 500 Index seems to backup these critiques. Investors in the index only get a 9% increased exposure to companies with
climate-related targets
compared to its regular S&P 500 Index.How will Tesla’s removal from ESG indices affect the automaker?
It’s hard to say how much the removal of Tesla from ESG indices will impact the company.
But if investment in the company slows, it will put the brakes on Musk’s goals to
control the supply chain
and lower the price of Tesla’s vehicles, keeping electric vehicles out of reach for many consumers.Tesla prices keep rising, and
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