Elon Musk called ESG a scam — did the Tesla chief do investors a favor?


The investment usually uses a combination of head, heart and intestine, although this should not be done. And perhaps no subject of the market removes “all sensations” like the ESG.

This week, a major move to cut Tesla from an environmental, social and governance (ESG) index very often caused anger and relief almost to the same extent.

Defiance was exposed to Standard & Poor’s, which rejected Tesla from its ESG index; the annoyance arose from Tesla TSLA,
-6.42%
investors, including well-known asset manager and Tesla tora Cathie Wood. There was also a booming snapback from Elon Musk.

Sustainable investment: Two pioneers of sustainable investment say that most widely adopted ESG ratings today and zero-zero promises are mostly worthless.

Above all, a new wave of confusion arose about what constitutes “ESG” if what many see as the renegade anti-gasoline is no longer obtained.

The S&P 500 ESG index dropped Musk’s Tesla from the list as part of its annual rebalancing. But in large part because it is also supposed to track the broader S&P 500 SPX,
+ 0.01%,
although while adding an ESG layer, the index maintained the oil giant ExxonMobil XOM,
+ 0.79%
in its best ESG combination. Also included: JPMorgan Chase & Co. JPM,
-0.82%,
which has been called by environmental groups as the main provider in the oil area.

“ESG is a scam. It has been armed with fake social justice warriors,” Musk tweeted, lamenting that ExxonMobil outperformed Tesla.

“Ridiculous,” was Wood’s concise response to Tesla’s elimination.

“While Tesla may be playing its part in getting fuel-powered cars off the road, it has lagged behind its peers when examined with a wider ESG lens,” Margaret argued. Dorn, senior director and head of North American ESG at S&P. Dow Jones Indices, in a blog post.

Reads: Electric vehicles can store energy for our homes and the grid: why “vehicle-to-toto” technology is a must-have investment

Specifically, it was the “S” and the “G” that embittered Tesla’s “E”, according to the S&P report. Tesla was rejected for allegations of racial discrimination and poor working conditions at its factory in Fremont, California. The automaker was also called in for its management of the NHTSA investigation after several dead and injured were linked to its autopilot vehicles.

Just Capital is critical of S&P. Historically, Tesla has ranked 10% lower than Just Capital’s annual sustainability rating, mainly because of how it pays and treats its workers, the investment company said. Broadly speaking, Tesla is doing well in environmental issues, customer treatment, and job creation in the United States, but not so well in certain “S” and “G” criteria, such as paying a fair and decent wage “nor” protect the health and safety of workers “nor with discrimination issues related to diversity, equity and inclusion (IED).

Paul Watchman, an industry consultant who wrote a key report in the mid-2000s that helped lift ESG investment, said Tesla should be part of the ESG indices. “Not all ESG violations are the same, and this assessment shows how distorted the S&P assessment is,” he told Bloomberg.

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

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

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

Dimensional Fund Advisors says it is also challenged by ESG ratings. The correlation between ESG scores from different vendors has been estimated at 0.54, they said. In comparison, the correlation in 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 most-tracked ESG-focused indexes, another layer of confusion about what ESG really means. The methodologies used by MSCI and S&P for their ESG indices are very similar.

On the part of S&P, the inclusion of Exxon maintains its representation of the energy sector in accordance with broad objectives.

But does this make many investors wonder why combining ESG with any other priority? And others who regret all the exceptions that can lead to an ESG promise and the placement of a stock in an ESG index, ETF or mutual fund.

Stubborn environmental groups also often have problems with the inclusion of traditional oil companies under an ESG label. “We see that funds with ESG in their names get F in our detection tools because they have dozens of fossil fuel extraction companies and coal services,” said As You Sow CEO Andrew Behar .

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

Regardless of which piece of ESG matters most to an investor, trust matters most.

In fact, some ESG observers say that Tesla is not as clean from an environmental point of view as its hyperfocus may indicate, which essentially means that you can’t accept any company’s ESG promise on merit alone. Tesla was recently labeled As You Sow in a report that ranked 55 companies for their “green” progress after making promises. Tesla scored low for not publicly sharing emissions data.

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

Reads: What does “free speech” really mean? Twitter does not censor speech, despite what Elon Musk and many users think

Beyond environmental data, and especially greenhouse gas emissions, increasing information on the company’s sustainability can be challenging, 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 a hundred pages long, differ substantially from company to company, and may not contain all the information that interests investors.

The Securities and Exchange Commission is moving closer to the unified climate change risk reporting rules and has taken a look at the broader ESG promises. The Department of Labor is also considering the inclusion of 401 (k) ESGs, including the transparency of this addition. For now, the company’s action is voluntary.

If individual companies are losing the brand with ESG. The backgrounds of these names can be just as confusing.

A report by InfluenceMap, a London-based nonprofit, valued 593 equity funds with more than $ 256 billion in total net assets and found that “421 of them have a negative score of portfolio alignment in Paris “, a selection criterion used by Influence Map. This means that most of the lists are not aimed at achieving the maximum global warming of 2 degrees Celsius (and ideally 1.5 degrees) set out in the voluntary climate agreement in Paris. Companies may be promising a greener future, but many less are.

The key to investing more in ESG is to lower your 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.

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



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