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Tesla and ESG: a bolt in the blue?

It happened all of a sudden: on may 18th 2022 the rating agency S&P Global excluded Tesla from its ESG Index driving Tesla CEO’s Elon Musk through a furious tweet: “ESG is a scam (…)”. A bolt in the blue.



Source: Elon Musk on Twitter https://twitter.com/elonmusk/status/1526958110023245829

Why this? Possibly because, first of all, being S&P a market mover, it had already triggered a drop in Tesla’s stock value by 15% in 2020 [1]. A further reason stands behind the fact that there is no agreed standard on ESG indices and this is causing irritability.


Now, on the first reason, there is little to say. Credit rating agencies such as S&P Global do their job with independence and transparency. Regulators demands to involve ESG factors in CRAs assessments are a proof of bringing about material ESG issues in Credit Risk. The result is that CRAs keep focusing on credit while producing an ESG “score”, which provides them with an ancillary data-driven assessment of the ESG risk appeal of the issuer [2]. Also, looking at the methodological background of the index exclusion [3] observers might say that Tesla’s environmental strenghnesses were not at all at the basis of the analysts’ choice. Indeed, Tesla is at the forefront of Electric Vehicles (EVs) innovation. Looking beyond the E factor though Tesla fell off a set of adverse happenings spacing from human rights up to the EVs automative systems’ security, with overtime speculative stock price fluctuations inflated by the company’s CEO and serial tweeter Elon Musk – add Morningstar analysts [4]. In brief, the company is lacking of Social and Governance fundamentals.


All things considered, the real underlying motivations of the index exclusions have been purely subjective, since, according to S&P proprietary methodology, other companies have taken the floor. In this case, the problem is not the exclusion from the index per se. Rather, the exclusion of Tesla from an index that is among the most authoritative in the US market, essentially makes such 'action' to be a market moover given S&P remarkable standing as an independent rating agency.


“Underlying most arguments against the free market is a lack of belief in freedom itself.” ― Milton Friedman


ESG are not a rip-off but the future. And to underestimate them would be naïve. For no man can stand above the market - as the Economist Milton Friedman's quote means it. That said, Musk's tweet ignited a legitimate debate on the matter. This time, the market has made Tesla paying the piper. Anyway, the divergences between existing ESG index methodologies are still a topic, as underlined by a MIT insightful paper stressing that so called ‘Aggregate Confusion’ [5].


While observers expect a decisive step towards a regulated ESG benchmarking methodology in the EU, there is still a lack of sensitivity concerning the ESG in the US market. Whenever regulators will define a precise benchmark for ESG indices then - of course – we will talk about inclusions and exclusions from ESG indices with objectivity. By then, we hope that Tesla - with its cutting-edge potential - will change its strategies and at least attempt to provide appropriate implementations also in the social and governance sphere.


By Manfredi Morello



References

[1] Reuters “Tesla shares fall as it fails to make it into S&P 500 index”. URL: https://www.reuters.com/article/tesla-stocks-idUSL4N2G52GS

[2] Morello M. (2020) “Will Credit Rating Agencies take over ESG Rating Agencies?”. URL: https://www.csrnatives.net/post/will-credit-rating-agencies-take-over-esg-rating-agencies

[3] Dorn M. (2022) “The (Re)Balancing Act of the S&P 500 ESG Index”. URL: https://www.indexologyblog.com/2022/05/17/the-rebalancing-act-of-the-sp-500-esg-index/

[4] Norton L. (2022) “This is Why Tesla’s ESG Rating Isn’t Great” URL: https://www.morningstar.co.uk/uk/news/221629/this-is-why-teslas-esg-rating-isnt-great.aspx

[5] FinancialTimes.com (2022) “Aggregate ESG confusion”. URL: https://www.ft.com/content/e84a6f9a-7861-43e6-b0e8-773732772c3a