Tesla (TSLA) Gets Booted from the ESG Index

On May 2nd, the S&P 500 removed Tesla (TSLA) from its ESG Index, which is short for environmental, social, and governance. In recent years ESG investing has grown in popularity as more and more investors push for companies to treat the environment and their stakeholders to a higher standard. But, Tesla, a company that many people would point to as the poster child of an environmentally-friendly company, is no longer on the S&P 500's list of companies that are considered environmentally friendly.

If you are confused, you are not alone. Let's take a deeper look at this change and how it could affect your investments.

The idea behind ESG investing is that only companies promoting environmental sustainability, low carbon emissions, green energy initiatives, and good waste management would meet the environmental sustainability aspect of ESG investing. However, the S&P 500 said that Tesla's "lack of low-carbon strategy" and "codes of business conduct" heavily factored into the decision. The S&P said that Tesla's factories produced very high levels of pollutants. Tesla ranked 22nd on last year's Toxic 100 Air Polluters Index, a list compiled by U-Mass Amherst Political Economy Research Institute. For context, ExxonMobil ranked 26th on that same list last year.

Furthermore, Tesla is facing an investigation in California for how it handled waste from its plant. In addition, the company has paid fines in Germany related to its failure to meet certain "take back" rules in the country for old batteries that power their cars. The S&P 500 noted that while Tesla plays a prominent role in reducing oil-powered cars, it has "fallen behind its peers when examined through a wider ESG lens."

The S&P 500 also weighs how the companies on its ESG list treat employees, customers, and other stakeholders like shareholders. Tesla was sued in California for harassment and discrimination at its plant. In addition, the company has also been investigated for autopilot-related crashes. Both of these situations point to low scores for the social component of the ESG scoring and ranking.

Elon Musk, the CEO of Tesla, has also been called out for his treatment of employees and how hard he pushes them to make changes and develop new cars and technology. He has also been very vocal during the pandemic about State-forced closures of his car manufacturing plant in Freemont, California, and other plants worldwide.

I am sure the research performed by the U-Mass Amherst team was fair and accurate, and we can't argue that lawsuits have been brought against Tesla for several reasons that, if true, no one would say are good. Tesla's social problems should not be overlooked, and I would hope played a larger role in the removal from the S&P 500 ESG list. However, there is certainly an argument that Tesla is doing more good for the environment than the vast majority of publicly-traded companies. They are producing a quality vehicle that uses renewable energy while at the same time likely lowering the number of vehicles that use internal combustion engines. This makes you wonder what exactly you invest in when buying an ESG fund.

With that thought, if you own an ESG fund, you may need to research and see if it follows the S&P 500 ESG Index or if the fund managers have their own methodology in determining which stocks make their list. For example, the SPDR S&P 500 ESG ETF (EFIV) tracks the S&P 500 ESG Index that just removed Tesla from its index. But the American Century Sustainability Equity ETF (ESGA) does not track the S&P 500 ESG Index, its fund managers pick the stocks the fund will hold from a different set of parameters. Thus the ESGA ETF still owns Tesla.

To figure out whether or not an ESG Exchange Traded Fund that you own or are interested in buying follows the S&P 500 ESG Index, go to the fund's prospectus page and read about how the fund picks and chooses the stocks it will own. You will also usually find a benchmark for the fund, which is how it determines if it is performing better than or worse than its peers. If the fund is using the S&P 500 ESG fund as its benchmark and performs very similarly, as in just 0.01% difference, it is highly likely it mirrors what the S&P 500 ESG Index holds.

Don't feel shocked and confused by the move to remove Tesla from an ESG Index. It has confused a lot of people. But this is an excellent reminder that not all will agree with what an ESG stock is or what it is not.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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