Not only did Musk blast corporate ESG ratings on Twitter as “the incarnation of the devil”, but Tesla also pointed out in its recently released 2021 Impact Report that the current ESG assessment methods on the market are inherently flawed, and ESG needs to Improve its ability to measure and assess real conditions.
Crucially, these ratings are used by fund managers to help decide where to invest, focusing only on the dollar value of risk or reward, Tesla noted. That said, many investors rely solely on ESG reports to invest without really considering whether their investments will make the world a better place, which blinds some individual investors who bet on ESG funds.
At the same time, Tesla did not score high on multiple ESG ratings, even worse than two oil companies, angering Musk even more.
Musk slams corporate ESG scoring standards
In chronological order, in early April, Musk replied to netizens on Twitter that “corporate ESG ratings are the incarnation of the devil.” He said ESG investment principles “should be removed if not amended”.
On April 23, Musk blasted on TwitterMicrosoftFounder Bill Gates spent $500 million shorting Tesla while inviting Musk to participate in his charitable efforts on climate change. Musk refused, arguing that the behavior was hypocritical.
“I can’t take your philanthropy on climate change seriously when you’re short Tesla, which is the company that has done the most to address climate change,” Musk said.
Interestingly, Ark Investment Management analyst Brett Winton quipped that it doesn’t matter if Bill Gates is short Tesla, which only has a very generic ESG rating that is “inconsistent” with climate goals. So as long as he is long Shell, which has a higher ESG rating than Tesla, there is no hypocrisy.
Musk criticized this, saying that ESG ratings are meaningless.
Ironically, however, Tesla is by far Ark’s largest stake, with 10% of the company’s flagship fund, the Ark Innovation ETF, currently worth more than $968 billion. .
And, Winton is very optimistic about Tesla. After an analyst commented that “Tesla’s market share could peak in 2021” and compared the company to Netflix, Winton came out in defense of Tesla, arguing that the situation he described did not apply to The electric car industry especially Tesla.
Tesla: Current ESG assessment methodology ‘fundamentally flawed’
On May 6, Tesla raised the question of ESG scores in its 2021 Impact Report. In the foreword, Tesla said straight to the point:
The current ESG assessment methods on the market are inherently flawed. ESG needs to improve its ability to measure and assess what is really happening.
The report said that current ESG ratings are based on the impact of ESG-related factors on corporate profits, rather than measuring a company’s real-world social and environmental impact, and also do not analyze a company’s positive impact on the global environment.
These ratings are used by fund managers to help decide where to invest, focusing solely on the dollar value of risk or reward. That said, many investors rely solely on ESG reports to invest without really considering whether their investments will make the world a better place.
Indeed, individual investors who put their money into ESG funds managed by major asset managers are unaware that their money is being used to buy stocks of companies that are exacerbating rather than mitigating the effects of climate change, Tesla argues.
Tesla also stated:
We need a system to measure and review actual positive impacts on our planet, so that unsuspecting individual investors can choose to back companies that can make and prioritize positive impacts.
Large investors, rating agencies, corporations and the public need to drive change in the rating system.
Tesla also cites a specific example of an ESG rating being unreasonable. In the ESG scoring of the automotive industry, generally the larger the proportion of tram sales or the greater the number, the higher the score should be. But automakers that continue to churned out gas-guzzling automakers will also see their ESG ratings rise if they reduce greenhouse gas emissions slightly.
Much of the car’s emissions data, which is generated when customers drive the car, is often incorrect, not reported at all, or based on “unrealistic assumptions.” These scores often ignore or miscalculate the environmental impact of carbon emissions during vehicle use. Some oil and gas companies have scored higher than Tesla under this scoring system.
Hiromichi Mizuno, a Tesla board member, also commented. He added that Tesla is not condemning ESG investing, but wants the rating scheme to be fair, including focusing on the positive, not just negative, impact that more companies have on the world.
Some analysts believe that these rating systems do need to take into account both the positive and negative effects of a company. More Tesla’s contribution to the environment can be seen through the 2021 impact report released by Tesla, whose mission is to accelerate the transition to sustainable development. If ESG scores included more companies’ positive and negative environmental impacts, perhaps this would encourage oil companies and other companies with lower scores to commit to more positive environmental impacts.
Tesla’s ESG rating is ‘average’
Tesla doesn’t score high on multiple ESG ratings, which may be one reason Musk is angry about it.
In November last year, the ESG ratings and research firm Morningstar Sustainalytics released a rating report. In this report, Tesla has an ESG score of 28.5 (lower is better) as a “moderate risk”. Tesla ranks 41st out of 82 global car companies and 8192 out of 14,666 global car companies. Tesla’s score is based on two things: exposure and management.
Sustainalytics wrote:
Risk exposure refers to the degree to which a company is exposed to different material ESG issues. Our scores take into account sub-industry and company-specific factors, such as its business model. Tesla Inc’s exposure is moderate.
Management refers to the extent to which a company manages its relevant ESG issues. Our Management Score assesses the robustness of a company’s ESG programs, practices and policies. Tesla’s management of material ESG risks is mediocre.
Of the 41 auto industry companies rated by MSCI, Tesla is also rated just “Average” and is considered to be hampering the global climate goal of limiting warming to 2 degrees Celsius.
Last year, international financialeducateThe website Investopedia published an article featuring the top four oil companies doing the most to protect the environment, namely Royal Dutch Petroleum Shell, France’s TotalEnergies SA, Spain’s Repsol SA and Norway’s Equinor. Their ESG scores were 35.1, 29.2, 26.7 and 32, respectively.
Notably, two oil companies scored better than Tesla – OMV AG and Repsol, both below 28.5. Among automakers, Mercedes-Benz and BYD also scored better than Tesla.
But Tesla’s score is still quite satisfactory, not bad enough to surprise people. In an article published by the GRC Global Research Council in February this year, the authors made an interesting point that Musk himself may be responsible for Tesla’s relatively good score:
But when it comes to transparency, labor relations, and adherence to governance, such as having a CEO who doesn’t tweet at will, Tesla scores even worse.
The author goes on to add that Tesla does have a higher ESG rating than most oil companies as well as other automakers such as Volkswagen and Toyota, which is an improvement over last year. But if not enough is done on execution, the rating drops:
Musk helped create an EV victory, but he has to remember that he’s a mortal, and his good deeds won’t allow him to do whatever he likes — because like ice skating, you might Lost points for lack of execution.
