Tesla’s Ouster from ESG Index Highlights Importance of ‘S’ and ‘G’ Issues

Authors: MLT Aikins ESG practice group

You might assume that electric vehicle manufacturers would have high ESG ratings – but that isn’t necessarily the case, as evidenced by Tesla’s recent removal from a prominent ESG index.

Earlier this month, S&P Dow Jones Indices announced it had removed Tesla – the world’s largest manufacturer of electric vehicles – from the S&P 500 ESG Index, a broad-based index of publicly traded securities that are deemed sustainable based on their S&P DJI ESG Scores.

Tesla’s ESG score ranked in the bottom quartile of its industry peers. While S&P acknowledged that Tesla’s ESG rating has remained stable over the years and its lower ranking was largely attributable to competitors such as GM improving their ESG scores, controversies also contributed to Tesla’s lower ranking.

Tesla’s Score Hurt by Claims of Racism, Handling of Regulatory Investigation

S&P noted that its media and stakeholder analysis of Tesla – which screens for controversies that may have a financial or reputational impact on a company – uncovered some concerns.

Two separate incidents centred on claims of racial discrimination and poor working conditions at Tesla’s manufacturing plant in Fremont, California, hurt the company’s ESG score. Last year, a former worker at the Fremont plant was awarded US$137 million after suing Tesla for racial harassment.

Another factor that hurt Tesla’s ESG score was the company’s handling of a National Highway Traffic Safety Administration investigation into multiple deaths and injuries linked to its autopilot vehicles.

Tesla’s ESG score also suffered because the company doesn’t have a low-carbon strategy.

“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,” wrote Margaret Dorn, Senior Director, Head of ESG Indices, North America with S&P Dow Jones Indices.

Energy Company Among ESG Index’s Top Holdings

Tesla CEO Elon Musk reacted to the company’s removal from the S&P 500 ESG Index by tweeting “ESG is an outrageous scam!” Those who were surprised to see the electric vehicle manufacturer removed from the index might be just as surprised to see Exxon Mobil among its top holdings.

But as we’ve discussed in previous blogs, just because a company is in the energy sector doesn’t mean it can’t perform well from an ESG perspective. Exxon Mobil recently announced an ambitious plan to reach net zero emissions by the year 2050 – the same type of plan that Tesla was penalized for not having – following a successful campaign by activist investors in 2021 to advance decarbonization at the energy company.

Tesla’s removal from the S&P 500 ESG Index demonstrates that companies viewed as being environmentally friendly aren’t necessarily strong performers when assessed from a broader ESG perspective. By the same token, energy companies such as Exxon Mobil don’t necessarily have poor ESG performance. As evidenced by the S&P 500 ESG Index rebalancing, ESG performance is relative to peers, and as more companies dedicate resources to improving their ESG performance, especially decarbonization, the early leaders will not be given a free pass.

The lawyers in the MLT Aikins ESG practice group have extensive experience advising clients in a wide range of sectors on their ESG strategies. If you’re looking to enhance your ESG performance and attract potential investors, contact us to learn how we can help.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.