Elon Musk called ESG a scam – did the Tesla boss do investors a favor?

Investing usually uses a combination of head, heart and gut, although this is not the intention. And perhaps there is no market theme that touches on “all the emotions” quite like ESG.

This week brought a major step to cut Tesla from a closely followed environmental, social and government index (ESG) anger and relief to almost equal extent.

Defiance was exhibited by Standard & Poor’s, which rejected Tesla from its ESG index; irritation arose from Tesla TSLA,
investors, including well-known asset manager and Tesla bull Cathie Wood. There was also a sizzling snapback from Elon Musk.

Sustainable investment: Today’s widespread ESG rating and net zero promise are mostly worthless, say two pioneers in sustainable investment

For the most part, a fresh wave of confusion emerged about what constitutes “ESG” if, as many see it as the anti-gasoline drain, it no longer gets its due.

The S&P 500 ESG index dropped Musk’s Tesla from the ranks as part of its annual rebalancing. But largely because it’s also meant to track the wider S&P 500 SPX,
although the index added an ESG layer, the oil giant ExxonMobil XOM,
in its best ESG mix. Also included: JPMorgan Chase & Co. JPM,
which has been challenged by environmental groups as the main lender for the oil patch.

“ESG is a scam. It has been armed by fake social justice fighters,” Musk tweeted, lamenting that ExxonMobil topped Tesla.

“Ridiculous,” was Woods concise response to Tesla’s removal.

“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 broader ESG lens,” argued Margaret Dorn, senior director and head of ESG Indices, North America, at S&P Dow Jones Indices, in a blog post.

Read: Electric cars can save electricity for our homes and the electricity grid: Why ‘car-for-everything’ technology is an investment theme to follow

Specifically, it was “S” and “G” that acidified Tesla’s “E”, shows S & P’s report. Tesla was marked for allegations of racial discrimination and poor working conditions at its Fremont, California plant. The automaker was also called out for its handling of the NHTSA investigation after several deaths and injuries were linked to its autopilot vehicles.

The ESG-minded investment house Just Capital has a similar critique as S&P. Tesla has historically scored in the bottom 10% of Just Capital’s annual sustainability ranking, primarily because of how it pays and treats its employees, the investment firm said. Broadly speaking, Tesla does well on environmental issues, customer care, and job creation in the United States, but not so well on certain “S” and “G” criteria, including “paying a fair wage and living off” or “protecting workers. health and safety “or with diversity, equality and inclusion (DEI) -related discrimination controversies.

Paul Watchman, an industry consultant who wrote a groundbreaking report in the mid-2000s that helped ESG investments get underway, said Tesla should be part of ESG indices. “Not all breaches of the ESG are equal, and this rating shows how skewed the S&P rating is,” he told Bloomberg.

It is precisely this difference of opinion that can confuse investors the most.

“The majority of investment managers who use ESG simply pay money to data providers to tell them what good ESG is,” Tony Tursich of the Calamos Global Sustainable Equities Fund said in a MarketWatch interview.

ESG ratings are not like scores given by credit rating agencies where there is agreement on credit rating criteria. With ESG, there are so far no standard definitions.

Dimensional Fund Advisors says it is also being challenged by the ESG rating. The correlation between different providers’ ESG scores has been estimated at 0.54, they said. In comparison, the correlation in the credit ratings assigned by Moody’s and S&P is 0.99.

MSCI Inc., the leading provider of ESG ratings, still includes Tesla AND Exxon in its broader ESG-focused indexes, another layer of confusion about what ESG really means. The methods MSCI and S&P use for their ESG indices are very similar.

For S & P’s part, the Exxon inclusion maintains its energy sector representation in line with broad objectives.

But that leaves many investors, why mix ESG with any other priority? And yet others regret all the exceptions that can come with an ESG promise and a stock’s placement in an ESG index, ETF or mutual fund.

Steady environmental groups also typically take trouble including traditional oil companies under an ESG brand. “We see funds with ESG in their names getting Fs on our screening tools because they have dozens of fossil fuel extraction companies and coal-fired utilities,” said As You Sow CEO Andrew Behar.

But other observers in the energy industry say their inclusion may have a different meaning. The transition to cleaner opportunities at the well-established traditional energy companies will be most effective given their size, multinational reach and their investment in practices such as carbon capture. Considering them as ESG-lite keeps the pressure on to evolve, they claim.

No matter which part of the ESG means the most to an investor, trust means the most.

In fact, some ESG observers say that Tesla is not as clean on the environmental side as its hyperfocus may indicate, which basically means you can not take any company’s ESG promise alone. Tesla was recently tagged by As You Sow in a report that ranked 55 companies on their “green” progress after promises were made. Tesla received poor marks for not sharing emissions data publicly.

“Part of [Tesla’s] the problem is lack of detection. For a person committed to free speech, Musk could do a better job of transparency at Tesla, ”said Martin Whittaker, the founding CEO of Just Capital.

Read: What does ‘freedom of speech’ really mean? Twitter does not censor speech, despite what Elon Musk and many users think

In addition to environmental and especially greenhouse gas emissions, data, the increase in broader information about the company’s sustainability can pose challenges, says Will Collins-Dean, senior portfolio manager and Eric Geffroy, senior investment strategist at Dimensional Fund Advisors, in a comment.

For example, corporate sustainability reports can be hundreds of pages long, differ significantly from one company to the next, and may not contain all the information that interests investors.

The Securities and Exchange Commission is moving closer to uniform rules for climate change risk reporting and has taken a look at broader ESG promises. The Ministry of Labor is also considering including the ESG in 401 (k) s, including how transparent this addition should be. So far, the company’s action is voluntary.

If individual companies are missing the mark with ESG. The means at stake by these names can be just as confusing.

A report by InfluenceMap, a London-based nonprofit, evaluated 593 equity funds with over $ 256 billion in total net assets and found that “421 of them have a negative Portfolio Paris Alignment score”, a screener used by Influence Map. This means that the majority of inventories are not on track to reach the maximum 2 degrees Celsius (and ideally 1.5 degrees) global warming set out in the voluntary Paris Climate Agreement. Companies may promise a greener future, but far fewer deliver.

The key to healthier ESG investments is many, to narrow expectations.

“Instead of using generic ESG ratings, investors should first identify which specific ESG considerations are most important to them, and then choose an investment strategy accordingly,” Collins-Dean and Geffroy said.

“An example might be reducing exposure to high-emission companies,” they said. “The broader set of goals is, the more difficult it can be to manage the interaction between them. A ‘kitchen sink’ approach that integrates dozens of variables can make it difficult for investors to understand a portfolio’s allocations and can lead to unintended results. “

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