Why was Tesla removed from the S&P 500 ESG Index?

Elon Musk labelled the exclusion 'a scam'

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Elon Musk's electric carmaker Tesla was removed from the S&P 500 ESG Index on Wednesday in a move which, on face value, may seem surprising.

The updated list features global heavyweights such as Apple, Microsoft, Amazon and Alphabet, but the world's biggest EV manufacturer, whose self-declared mission is to “accelerate the world’s transition to sustainable energy” is absent.

Tesla's share price closed about 7 per cent lower on Wednesday to $709.81 and the company's stock price has declined 41 per cent year-to-date.

Its market value now is $735.4 billion, well below its $1 trillion market cap reached on October 25. The company is still the most valuable automaker in the world and eclipses the combined value of five of its biggest rivals: Toyota, Volkswagen, Daimler, Ford and General Motors.

In a blog post S&P explained its reasoning for excluding Tesla from the list, which measures the performance of securities based on environmental, social and governance criteria. Here are the key points:

So, why was Tesla left out?

There are a number of reasons, according to Margaret Horn, head of ESG Indices, North America, for S&P Down Jones Indices.

First, Tesla was ineligible for index inclusion due to its low S&P DJI ESG score, which fell in the bottom 25 per cent of its Global Industry Classification Standard (GICS) industry group peers, she said.

The company wasn't the only big-name to not make it - Warren Buffet's Berkshire Hathaway, healthcare product manufacturer Johnson & Johnson and Facebook owner Meta were also excluded.

Ms Horn explained that the GICS industry group in which Tesla is assessed (Automobiles & Components), experienced an overall increase in its average S&P DJI ESG Score. So, while Tesla's score remained "fairly stable", it moved down relative to its peers.

Factors contributing to its score include "a decline in criteria level related to Tesla’s (lack of) low carbon strategy and codes of business conduct", she said.

The low carbon strategy criteria focuses on companies’ strategies to reduce the carbon intensity of its car portfolio (efficient technologies), but also assesses its current portfolio exposure to regulatory risks.

"In addition, a Media and Stakeholder Analysis, a process that seeks to identify a company’s current and potential future exposure to risks stemming from its involvement in a controversial incident, identified two separate events centered around claims of racial discrimination and poor working conditions at Tesla’s Fremont factory, as well as its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles," she said.

"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."

How did Elon Musk respond to this?

Mr Musk isn't one to hold back his opinions and naturally voiced them on Twitter, the social-media microblogging company he’s agreed to buy for $44bn.

He said the index is a "scam", and that it has been "weaponised by phony social justice warriors".

To qualify his assertion he said "Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list!"

Tesla has previously called ESG methodologies "fundamentally flawed".

Ms Dorn said the index aims to keep industries weighted the same as they are in the regular S&P 500 index "while enhancing the overall sustainability profile of the index." In practice that means it can keep oil companies while leaving out big players like Facebook parent Meta Platforms and Wells Fargo & Co.

Musk has had a bad week, financially...

With Tesla's stock tanking to the lowest level this year Mr Musk had $12.3bn wiped off from his wealth on Wednesday alone.

Mr Musk has lost $49bn since launching his bid for Twitter last month, partly as the wider market tumbled and as some investors in Tesla grew concerned over how he’d fund his offer for the social media company.

Still, he remains the world’s richest person, with a fortune of $209.9bn, according to the Bloomberg Billionaires Index, but has shaved $60.4bn off his wealth this year. Binance’s Changpeng Zhao has lost $81bn and Amazon's Jeff Bezos’s fortune has dropped by $62bn.

On Wednesday, Mr Musk said he will no longer support the US Democrat party and will back their Republican rivals.

Updated: May 19, 2022, 7:25 AM
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